The Egyptian economy witnessed a lot of fluctuations in 2016, seemingly becoming more prominent than ever before after the liberalisation of the exchange rate and impacting all companies working in the Egyptian market. Some of the most prominent company executives have expressed their optimism of the long-term prospects of the Egyptian economy and their business in 2017 to the daily business news roundup Enterprise. Nevertheless, the CEOs made it clear that a lot of challenges are also expected; something they had all agreed on. Daily News Egypt tackled the highlights of Enterprise’s interviews with CEOs of some of Egypt’s biggest companies.
2017 will be the year of surprises: Hani Berzi, CEO of Edita
According to Hani Berzi, CEO of Edita, the largest challenges before the economy will be reforming the trade imbalance, and the availability of foreign exchange. He expressed his concern about the measures the government could take to reform the trade deficit and the impact on trade agreements, including free-trade agreements.
Speaking about the largest challenges for the food industry, Berzi said that they are represented in regulations. “Regulators need to work on how they interact with businesses—the types of raids we have seen on factories, whether from the health, supply, or the interior ministries, send the wrong message. I’m thinking here of what happened to us with sugar and to Heinz with tomatoes. There could be some deviation from good manufacturing processes, but good businesses reform these,” Berzi added. Such events spoil all the efforts to make exports grow, according to him.
Berzi noted that the large population of more than 90 million citizens in Egypt, growing at a rate of 1.6-2% annually, creates a fertile ground and an amazing market for the snack food industry as eating habits change, noting that opportunities can also be found in trade barriers the government is implementing to slow down imports, whether they are tariff or non-tariff barriers. “We’re going after this opportunity by investing in improvements to our manufacturing processing and improving product delivery. Moreover, we are continuously working on new non-traditional products that offer good value for money,” said Berzi.
Berzi said that his company will invest about EGP 350-400m in 2017. He expected the food sector in general to perform best next year, supported by the population increase.
On the other hand, he noted that the opportunities available in the industry will not come for free, as consumers will be highly selective with the post-flotation inflation and will not buy something simply because it is cheap, but will also look for quality.
Berzi expected the real estate sector to perform worst in 2017 leaving the most negative impact on the country’s economy, but expressed optimism about exports if the right steps were taken by the cabinet.
Export-driven industries to perform best in 2017, sectors reliant on exports to perform worst: Hisham Ezz Al Arab, chairperson of CIB
Chairperson of the Commercial International Bank (CIB) Hisham Ezz Al Arab said that 2017 will be a year of change across all economic sectors as reforms continue to take place.
He noted that the largest challenges for the economy will be the pains associated with structural reforms, stressing that these measures are exactly what the economy needs on the long-term; however, the interim period will be “painful for many”.
Ezz Al Arab expects to see more consolidation in the banking and finance sectors with the ongoing structural reform programme.
The biggest challenges for the CIB in 2017, according to Ezz Al Arab, will be helping clients cope with the challenges arising from the reform programme while also managing costs, including staff costs, electrical power, and costs of opening new branches in such a high-inflation environment.
Ezz Al Arab expects all export-driven industries to be the best performers in 2017, while the worst-performing sectors will be those reliant on exports. He also noted that opportunities are clearly massive in the field of microfinance lending, in which the demand is huge, but the sector is very underpenetrated. The industry is profitable, well-regulated, and very appealing, according to Ezz Al Arab.
In terms of regulations and legislative frameworks, Ezz Al Arab said that there is a need to keep an eye on opportunities to deregulate. “Our industry is very well-regulated, but we are going to need to look at how this changes as we push for better financial inclusion and the first steps on a multi-year journey to becoming a less cash-based economy,” he said, noting that so much being done now in technology can increase penetration and prompt more competition in the marketplace, resulting in more financial inclusion, better products, and better services.
2017 will be a year of change and adaptation: Ahmed El Sewedy, CEO of Elsewedy Electric
Ahmed El Sewedy, head of Elsewedy Electric, believes that positive changes are tangible two months into flotation, noting that more challenges are expected for some companies. “You’re going to see those changes hit the banks—any borrower with US dollar debt on their balance sheet is going to be hit,” he said.
The factors that made a business successful over the past decade will change over the next two or three years and will no longer be the same as those that had previously contributed to a company’s success.
The largest challenges for the economy right now, according to El Sewedy, is the need for the government to provide policy stability, especially in rules and regulations. “We need clear five-year frameworks for taxes, customs, and the availability of land for industrial projects. We need stability, and with this, the outlook for Egypt is excellent,” he added.
In terms of his company’s activities, Elsewedy Electric is building three large power plants, where the next steps will focus on power transmission, such as cables and towers which are a large part of his company’s business.
El Sewedy expects great growth in Egypt and Africa over the next four years. He predicted a boom in the agriculture and food sectors in Egypt in 2017.
He added that the government’s legislative priorities should focus on how to double exports in two years’ time, which demands support to the local industry, including investment incentives. He also added that the government needs to help local companies improve their quality to meet export standards.
Government reforms will help the economy on the long-term: Karim Awad, EFG-Hermes CEO
“The world is going through a tremendous period of change, and our region is far from immune,” said Karim Awad, CEO of the investment bank EFG-Hermes since 2013. Combining this with the period Egypt is passing through and the government’s economic reform programme, the level of change is historically unprecedented, according to Awad. He believes that the reforms are spot-on in terms of what they will do for the long-term health of the economy, but they will pose short-term challenges.
He added that companies will have to adapt to the expected changes in 2017, through which each business will adjust its plans to suit the new changes.
When asked about the largest expected challenge to the economy, Awad said that it would be bringing in investments, whether direct or portfolio. He added that it is necessary to make Egypt attractive enough for investments as non-Egyptian investors have a variety of investment destinations to choose from, stressing that it is crucial for the government to listen to issues of investors and deal with them quickly.
Regarding Egypt’s exports, Awad believes that the way to increase them is through pinpointing Egypt’s competitive advantages and helping its companies become globally competitive to bring US dollar inflows into Egypt.
In terms of the government reforms, Awad said that the current decisions made by the government and the eventual resolution of the currency volatility are crucial. He added that the state of currency instability today is only temporary where the percentage of our mergers and acquisitions (M&A) transactions will be cross-border and will more likely be financed by equity than by debt, given the high interest rate environment. “This is going to be great for the foreign direct investment flows into the country and for the Central Bank of Egypt’s (CBE) reserves,” Awad said.
Improving the business environment in general will be the biggest challenge in 2017: Ahmed Badr, MENA CEO of Renaissance Capital
Ahmed Badr believes that the flotation of the Egyptian pound was without a doubt the right move. “Letting the currency go without ambitious reforms and improvement of the business environment will not help much though,” Badr added.
In 2017, Badr is optimistic about remittances and looks at them as a great opportunity for the economy, in addition to the number of expected IPOs throughout the year and M&A activity.
Badr predicted that the sectors of banking, healthcare, and education will significantly improve throughout 2017, while healthcare and education are expected to especially improve during the second half.
On the other hand, Badr said that the main challenge before the Egyptian economy at this point is improving the business environment, perhaps through smaller steps, such as facilitating the investors’ obtainment of licences for lands and the establishment of new factories, and reviving tourism. Improving security and investing in the service industry to support hotels will help bring back tourism, because even if Egypt is considered a cheap country for tourists, if they have a bad experience they are less likely to return, according to Badr.
Badr believes that Egyptian consumers still have purchasing power however negatively they may be affected now. The formal economy helps support this purchasing power; however, the informal economy is probably much bigger than the formal economy. Hence, it negatively affects the current purchasing power, according to Badr. He added that the flotation is bringing liquidity from the informal economy into the formal economy, leaving the economy with a somewhat unified exchange rate and no incentives to go to the unofficial market.
Healthcare sector expected to improve in 2017, housing and construction may underperform: Ahmed Badreldin, partner in Abraaj Group
Ahmed Badreldin, partner in Abraaj Group, believes that the fruits of the Egyptian pound’s floatation will start to become obvious in the second half of 2017 as the currency will begin to strengthen and maybe even stabilise. “However, the primary issues for the businesses in which we have invested will be wage and cost inflation headwinds,” Badreldin noted. He also pointed out that inflation and interest rate headwinds are the largest barriers to an optimistic outlook on the IPO pipeline.
Badreldin expected the healthcare sector to improve, noting that while there may be some inflationary pressure on the wage side, the pricing will remain market-driven. He stressed that his company will be investing in the healthcare sector as it sees room for investments in medical technology and capacity growth with focus on patient care and safety.
His company will also invest in pharmaceuticals depending on the opportunities that arise and the expected developments resulting from new pricings and regulations, as Badreldin believes that the sector of pharmaceuticals will improve if regulations and price increases are allowed. However, he pointed out that the sector may underperform without loosened price controls.
In terms of other sectors, he believes that right now margins are compressed in the food sector but will likely catch up, especially with the high demand.
“The housing and construction sectors could face some headwinds given the erosion of purchasing power and inflation on the raw materials side,” Badrledin said, describing his expectations for housing and construction in 2017.
Regarding power generation and other sectors related to it, Badreldin expects them to perform well during 2017, similarly to infrastructure, supported by strong fiscal stimulus.
