Al-Ahram Weekly sums up a year of extremes in Egyptian economy and sounds out expert opinions on ways forward It seems that every time the Egyptian economy tries to lift its head, it gets knocked down again. This year all events seem to have conspired against it. The year started out on the wrong foot with spiralling price rises in all commodities from bread to oil, putting further pressure on government expenditure. Even so international institutions continued to laud Egypt's economic reform. A report on the International Monetary Fund's (IMF) Article VI consultations with the Egyptian government showed Egypt's "economic performance since 2004 has been impressive, underpinned by the structural reform programme that has included tax reform and fiscal consolidation, the liberalisation of foreign trade, investment, and the exchange market, the privatisation of state entities, and measures to strengthen bank balance sheets and banking supervision. The reforms have raised Egypt's potential output and provided more room for manoeuvre with respect to macroeconomic policies." So where is the problem? The fruits of reform have yet to trickle down to the average citizen. And with everything becoming more expensive, the situation has worsened still. The government could do nothing but increase its budget allocations for subsidies. Yet it was not enough because there was no putting a halt to prices, that is until the bubble burst and the financial crisis reared its ugly head in September 2008. Reactions in the Egyptian stock market were the most obvious domestic manifestation of the crisis. By November the market had lost 65 per cent of its value through the year on the back of heavy selling by individuals and foreigners. Most analysts had said that there was no reason Egypt's stock market should have dropped in this manner. The fundamentals of all the listed companies were sound, after all. As it turned out, it was a matter of foreigners needing their money elsewhere. Whatever the reason, some $16 billion in portfolio investments are estimated to have left the Egyptian market since then. However, experts reassure that Egypt's economic fundamentals are intact and that reform has afforded the country immunity against the effects of the crisis. Egypt's banking system has proven its resilience and resisted the storm. But reform should not stop there, warns Ahmed Galal, managing director of the Economic Research Forum (ERF). He hopes the financial crisis does not distract Egypt's policymakers from continuing with their reforms. Although much has been done, there is more work ahead, he says, pointing out that many countries are still ahead of Egypt on business environment indices. "We need to work more on lowering transaction costs, exit policies and bureaucratic constraints, while expediting dispute resolution, and trim down our budget deficit," Galal said. These reforms, Galal said, have to continue parallel to the government's tackling of the crisis. And as all indicators have so far shown, they will have their hands full. As the IMF report says, "the more urgent challenges are to maintain growth and balance of payments stability in the context of the global financial turmoil and a rapidly deteriorating international economic outlook." In fact, it is now clear that the global slowdown will take its toll on Egypt's hard currency earnings from exports, tourism and Suez Canal traffic. With this in mind, Egypt's growth rate is forecast to slow down to around 5.5 per cent, down from seven per cent, the average of the past three years. But both the government and business community are well aware of the challenges that lie ahead. Alaa Arafa, chairman and chief executive officer of Arafa Holding, an Egyptian manufacturer specialising in apparel production, advises that in a slowdown manufacturers should manage their expectations. He said it is important to cut prices, maintain market shares, and keep the factories running even at a loss. "If we do not do this, somebody else will take over our place on international markets. The ball has to keep rolling even at a loss of profitability. Lose money but do not lose the market share," said Arafa. He added that this formula worked for him in the economic climate that prevailed after 11 September 2001' attacks in the US. Although everything seems to have come to a standstill with the financial crisis, Arafa has found opportunity among the rubble. He acquired a 35 per cent stake in Forall Confezioni SpA, aka Forall Group, best known for its flagship brand Pal Zileri. "Taking over this company had been my dream for five years. It would not have been possible were it not for the financial crisis. It enabled us to acquire the company at a price we could afford, and it put the company on a strong footing in a weak market," Arafa said. He would not encourage others to do the same unless they see it is positive for them from a value and a strategy point of view. Arafa remains very cautious, however, with regards to expectations for the new year. "Six months ago we were expecting the price of oil to hit $250. We thought we were on the verge of an era where nothing would ever be cheap any more. All this has changed. Today we are looking at $30 per barrel of oil. We now know we cannot predict what will happen with any measure of certainty," Arafa said. On the other hand, he added that there will definitely be a drop in growth, while inflation and prices will follow suit. This will mean that the poor will be better off. "Should they not lose their jobs, their purchasing power will definitely strengthen," he said, stressing that manufacturers should strive hard not to cut jobs even if it costs them more. Salah El-Hadari, head of the car manufacturers division at the Federation of the Egyptian Industries is not too pessimistic either. He said that although sales have dwindled since October, the situation is not alarming yet. Overall automotive sales in 2008, estimated at 260,000 units, will register an increase of about 16 to 25 per cent compared to last year's sales of 227,000 units. He assures that the drop in sales will only be temporary and that sales will pick up again in 2009 due to an ever-increasing demand in the Egyptian market. In his opinion, what might be affected are the Spare parts exports to the EU. "But if local sales pick up, they will make up for any drop in exports," he said. As far as the stock market is concerned, Mohamed Radwan, head of foreign sales at Pharos Holding, is doubtful that 2009 will be worse than 2008. The new year will bring with it problems in the real economy, not so much in the stock market. "No doubt this will reflect on the performance of listed companies," he said. "But all the negative expectations about the future are already accounted for in the share values. We are very close to the bottom." Radwan added that after hitting the bottom, the market will face a stagnation period, followed by high volatility that would raise the retailers' fears enticing them to quit the market and the volume of transactions will shrink. However, as of the end of the second half of 2009, he says, the market will be heading upward. Radwan expects the telecommunications and banking sectors to be the best performing during the year. "So far they have proven to be the most resilient to the market's upheavals; they have high dividend yields as well as clean balance sheets," he said. What the market needs now, in Radwan's opinion, is a drastic change not on the micro level but on a higher level. "Something that would change some of the chronic problems in Egypt like naming a deputy for the president or a drastic change in its human rights record," he suggested. "Changes in market regulations or the performance of traded companies would have changed the sentiment in normal times but not in such a severe slump." Other recipes were offered by Amr Bahaa, board member of Piraeus Bank. Praising the Central Bank of Egypt's recent move to cancel the 14 per cent reserve requirement on loans to small businesses, he said "there has to be a national programme in support of small and medium enterprises [SMEs], not only to provide them with cheap credit, but procedures must be facilitated as well." To Bahaa it is not only SMEs which require a national programme. A new national vision on where Egypt should be heading is needed. "Nobody has a vision. Whatever measures are taken, they only act as sedatives, after which we find ourselves in even bigger problems." Amidst all this, what is very important, says Galal of ERF, is to direct more attention towards social policies. "The government continues to deal with the distributional benefits of reform as an afterthought and this should not be the case," he said. In his opinion, more attention is given to reforming economic policies and not enough to social policies such as education or sanitation. And more needs to be done, he says, on income policies which take into account the level of inflation, productivity and aligns incentives with productivity. ------------------------------------------------------------------------ Poverty persists in Egypt despite improved economic indices. The average man or woman on the street continues to fail to see the fruits of reform. This year was particularly tough on the poor due to soaring prices, reflecting on the local market in bread shortages and dramatic hikes in the cost of all food staples. The government could do nothing but increase allocations for subsidies. It expanded the rationing card system to include more beneficiaries. This will mean the addition of 15 million new beneficiaries who were born in the past 20 years.Currently, rationing cards benefit 10 million families. They enable beneficiaries to buy staples such as sugar, rice, cooking oil and beans at reasonable, subsidised prices. But the government will need to do more than provide subsidies if it is to combat poverty. Figures show that poverty rates stood at 26 per cent in 2005. Although this is a clear improvement to a 42 per cent poverty rate in 1990, it still leaves much to be desired. The government hopes to reduce poverty to 15 per cent by 2011-2012. Egypt will still need to work further to reduce the poverty rate down to 10 per cent by 2015. Shortages in car fuel octane 80 this summer spread to most governorates, causing chronic congestion at fuelling stations. The situation was the normal outcome of the government's decision in May to increase the cost of octane 90 and 92 gasoline from LE1.30 and LE1.40 to LE1.75 and LE1.85, respectively, while maintaining the same price of octane 80 at LE0.90. The intention was to lift fuel subsidies for the well-to-do while keeping it intact for the less privileged. Octane 80 is mostly used in older model taxi cars, police vehicles and public- owned buses. The most bizarre of the government's schemes this year has been the citizen ownership programme. This new form of privatisation, yet to be incorporated into a draft law and presented to parliament, is aimed at enabling all adult Egyptians to become shareholders in public sector companies. Up to 40 million Egyptians -- aged 21 and above -- are to receive free shares in dozens of public sector companies within a year. "It's a once-in-a-lifetime chance," Mahmoud Mohieldin, minister of investment, said during a press conference publicising the plan. The idea behind the scheme is to allow for greater public involvement in the management of public assets. The value of the shares is estimated at between LE300 and LE500. While some thought the scheme was a chance to "own a piece of Egypt", to the majority it was met with much scepticism. Some observers saw the new scheme as devised to deflect pressure from a government that has often been accused of selling public assets below their market value. Egypt's real estate market has not fallen into the subprime trap. The mortgage system and procedures have not been simple enough to encourage people to integrate. It is estimated that only LE3.1 billion have been invested into Egypt's mortgage market since it became operational in 2004. Experts believe that providing more middle- and low-income housing units by developers will attract greater interest in the mortgage system and satisfy a huge albeit untapped demand. Developers have been catering mostly for the high-end market, with a result of excess supply. A study by Pharos Holding for financial investments shows that informal housing represents 65 per cent of housing supply in the country, while 20 per cent of the Egyptians live in slums, 10 million households live illegally, and three million live in shelters.
