Saturday,16 December, 2017
Current issue | Issue 1127, 20 - 26 December 2012
Saturday,16 December, 2017
Issue 1127, 20 - 26 December 2012

Ahram Weekly

Economy on the brink

While the whole Egyptian economy has been suffering a slowdown since the revolution, some areas were particularly hard hit. Al-Ahram Weekly presents a glimpse into the main developments in these sectors

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Al-Ahram Weekly

Politically driven EGX30

FOLLOWING a tough 2011 that stripped the market of 50 per cent of its value following the 25 January Revolution, 2012 is coming to an end with the market topping its regional peers. The EGX30, the market’s main measure, gained 42 per cent since the beginning of the year to half of December.

The political scene overshadowed the market that started the year in negative territory as the world’s fourth worst performing and with Moody’s putting Egypt five levels below the investment grade. 

However, the convening of the first parliament ignited interest in the market which got a pat on the back by news that Egypt was asking the IMF for a $3.2 billion loan to bridge the gap in its budget. The market gained more than 40 per cent up to 1 March.

But the fast-paced recovery slowed down amid a profit-taking spate. Also, the run down to presidential elections and the scrapping of the natural gas export deal with Israel took a toll starting mid-April.

The negative sentiment was accelerated by the invalidation of the Constituent Assembly and the dissolution of the People’s Assembly, with confidence reaching its lowest point of the year in the third week of June.

Egyptian shares rallied 13 per cent after the Muslim Brotherhood’s Mohamed Morsi won the presidential elections Sunday 24 June. The mere presence of an elected president sustained the revival for more than two months.

But the market nosedived in early October on the back of President Morsi’s 6 October anniversary speech where he hinted at allegations of financial corruption in three listed companies that together represent 50 per cent of the market’s capitalisation: Orascom Construction Industries, Egyptian Kuwaiti Holding, and Talaat Mustafa Group.

A downward trend was clear by the end of the year, reaching its peak by early December amid heightened political tension triggered by Morsi’s 22 November constitutional declaration.

Politics set the macroeconomic direction and overshadowed company news to be the main mover of the market. The year witnessed few important company developments; maybe the most important is the formation of a joint venture between the Qatari Qinvest and EFG-Hermes to form a new investment bank with a wider international reach.

A main feature of the year was the reluctance of foreigners to buy in the market, emerging net sellers most of the year. The market reversed its trend in the week to mid-December with news of smooth voting in the referendum on the constitution to close at 5,162 points compared to 3,802 points on the first trading day of the year.

 

FDIs at a minimum

 

FOREIGN direct investment, once testimony of international confidence in Egypt’s economy, stood at a meagre net of $2.1 billion in fiscal year 2011/12. This is less than the $2.2 billion registered in 2010/11 according to Central Bank of Egypt figures, and way below the 2009/10 $6.7 billion and $8.1 billion in 2008/09.

Unstable political conditions in addition to a blurred economic vision have hampered investment across the board as foreign investors turned to “wait and see” mode.

Consecutive governments during the bumpy transitional period, and the current government that came into office after this year’s presidential elections, failed to send reassuring signs to the investor community or restore confidence in the Egyptian market. Compounding the situation, government credibility came into question as several contracts signed under the former regime were annulled by court order. These include contracts for land rights as well as companies privatised under the former regime. Furthermore, continuous demonstrations and riots by workers have dampened investors’ confidence in the government and the investment climate in the country.

For his part, President Mohamed Morsi travelled east and west around the globe, often accompanied by business delegations, in a bid to drum up investment and to indicate to the world that Egypt is back in business. He has also been receiving in Cairo numerous foreign and Arab business delegations and dignitaries seeking to test the business climate. His coming to office as the country’s first democratically elected president was expected to boost investment. However, continued instability has kept that from happening.

Egypt still needs to set the ground for a healthy investment climate that would enable it to attract investors on the long term. This includes, most notably, clarity on the country’s macroeconomic direction and future policies, preserving and guaranteeing investment contracts, and above all restoring security.

 

Industrial doldrums

ALMOST two years after the revolution, the industrial sector, which remains an economic mainstay in Egypt with well-established divisions such as textiles, food processing, consumer staples and automotive assembly, is struggling to continue. As if it did not already have enough problems, from bureaucracy and lack of well-trained labour, the sector was hard hit by political instability, lack of security and a lack of clear vision for economic policies. In consequence, the growth rate of the industrial sector registered unprecedentedly low figures, standing at negative one per cent (-1) in 2010/2011 and it was only slightly up to 0.7 per cent in 2011/2012.

Investors were often taken off guard in the past two years by sudden decisions to impose new taxes, charge higher customs duties, ban the export of a certain product, or banning the import of another. Rising production costs have also become a risk. Energy intensive industries such as petrochemicals, aluminium and ceramics are currently paying a 30 per cent increase in electricity prices since the country decided to put an end to energy subsidies in January 2012. Moreover, prices paid for natural gas by heavy industries such as cement and steel also witnessed hikes. The move to increase energy prices on industries was part of the government’s strategy to rationalise fuel subsidies, which reached LE115 billion in 2011/12.

One more notable threat to the industrial sector is that the workforce has become politicised. Since Hosni Mubarak’s departure, strikes in the sector have become the norm. Worker strikes calling for financial demands usually end with investors responding by increasing salaries, causing more increases in a product’s final cost price.

With this business environment, according to official figures, 1,575 factories were not able to continue in operation and a large number of the remainder suffered heavy losses. A survey conducted by CEEMEA Business Group, an association for African, Middle Eastern and Central and Eastern European businesses, estimates that 35 per cent of Egypt’s industrial firms suffered a drop in revenues of up to 10 per cent in 2011. A number of companies reported that they are expecting more losses in 2012 due to the application of high rates on energy prices.

The Egyptian industrial sector, with its 33,000 formally registered firms, represents total investments standing at LE534 billion. It accounted for 15 per cent of Egypt’s GDP in 2011/2012, the highest rate compared to other sectors. It formally absorbs 1.7 million workers representing 14 per cent of Egypt’s total workforce. This figure is much higher if it includes the number of workers employed by the informal sector.  

Egypt, having one of the world’s largest and fastest-growing populations, is an attractive market for manufactured goods. However, opportunities in the long-term outlook may be less obvious as political uncertainty is likely to delay expansion plans and create an operating environment marked by rising costs.

 

No Christmas gifts

IT’S THE SECOND Christmas since the 25 January Revolution that Egypt’s tourism industry is missing on. Up until a few weeks ago, hopes had been high that this winter 2012/13 — the high season in Egypt — tourism would be better than in 2010 in terms of the number of tourist arrivals and revenues. 2010 was a peak year for tourism. Some 14.7 million tourists visited, bringing in revenues of $12.5 billion. The violence that broke out a couple of weeks ago following President Mohamed Morsi’s controversial constitutional declaration put an end to those hopes as many of this season’s reservations were cancelled.
And this has been the story of tourism since the revolution. Tourism was the sector hardest hit by the political instability and lack of security in the wake of the revolution. Occupancy rates in most hotels and resorts were at their lowest; reservations were cancelled; tour companies and governments listed Egypt as an unsafe spot. In the first days following the revolution, losses to the sector reached hundreds of millions of dollars per day. Cultural tourism in Cairo, Giza, Luxor and Aswan suffered the most with an average of 20 per cent occupancy rates at best.
But countless efforts have been made to save the industry from the setbacks of the past 22 months. The sector has managed to persevere. In 2011, against all odds, 10 million visited Egypt, with revenues estimated at $8.8 billion. 2012 had been promising even better figures before the latest spate of violence. According to the Ministry of Tourism, tourist arrivals reached 9.5 million during the period of January to November 2012, an increase of six per cent on the same period the year before.
Nevertheless, the fate of the whole 2012/13 winter season is yet unknown. The continued political instability, even after presidential elections, and occasional spates of violence are keeping the sector from taking off. Experts agree that sustainable stability and security are needed for the industry to boom.
In the meantime, any setback is costly for everyone. The tourism sector, which boasts LE200 billion in investments, contributes more than 11 per cent of the total national income and 17 per cent of hard currency revenues. More than four million Egyptians work in the tourism industry and another 14 million benefit directly and indirectly from tourism.

 

Strike while you can

EGYPT’S workers have found their long-lost power. 2012 has seen 1,398 sit-ins and protests by employees in both the public and private sectors.
Everyone from teachers to physicians, public transportation workers, post office employees and public taxation workers has repeatedly been on strike. In fact, the revolution stirred the labour movement around the country. Every week, strikes are a staple feature of the news, whether at a factory, the subway, the airport or even hospitals.
Strikes mostly demand better work conditions, higher pay, social insurance, healthcare, bonuses and disbursement of overdue payments.
Workers say that they have no choice but to strike to make their voices heard. Should the formation of independent labour unions be allowed, workers would not need to resort to strikes to get their rights.
But that hope will not be possible after the new labour law 97/2012 passed by President Mohamed Morsi last month. The new law according to experts reconfirms the Egyptian Trade Union Federation (ETUF) as an arm of the state. The law further extends government control over the federation.
According to official figures, the Egyptian labour force totals some 27 million, four million of whom are public sector workers affiliated with ETUF. The workers have no choice in the matter. Their membership is part of their employment package.
Experts say the new law criminalises strikes under the pretext that they are attempts to delay production.
Ahmed Al-Borai, former labour minister under the Essam Sharaf government, drafted a law allowing any group of 50 or more workers to organise, and made room for the formation of several unions in one workplace. But the draft was rejected by the Supreme Council of the Armed Forces and later relegated to the back burner by the Islamist-dominated People’s Assembly.
With the new law Egypt risks being blacklisted by the International Labour Organisation because it violates conventions signed by Egypt on the freedom of association and the right to organise.

 

Empty food basket

ALTHOUGH the agricultural sector is the main source of food for Egypt’s growing population, provides raw materials for its local industries and employs more than a quarter of Egypt’s total workforce, it faces serious challenges, particularly shortages of land and water. These problems pre-existed the revolution and were augmented after. The lack of law and order led to many violations of the law prohibiting construction on fertile land.
Egypt has nine million feddans (3.69 million hectares) of agricultural land occupying just 3.7 per cent of the country’s land area. Fine weather helps in cultivating different kinds of crops, including cotton, cereals, fruits and vegetables. Yet Egypt is a major importer of cereal crops. It is the world’s largest buyer of wheat, as domestic supply cannot meet demand. Imports account for some 40 per cent of total consumption.
To cut down on imports there have been efforts to increase local production throughout the past two years. These efforts have begun to bear fruit. Domestic wheat output rose 17 per cent to 8.3 million tonnes in 2010/2011 compared to 7.1 million tonnes in 2009/2010. Aggregate cereal production in 2011 was around 22.3 million tonnes, up 9.3 per cent on the previous year. This is attributed to an increase in the area allocated to these crops, use of better seeds and payment of higher delivery prices to farmers.
But Egypt is also an exporter of agricultural goods. Citrus products are Egypt’s largest agricultural export earning the country around $1 billion annually. Egypt is ranked seventh in the world for orange production (with 2.4 million tonnes) worth $464 million, according to the Food and Agricultural Organisation (FAO). However, agricultural exports have been negatively affected by the revolution. Some foreign buyers have become more reluctant to make payments before delivery for fear that unrest in the country could cut off supply. And some agricultural investors are also holding off on starting new projects or expanding new ones until the political situation clarifies.
Meanwhile, small farmers are complaining that they are not supported by the government. They buy raw materials such as fertilisers and seeds at international prices but they are not permitted to sell their products, particularly strategic crops (cotton, wheat, corn and wheat) at global rates. They also suffer from shortages of water for irrigation and fuel needed for machinery.
Farmers’ problems have reflected on the agricultural sector’s performance leading to a modest contribution to Egypt’s total GDP. In 2006/2007 the sector’s contribution to GDP was 6.5 per cent and in 2009/2010 it reached 9.2 per cent compared to 13 and 20 per cent contribution by the industrial sector in those two years.
In 2010/2011 the agricultural sector’s contribution to GDP was up to 18 per cent for no virtue of its own but only due to deterioration in the performance of other sectors.
Efforts to increase supply, particularly through enhancing productivity and developing major desert projects, are underway. The government’s annual economic and social plan is targeting an increase in total investments in the agricultural sector from LE5.1 billion in 2011/2012 to 12.4 billion in 2012/2013, as well as adding 1.2 million feddans to cultivated lands by 2017 and to reach 3.4 million feddans by 2022.
However, experts believe that the agricultural plan can never be achieved because Egypt faces imminent water shortages. Egypt’s annual quota of River Nile water is 55 billion cubic metre of water, of which 48 to 50 billion is used in cultivating the current area estimated at eight million feddans. Experts believed that Egypt needs a properly integrated master plan that would both set a long-term strategy for the entire sector and delineate different organisational tasks and responsibilities more clearly.

Compiled by: Mona El-Fiqi, Sherine Abdel-Razek, Ahmed Kotb and Nesma Nowar

 

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