Though Egypt’s currency woes have filtered through the entire economy, the industrial sector was hit particularly hard in 2015-16. The weakness of the Egyptian pound had slowed the pace of new investment and led to plant shutdowns by foreign investors. With a shortage of US dollars, manufacturers have to source funds in the parallel market, where a gap between the rates on offer and the official rate at the Central Bank of Egypt (CBE) had been slowly and steadily widening before the pound was floated in November 2016.
Nothing New
Currency problems have been a factor since Egypt’s revolution in 2011, but with gas production down 22.3% since a peak in 2009, the balance of payments has been under greater pressure. Despite an injection of more than $25bn in aid from regional allies, Egypt has struggled to maintain its subsidies as well as balance its books. In FY 2015/16 Egypt’s budget deficit rose to 12.1% of GDP. However, the first three months of FY 2016/17 has seen the budget deficit ease to 2.4% of GDP primarily because of significant reductions in government spending.
Up until November 2016 the CBE sought to maintain a peg for the pound, which it had adjusted several times over the past few years, but this did not reflect what the market believed was the currency’s true value, creating a parallel market based on demand and supply. As of late July the peg of LE8.8: $1 compared with parallel market rates above LE12 prior to the float. “Artificial forex prices were contributing to inflation and an imbalance in the market. Most investors were waiting to see how the situation was going to play out, or investing in secure assets like real estate,” Kamal Gabr, managing director of Duravit Egypt, told OBG.
This and stipulations from the IMF deal prompted the country to abandon its currency peg to the US dollar; however, this caused the pound to lose half its value and inflation to significantly increase into 2017.
Impact
Not taking into account the recent float of the pound, the impact throughout most of 2015-16 on manufacturers was significant. In some cases, as much as 90% of the foreign currency needed by industry had been sourced at the higher pegged rate, leading to two choices – either pass it on by raising prices in an economy with millions of price-sensitive consumers, or absorb the loss internally.
Juhayna Food Industries, a major food staples producer, reported a 54% drop year-on-year (y-o-y) in earnings on a per share basis in the second quarter of 2016, despite posting revenues that were 21% higher than in the second quarter of 2015. Juhayna boosted prices after the devaluation in March 2016 to reflect higher costs for raw materials. In the automotive industry, where foreign parts typically comprise 60% of domestically produced cars, production had suffered and sales were falling. “Nobody was committing to large purchases because of the forex issue,’’ Ramez Adeeb, chief manufacturing officer for Ghabbour Auto, told OBG. However, he noted, “The demand is still there. This is a market where people like to have a car.” Indeed, the country’s long-term fundamentals for industrial manufacturers remain relatively robust, buoyed by renewed support from the IMF.
Currency Float
In August 2016 the IMF announced a package for Egypt. Pending a review in late February 2017, Egypt appears to be on track to receive the second instalment of a $12bn, three-year loan. “Egypt is a strong country with great potential, but it has some problems that need to be fixed urgently,’’ said Chris Jarvis, the IMF’s lead negotiator, during the talks.
As markets wait to see where the pound will settle in value, local media reports that the float and subsequent depreciation has left many importers facing ballooning dollar debts. While soaring consumer prices prompted the government to increase subsidies for sugar and cooking oil by 14% and 20%, respectively, in February 2016. As of January 2017 the consumer price index had risen by 28.1% y-o-y, up from 13.6% in October 2016 before the unpegging of the currency.
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