Tuesday,21 November, 2017
Current issue | Issue 1367, (2 - 8 November 2017)
Tuesday,21 November, 2017
Issue 1367, (2 - 8 November 2017)

Ahram Weekly

Benefiting from floatation

Beesan Kassab charts out the winners from the CBE’s decision to float the pound last year

A year after the Central Bank of Egypt (CBE) floated the Egyptian pound, inflation is still taking its toll on the economy, rendering the decision the least popular in a long time. The decision, however, seems to have relatively benefited businesspeople across the different strata of the economic spectrum.

According to a July survey covering 45 companies, Mubasher Financial Services (MFS), a company providing financial services, found that profits were expected to record a 46 per cent increase and revenues an upward of 40 per cent, compared to 2016.

MFS concluded that this leap in profits and revenues was the result of what it described as stability in the exchange market after the foreign currency shortage of last year affected the businesses of those companies.

The banking and financial sectors top the list of economic sectors in gross profit with 43 per cent, according to MFS. 

“Banks benefited from floatation indirectly,” Mohamed Abu Basha, an EFG Hermes economist, told Al-Ahram Weekly. Increasing interest rates since the floatation of the pound, Abu Basha explained, positively affected the banking sector. Banks benefited from the increased interest rate on government debt securities, which is one of the favourite sectors for bank investments. This became evident in bank profits, he added.

The decision to float the pound last year was tied to a number of CBE steps to increase interest rates, starting with a three per cent surge, then increasing overnight lending and deposit rates with 18.75 and 19.75 per cent. These consecutive decisions were an attempt by the CBE to curb inflation that resulted from floatation. Government debt increased, however, with an accompanying hike in returns that surpassed 20 per cent.

The costs which the banks endured in return for increasing interest rates for depositors remain less than the profits they made from government bonds and treasurer bills, said Abu Basha, especially that high interest saving vessels, up to 20 per cent, were only offered at a number of governmental banks.

In April 2016, Moody’s issued a report expecting that the Egyptian banking sector would achieve a 12 per cent profit from the CBE’s decision to increase interest rates after the floatation, considering the increased interest rate on government debt securities.  

Securities brokerage firms benefited immensely from the floatation of the pound, Noeman Khalid, an analyst with CI Capital Asset Management, told the Weekly. Khalid believes the gains came on the back of the stock market index as a result of repricing shares after the devaluation of the pound. “Businesspeople wanted to make up for the losses incurred as a result of the floatation by repricing shares. In other words, they treated their shares like a storehouse for their valuables and sold them for high prices only. This explains the increase in the price of shares of some companies which were negatively affected by the floatation, especially with the rise of production costs and fears of raising prices for consumers lest demand decreases amid high inflation rates.”

But the increase in stock indices doesn’t translate as an influx of new investments in the stock market, Khalid said. According to CBE figures, foreign investment net purchases in the Egyptian stock market recorded $498 million during the fiscal year 2016/17, as opposed to $157.1 million recorded earlier. The figure is still minimal, he stated, in comparison to the foreign investments in treasury bills which exceeded $16 billion since the floatation of the pound in November 2016. “This confirms that the increase in the stock index after the floatation depended solely on repricing shares, without any meaningful change towards attracting new foreign investments,” he added. 

“With the exception of a few sectors, benefiting from the devaluation of the pound depends on the companies’ ability to make profits in dollars, not the sector to which a company belongs,” Amr Al-Alfi, global head of research at MFS, told the Weekly

“The amount of benefit depends on the foreign component in a company’s product. The more the foreign components the less profit the company can make,” he explained.

The bigger chunk of Egypt’s imports are intermediate goods. In 2016/17, out of $57.122 billion worth of imports, intermediate goods were brought in for $15.749 billion. Investment goods were imported for $8.8 billion.

According to the CBE, non-petroleum products constituted 16.3 per cent of exports for the fiscal year 2016/17, with a total amount of $15.1 billion, an increase from $13 billion the year before, the result of increasing competition on the part of exporting companies after the floatation of the pound.

“The companies that benefited from the floatation are those that developed their exporting edge. But the devaluation didn’t help a non-exporting company to export,” pointed out Khalid. “For a company to start exporting requires more investments the price of which has definitely increased after the devaluation of the pound.”

For example, MFS figures indicate that Al-Sewedi Electric was one company that benefited the most from the floatation because of the availability of foreign currency at the company. By the end of the second quarter of 2017, the company recorded an increase in its net profits of 72 per cent, compared to the same period last year. Telecom Egypt is another example that “recorded high profits from the devaluation of November 2016”, stated a MFS report. A third of the company’s revenues comes from services valued in dollars.

“The real estate sector recorded an increase in sales right after the floatation and during the first quarter of 2017,” said Mohamed Marei, a real estate analyst at Prime Holding. “Luxurious estates recorded a price increase of 70-100 per cent because of the increase in building material costs and increasing demand on real estate for fear of more price hikes,” he added.

“The purchasing power in the real estate sector later decreased with the exponential rise in prices. Revenues, nonetheless, remained high despite the decrease in sales,” Marei said.

UAE Arqaam investment bank issued a report in July stating that the luxurious real estate sector attracted Egyptians living in the Gulf whose savings are in dollars because of the decrease in the price of estates in dollars following the pound’s floatation. 

The MFS survey expected an 80 per cent increase in the net profits of real estate companies this year.

Marei insists that the boom in the real estate sector did not reflect positively on the sector’s performance in the stock market. The reason, he believes, is the spread of expectations that the boom in sales and rising prices would be followed by “a real estate bubble” — expectations Marei strongly disclaims.  

In return, however, Marei points to a return of interest in real estate investment in the stock market amid expectations of decreasing interest rates at banks, which will in turn decrease the borrowing cost for real estate companies and increase their sales following a drawback in the appeal of depositing in banks.

“With every one per cent decrease in interest rate we can expect a 2-3 per cent increase in real estate sales and a corresponding increase in real estate sector shares in the stock market,” Marei said.

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