Stocking on bad news The market mirrored it all: a year of political instability, economic upheaval and social unrest. The stock market warmly received the inauguration of Mohamed Morsi as Egypt's first post-revolutionary president with a short-lived optimism that pushed up the main index by almost 30 per cent in the two-and-a-half months following Morsi's taking power to reach 5969 points in late September, the highest level throughout the year. Yet, following this a myriad of bad news and poor economic and corporate-related decisions made it impossible for the market to touch such a point again, or come to one close to it throughout the year. June has been the worst month in Morsi's tenure thus far, with the EGX30 index losing 16 per cent of its value in the first three weeks of the month. The drop came on the back of fears of escalating tensions between Cairo and Addis Ababa relating to a proposed new Ethiopian dam on the River Nile, Morsi's decision to freeze diplomatic relations with Syria, and uncertainty surrounding the countdown to the opposition demonstrations on June 30. Also in June, Morgan Stanley considered cancelling the local bourse from its emerging markets index due to problems facing foreign investors in repatriating profits on the back of the dollar scarcity in Egypt. The government's statements and apparently hasty decisions have caused difficulties for blue-chip stocks, sending the market downwards. The best-known such statement came in early October, when Morsi hinted that the government was investigating corruption claims relating to companies including Orascom Construction Industries (OCI), TMG Holdings and the EgyptKuwait Holding Company, which together represent 20 per cent of the market's capitalisation. OCI was the year's newsmaker, starting with a stock swap deal that resulted in its being listed in Amsterdam under the name of OCI NV and sparking fears that it could delist from the local market. The market reacted even more negatively on the back of news of the travel ban on company chairman Nassef Sawiris and his father on charges of failing to pay overdue taxes on a deal executed in 2007. While the ban was lifted after OCI agreed to pay LE7 billion, observers believe that the move sent a negative message about how the government was treating businessmen, even if they were among the country's largest employers. Talk of levying a 10 per cent capital gains tax on IPOs and other transactions also spooked the market. While the government later annulled this tax, it imposed a 0.001 per cent tax on all the market's transactions. As for the year's most important deals, the Egyptian Financial Supervisory Authority (EFSA) declined to approve the merger between EFG-Hermes, the country's largest investment bank, and Qatar's Q-invest. Meanwhile, the Qatar-based QNB's acquisition of the National Société Générale Bank stirred reservations when the regulator decided to impose taxes on the agreement, though these were later cancelled. Reserves upbut higher debt The Central Bank of Egypt's (CBE) net international reserves rose by $1.6 billion last month to $16 billion at the end of May 2013, the highest level since January 2012 according to Ministry of Finance figures. The month witnessed a notable monthly increase of 11.2 per cent, an annual growth of 3.4 per cent, the first since December 2010. The increase was due to Qatari funds worth $3 billion, which will be converted into treasury bonds of three years maturity with a 3.5 per cent interest rate. The increase in reserves in April to $14 billion had been on the back of $2 billion in Libyan funds. Egypt's net international reserves (NIR) covered 3.2 months of imports in May, up from 2.8 months a month earlier. However, while the borrowed money has helped prop up the country's reserves, it has also helped inflate Egypt's debt bill. The government's external debt has reached unprecedented levels over the past year, and with the Qatari and Libyan deposits Egypt's foreign debt now stands at around $45 billion, approaching the debt recorded in 1990, which was $47.6 billion. Before the deposits, external debt stood at $38.6 billion in March 2013, an increase of 15.6 per cent compared to the $33.4 billion at the end of March 2012. A previous Qatari sum of $4 billion was deposited in the CBE as part of a financial assistance pledge during the second quarter of 2012/13. Egypt has converted the Qatari funds of $2.5 billion received in December 2012 into treasury bonds of 18 months maturity due in November 2014 with a 4.25 per cent annual interest rate. Turkey has also provided Egypt with financial support, lending the country $1 billion towards the end of 2012. Saudi Arabia has loaned Egypt $4 billion, including $1.5 billion in the form of non-refundable grants. Were Egypt to obtain the $4.8 billion loan from the International Monetary Fund (IMF) that it has been negotiating on and off for two-and-a-half years, the size of its external loans would bulge further. The IMF said recently that it was making progress in talks with the Egyptian authorities on the potential loan, but that technical issues such as subsidies remained. According to Gerry Rice, IMF spokesman, “we look forward to the resolution of remaining technical issues and the completion of the preparatory work by the authorities.” Besides the external debt, the situation is even more serious on the domestic front where gross domestic public debt reached LE1.3 trillion (77.4 per cent of GDP) at the end of March 2013, compared to LE1.1 trillion at end of March last year (68.3 per cent of GDP). This compares to the LE861 billion (55.8 per cent of GDP) at the end of March 2012. The increase in domestic public debt has been due to the government's eagerness to finance its gaping budget deficit through the sale of government bills and bonds. Officials have said that the country's budget deficit for 2012/13 will reach LE205 billion, or around 11.5 per cent of GDP. The government has been paying between 14 and 16 per cent for its paper, up from less than 10 per cent prior to the 25 January Revolution. Troubles for the pound The Egyptian pound has set record lows on the foreign exchange markets over the past 12 months, surpassing LE7 per dollar on the official market, a figure not seen since 2003. According to Central Bank of Egypt (CBE) rates, the dollar was selling this week for LE7.03. The pound has lost more than 11 percent of its value since late December 2012 and around 22 per cent since the 25 January Revolution. Dollars are becoming increasingly difficult to come by, and those wanting to change pounds into dollars must present the banks with documentation to validate their request. Dollars have largely disappeared from the country's currency exchange bureaus. Egypt's currency has been depreciating steadily since December 2012, following a new dollar auction system introduced by the Central Bank of Egypt (CBE) to protect the country's foreign reserves, which dipped to some $13 billion in March. According to the new system, foreign currency auctions are held regularly to sell to the banks based on their needs, which are reflected by market needs. However, the pound's downward trend began before the system was introduced, notably following President Mohamed Morsi's constitutional declaration in late November 2012. The sinking value of the pound and the flight to hoard dollars have been triggered by the unstable political and security situation in the country, Egypt's continuous credit rating downgrades, the country's budget deficit, and a slowdown in foreign investments. On the black market, which has flourished on the back of the scarcity of hard currency through official channels, the pound has lost even more ground, trading at around LE7.5 per dollar. The hike in the value of the dollar has in turn indirectly affected prices, not only because Egypt is a net food importer, but also because 60 per cent of the inputs that go into the manufacturing processes of local goods are imported as well. One downgrade after another Over the past fiscal year, Egypt has suffered one credit-rating downgrade after another, the latest coming in early May 2013 when the credit-ratings agency Standard & Poor's (S&P) placed Egypt in junk status, seven notches below investment grade where it had been in 2010. This latest downgrade was attributed by the agency to the government's apparent inability to come up with a plan to control its finances, leaving the country vulnerable to a balance of payments crisis. “The Egyptian authorities have yet to put forward a sustainable medium-term strategy to manage the country's fiscal and external financing needs,” S&P said in a statement. A low sovereign credit rating means that the risk of default is thought to be high and the cost of borrowing on international markets is therefore greater. S&P, Fitch Ratings and Moody's, the three largest rating agencies, have each cut Egypt's sovereign debt rating several times since January 2011. Besides the country's weak public finances, the agencies have been sensitive to political instability, such as the protests that followed the constitutional declaration in late November 2012 or the reaction to the court rulings on the deaths of fans at a football match in Port Said, which ignited violent unrest in the Suez Canal cities. The unrest resulted in many deaths, and it prompted President Mohamed Morsi to announce a state of emergency in Port Said, Ismailia and Suez. When it downgraded Egypt's bond issues in March, Moody's said that these were assets that were “subject to very high credit risk” sparked by the ongoing “unsettled political conditions” that have significantly weakened the country's economy. Earlier, in January 2013, Fitch said that “the political transition, while making significant progress, has at times been mishandled and serious divisions have opened up within society, contributing to sporadic outbursts of violence.” It also said that “political conditions are complicating economic policy-making.” S&P said in December that “the increased polarisation between the Muslim Brotherhood's Freedom and Justice Party and sections of the population is likely to weaken the ability to deliver sustainable public finances, promote balanced growth and respond to further economic or political shocks.” Egypt's dwindling hard currency reserves and the failure to reach agreement on an International Monetary Fund (IMF) loan have also been given as reasons for the credit downgrades. “In the absence of funding associated with an IMF programme, there is the potential for ongoing depreciation and reserves decline, which would generate inflation in an import-dependent economy and lift the subsidies bill,” Fitch said in January 2013. However, the ratings agencies have put the country on their watch list. S&P said in May that it “could raise the ratings if Egypt's political transition strengthens the social contract and a sustained increase in net international reserves provides evidence of an easing in external pressures.” But it could also “lower the ratings if we conclude that the government is increasingly unlikely to prevent a further significant deterioration in external indicators.”
End to fuel shortages? Fuel shortages became more severe this week in Cairo and other governorates, crippling people's activities. Long queues of cars lined up in front of gas stations, making the city's nightmarish traffic even worse. While the government attributed the severe shortages this week to a delay in delivering fuel to gas stations, ordinary citizens believe that the government intentionally left the market thirsty ahead of the protests scheduled for 30 June. They believe the government intendes to help prevent protestors opposing the president from partcipating in demostrations.This week's queues were a repeat of many others throughout the past 12 months. The government is hoping to end these fuel shortages through the application of the new smart-card system to end chronic fuel shortages and to better target fuel subsidies. If there is one thing that consecutive governments in Egypt have agreed upon, it is the inefficiency of the country's system of energy subsidies. Petroleum subsidies eat up a fifth of government expenditure, and the need to address this issue was never more urgent than after the 25 January Revolution, given the country's widening budget deficit. The total bill for energy subsidies is targeted to reach some LE100 billion in 2013/14. While the government had targeted LE70 billion for subsidies in fiscal year 2012/13, actual spending on energy subsidies reached LE120 billion due to the failure to implement reforms. Over the past year, the government has thus been talking of a new smart-card system that is aimed at rationalising the petroleum subsidies and making sure that they reach their intended targets. The first stage of the new system was kick-started last month, with a second phase scheduled for July. In a press conference held this week, the government announced that the main aim of the new smart-card system was monitoring and tightening control over the distribution process of subsidised petroleum products in such a way as to end smuggling and the selling of these products on the black market. The government stressed that there would be no cap imposed on the quantities of fuel allowed for each vehicle. This contradicted what was said last year, when it was announced that car drivers would get limited quantities of subsidised fuel through the smart cards. Should they consume more, they would have to buy it at market prices. “The new system aims at eliminating smuggling and providing a database of fuel consumers that will help policy-makers make decisions,” said Tarek Al-Barkatawi, head of the Egyptian General Petroleum Corporation (EGPC), during the press conference. He added that the first stage of the smart-card system, which supervises the distribution process from fuel depots to petrol stations, had been successfully completed. It involved issuing smart cards to some 64 depots and 2,600 fuel stations across the country. Some 3,000 points of sales had been established, and workers in the sector had received training on using the new system. “Through the new system, we have discovered that eight per cent of the registered petrol stations do not exist, even though they have been receiving fuel allotments,” Prime Minister Hisham Kandil said during the press conference. Kandil attributed the recurring fuel shortages in part to smuggling and in other part to the fact that some people had resorted to stockpiling subsidised fuel out of fears that prices would increase. He added that an island in the Mediterranean, which he did not name, had sent a letter to the Egyptian embassy requesting it to put an end to the smuggling of Egyptian fuel because it was causing damage to the island's local market. Kandil said that the new system would end such smuggling and rationalise fuel consumption, adding that the money saved would go towards other sectors, such as healthcare, which would eventually benefit the poor. Diesel is currently sold at the subsidised price of LE1.1 per litre, while 80 octane petrol costs LE0.9 per litre, 90 octane LE1.75, and 92 octane LE1.85. During the press conference, Kandil also announced the start of the second stage of the smart-card system, which involves issuing smart cards to fuel and diesel consumers. This will come into effect in July for diesel and in August for petrol. Owners of diesel-powered vehicles, which government figures put at one million, will receive their smart cards without paying any fees starting in July. The owners of cars running on petrol will have to register on the www.esp.gov.eg website, where they can also choose the place where they can pick up their cards. Dark nights Shortages of fuel have not only caused havoc among motorists lining up in front of petrol stations, but they have also caused problems for many households and industries as a result of prolonged power cuts because the country's power stations also run on fuel such as diesel and natural gas. The power cuts, which have slightly improved now, had lasted for up to four hours in some areas, several times per day. The situation was exacerbated by the onset of the summer season, which meant higher demand for electricity. According to the Ministry of Electricity and Energy, the fuel shortages have led to the loss of 4,500 megawatts (MW) of the national grid's total capacity of 30,000 MW. Some 90 per cent of Egypt's power is currently produced by fossil fuels. The recurring power cuts have become a source of frustration for many, igniting a spate of protests in some governorates, with activists calling upon citizens to stop paying their electricity bills in protest at the power cuts. The outages have caused damage to many industries, causing many activities to come to a halt. In a bid to solve the problem, the government has said that several projects are underway to generate more electricity, but that they needed time to start operating. It is also in the process of connecting the country's grid with that of Saudi Arabia, so that both countries can exchange energy given the difference in peak hours. Qatar has also granted Egypt five shipments of liquefied natural gas (LNG) to help it meet demand during the summer. The Gulf state said it would begin delivering the shipments at the end of July and could continue until mid-September. The gas will be used to fuel power stations, which could help Egypt avoid prolonged power outages. Meanwhile, the government has called upon all citizens to rationalise their consumption in a bid to avoid further cuts. Better bread The quality of Egypt's subsidised bread has improved over the past 12 months, and improving it has been at the top of President Mohamed Morsi's to-do list since he was elected to office last summer. However, while Morsi pledged to improve bread quality in the first three months of his tenure, this did not happen, and the improvements had to wait for later in the year. The improvements have come on the back of a new system for the delivery of flour to bakeries producing subsidised bread. Previously, the bakeries received the flour at LE16 per 100kg, encouraging some of them to sell it at a premium on the black market. In January 2013, the government decided that production would take place at market prices, and flour is now sold to bakeries at LE282 per 100kg, enough to produce 1,060 loaves of flat baladi bread. The bread is sold to consumers at LE0.05 per loaf of 130 grammes, with the government covering the difference between the cost of production and the sales price, paying an additional LE80 for each 100kg of flour used to meet the costs of labour and utilities. Providing high-quality bread at low prices has been a perennial challenge for successive governments over the past few decades. Though the subsidised bread has been sold at LE0.05 since 1989, its quality has got worse over recent years. Bread subsidies cost the country some LE16 billion annually. The government has announced that it is committed to retaining the retail price of LE0.05 a loaf, while changing the technical aspects of the subsidy system. The new system was first tried out in pilot projects in Port Said and Beni Sweif and was later expanded into other governorates. There are more than 18,000 baladi bread bakeries in Egypt, of which 90 per cent are privately owned and 10 per cent are publicly owned. The new system has not been universally welcomed. When it was first applied, hundreds of bakery owners from different governorates protested against it, saying that the cost price determined by the government was less than their actual expenses. In response, the government announced that the cost price would be revised each year. It also said that it was not obligatory for bakery owners to produce bread according to the new system. However, those who refused would have their licences to produce baladi bread withdrawn. Banking on sukuk As a result of President Mohamed Morsi's Islamist background, experts have expected that Islamic finance would play a significant role under his tenure as president. During Morsi's first year in office, Egypt saw its first sukuk, or Islamic bonds, law issued. After a lengthy process and weeks of debate, the Shura Council, which until a new parliament is formed has legislative powers, approved a new sukuk law last May. The Ministry of Finance is now about to issue instructions for implementing the new law, and the government is scheduled to promote 10 projects financed by sukuk bonds in the fields of electricity, transport and industry in a number of Gulf, Asian and European countries in the coming months. In the light of Egypt's deteriorating economy, with a budget deficit expected to reach some LE200 billion and a stalled $4.8 billion IMF loan, the government is pinning its hopes on sukuk bonds as a way of bridging its financing gap. The government said that sukuk bonds were the only way to finance development projects in Egypt without high associated costs, as the system would spare it having to borrow at interest rates of up to 16 per cent, adding to the country's debt burden. It added that issuing the bonds on the Egyptian market would encourage investment that would in turn create jobs and help alleviate unemployment. It would also increase production and export activities that would in turn ramp up foreign currency revenues. Egypt is expected to see its first sukuk bonds put on the market early next year, with the government expecting demand to range from $10 to $15 billion a year. Meanwhile, the new sukuk law has stirred controversy, with many experts expressing their reservations and saying that it could open the door to selling public assets and to foreigners acquiring these assets. The Islamic Research Academy of Al-Azhar (IRA) refused to approve the first sukuk draft law on the grounds that it violated Sharia law and could pose a threat to state sovereignty. The law was then amended, and the government sought to assuage public concerns by stating that the new law banned the issuing of sukuk bonds on public assets such as the River Nile, the Suez Canal, the Pyramids and others. It also stressed that sukuk bonds were a financial instrument that would be used to finance certain projects but would not be substituted for other instruments. According to Reuters, the global demand for sukuk bonds will increase from $140 billion in 2012 to some $420 billion by 2016. Among the countries that are expected to issue sukuk bonds soon, Egypt has the potential to be the largest market. Faltering tourism Egypt's tourism sector has faced several blows during the current financial year as a result of the continuing political instability in the country, though it has been able to maintain some positive signs. According to a recent statement by the Central Bank of Egypt (CBE), tourism revenues increased to $8.1 billion from $7.1 billion between July 2012 and March 2013. The number of tourists visiting Egypt increased as well, with Tourism Minister Hisham Zaazou stating recently that five million tourists had visited Egypt since January 2013, generating some $4 billion in revenues. He was optimistic that this figure could reach 13 million by the end of the year, bringing the industry close to its pre-revolution level of 14.8 million tourists in 2010. However, despite these figures experts believe that the sector has not fully recovered due to the lower revenues compared to pre-revolution levels. The smaller revenues are attributed to the fact that many tourism agencies and hotels across Egypt cut their prices in order to maintain occupancy rates in the wake of the revolution. Experts say that the numbers indicate that Egyptian beach resorts are the most alluring tourist destinations, while cultural destinations, such as Luxor and Aswan, have failed to pick up in the same manner. Hotels in Cairo have fared badly throughout the year as the capital has become a venue for protests and clashes. Though President Mohamed Morsi has vowed to support efforts to boost tourism, the recent decision to appoint Adel Al-Khayat, a founding member of the Islamist group Al-Gamaa Al-Islamiya, as governor of Luxor has not helped in achieving these goals. Following Al-Khayat's appointment, protests erupted in Luxor, with demonstrators citing the allegedly devastating impact the appointment could have on the region's tourism industry. Al-Gamaa Al-Islamiya was responsible for the massacre that killed 62 people, mostly tourists, in Luxor in 1997. Al-Khayat resigned from his post earlier this week in response to the pressures. Despite its relative recovery, the tourism sector remains vulnerable to the continuing political uncertainty in Egypt. Experts have warned that the industry could return to square one if the protests scheduled for 30 June turn violent. No bumper crop Egypt's wheat production has been a priority of President Mohamed Morsi since he came to power a year ago, with the president promising that the country could become self-sufficient in wheat in four years. Demonstrating his commitment to the issue, Morsi delivered a speech in a wheat field in Borg Al-Arab at the beginning of the harvest season, saying that this year's harvest would reach 9.5 million tonnes, an increase of 30 per cent over last year's, which he said had totalled 7.5 million tonnes. Though the harvest season comes to an end in June, the government has announced that it is satisfied with the increases in local wheat production as well as the amounts delivered. However, some experts remain sceptical, saying that the official figures are inflated. On 20 June, Bassem Ouda, the minister of supply and internal trade, announced that the amount of wheat already delivered to the government was 3.6 million tonnes, 150,000 tonnes higher than the same period the year before. Experts believe that this increase is in fact a modest figure that does not meet the government's previous rosy promises. They are also sceptical over the figures for both local production and the delivered amounts, due to the many obstacles facing wheat cultivation and storage in Egypt. Wheat is one of the country's strategic crops, but local production usually accounts for less than half of annual consumption, meaning that the country has to import the remaining amount of almost 10 million tonnes, making it the largest wheat importer worldwide. This year around 3.4 million feddans (1.038 acres) have been allocated to wheat cultivation. If the harvest reaches the targeted 9.5 million tonnes, this will be enough to cover six months of consumption and ought to relieve the pressure on the country's foreign currency reserves since it will mean fewer imports. In order to motivate farmers to produce wheat, the government has provided extra incentives including a delivery price higher than international prices. It is paying LE400 per ardab (150kg) for top-quality wheat and LE385 per ardab for lower quality varieties, with payment promised within 24 hours of delivery. In the doldrums Dissatisfaction with work has been a common denominator in Egypt over the past 12 months, with this being reflected in the strikes that have taken place in the country's hospitals, factories, airports, schools and universities. A report published in April by the Egyptian Centre for Economic and Social Rights showed that around 2,000 labour strikes and protests took place in 2012, four times the number in 2010. Many workers had dreamt that their lives would change for the better after the 25 January Revolution, but for many these dreams were not realised. While they hoped for better healthcare, higher salaries, and better education and housing, little of this has materialised. Many people's jobs have even become harder due to the economic slowdown, which has caused many to lose their jobs as a result of reductions in the workforce in many sectors and the cutting of wages in others. The slowdown has led to an increase in unemployment, which jumped to 13 per cent in the fourth quarter of 2012 compared to 12.4 per cent in the same quarter the previous year and 8.9 per cent in 2010 immediately before the 25 January Revolution. The increases have meant that 1.2 million more people became jobless after the Revolution, according to the Central Agency for Public Mobilisation and Statistics. Contrary to the promises made after the Revolution, workers have not been permitted to establish or join organisations of their own choosing without first having to seek authorisation. A draft law currently being discussed in the Shura Council puts severe restrictions on the establishment of free labour syndicates, and this law has been criticised by workers, human rights organisations and non-governmental associations. On the international level, the draft law has also stirred concerns, notably when Ban Ki-Moon, the UN secretary-general, cited the need for Egypt to ensure that its laws conformed to international human rights standards and respond to the aspirations of its people. Egypt was placed on the International Labour Organisation's (ILO) black list in June 2013, with the possibility that it will stay there for the next three years, for failing to issue a new law allowing workers the right to establish independent unions or syndicates. Egypt was taken off the ILO's black list after officials announced that the country's laws on freedom of association would be opened up. Being put back on the black list is a clear sign that labour rights have experienced a setback.
