In Egypt, dollar and optimism in short supply
Cairo, March 27, 2013
By Sylvia Westall
After two years of political upheaval and weakness in the economy, companies in Egypt are struggling with a sinking currency and a shortage of foreign exchange, forcing some to make painful changes to their business plans.
The central bank's foreign currency reserves have tumbled to $13.5 billion, covering little more than two months' imports, as tourism and investment have waned. So the central bank is rationing US dollar supplies in auctions, making it hard for firms to get hold of dollars through the banking system.
"Every single businessman in Egypt is facing this problem," said Mohamed Al-Sadat, vice chairman at Menco Group, a mechanical and electrical maintenance company based in Cairo.
The business, which employs 200 people, buys components such as transformers and ceramics from abroad for use in construction projects. It needs dollars or sterling for the deals.
"You have to get the money from any place, you have to have it, otherwise you are going to shut down and go home," Sadat said.
Some firms are turning to the unlicensed black market and paying inflated rates for hard currency, he said. The Egyptian pound is trading between banks at around 6.80 to the dollar, but black market street vendors are asking over 7.0.
Business leaders say they expect the currency to depreciate further; it has dropped 9 percent against the dollar since the end of last year. Last week Moody's Investors Service cut Egypt's credit rating for the sixth time since the uprising against Hosni Mubarak two years ago, saying political instability threatened consumption and investment.
The turbulence has made operating tough for Menco Group. The company sealed a deal to import transformers three months ago, with payment to be made in sterling; it then had to reduce the order by more than 15 percent because the weakened Egyptian pound raised the cost.
The firm did not want to cancel the deal entirely because it would risk losing the trust of its supplier, Sadat said.
"Four years ago I used to sit with my employees and make an annual plan: these are our targets, gentlemen, for the next year," he said.
"Now we do that every single month, maybe every 15 days, we sit together and put together a plan. It is very hard - we do not have a vision of what will happen tomorrow."
Businesses of all sizes across Egypt are feeling such pressures, especially those that rely on imports, said Hussein Sabbour, head of the Egyptian Businessmen's Association, which represents around 1,000 members.
Restrictions on foreign currency trade have made day-to-day business a nightmare for importers, and working with foreign partners has become difficult, he said.
He gave the example of his own company, which has an engineering and design contract in Bahrain; part of the work is subcontracted to a Bahraini company which he pays on a regular basis through a bank transfer.
While six months ago the payment used to be processed in 24 hours, now he is hitting a bureaucratic brick wall.
"The bank says: why are you transferring it? Give me the documents, let me see it. So the bank is very afraid that people will send money outside Egypt for no reason," he said.
Egypt tightened currency controls in December in response to a rush by some Egyptians to withdraw their savings from banks. This month the restrictions were eased for tourists moving currency across its borders, but stayed in place for Egyptians.
It is not yet clear how much Egypt's imports have been hit by the hard currency shortage, which has become more serious in the last three months. According to the most recent official data, imports rose to $16.4 billion in the final three months of 2012 from $14.6 billion a year earlier, but the increase was essentially due to higher costs for importing energy.
"Importing used to be extremely easy, money was available in the banks...Now it can still be done, but it has become very expensive," Sabbour said.
Small and medium-sized companies have been hit the hardest, but even larger groups are rethinking the way they do business.
Ahmed Monsef, chief executive of Toyota Group's operations in Egypt, said he faced issues including how to obtain foreign currency and how to deal with banks to secure letters of credit.
His toughest challenge is working out how to price imported cars in Egypt, given changes in foreign exchange rates and weak consumer sentiment. "There are of course different prices, it constantly changes," he said.
While Egypt's pound has fallen against the dollar and the euro, it has been fairly steady against the yen, so since December Toyota in Egypt has been taking an average price difference across the currencies, helping to moderate retail prices, Monsef said.
Some companies are benefiting from the currency crisis; exporters are finding they can sell abroad more cheaply. So far, however, the boost to most exporters seems to have been modest, partly because they depend to some extent on imports of machinery and raw materials.
Egypt's non-oil exports rose only marginally to $3.4 billion last quarter from $3.3 billion a year earlier, the official data show. Most of the Egyptian pound's depreciation has occurred since the start of this year.
Oriental Weavers, a major Egyptian rug and carpet maker which generates around half of its sales from exports, wants to boost that figure to about 60 percent in order to benefit from any further fall of the Egyptian pound.
In 2012, its sales increased 6 percent to 4.9 billion Egyptian pounds ($721 million) while net profit after minority interests rose 12 percent to 272.9 million pounds.
The company is looking at ways to alter its product line to adapt to tough economic conditions.
"We might compensate this slowdown in the local market with higher volumes," investor relations manager Haitham Abdel Moneim said. He gave the example of using rug making machines to produce larger volumes of lower quality rug material.
"We are trying to be as flexible as we can. However, there are still very challenging conditions."
Moneim said Oriental Weavers had learnt to adapt to the depreciating pound and high costs of raw materials. A bigger concern is whether Egypt's new leadership will improve business regulations and try to strengthen the country's infrastructure, he said.
"Unpredictability and change in terms of regulations, in terms of ports that keep closing, roads that keep getting blocked - that is a challenging business environment." - Reuters