Egypt firms struggle as political uncertainty hits economy

Published September 22nd, 2011 - 06:39 GMT
Egyptian firms, many facing strikes and other pressures to raise pay, in particular want assurances that economic policy will not become more populist
Egyptian firms, many facing strikes and other pressures to raise pay, in particular want assurances that economic policy will not become more populist

When the chief executive officer of Mobinil, one of Egypt’s largest telecommunications firms, tries to plan his budget for 2012, he struggles to balance a string of economic and political uncertainties.

“It’s difficult to forecast, it’s difficult to plan,” says Hassan Kabbani. “I’m not sure what to do and under what scenario I will go to my board to submit a budget proposal for 2012. Do we go with aggressive investment or should we hold, waiting to see? We lack visibility.”

Seven months after President Hosni Mubarak was ousted, Egypt’s business community is becoming more vocal in its pleas for the interim government to spell out how it plans to revive confidence in the economy, which has been badly hit by an exodus of tourists and investors.

Businessmen say Egypt cannot wait until the ruling military council hands administration over to a civilian government. Parliamentary elections, to be held in stages, are due to start in November and end in January. A date for the presidential vote has yet to be set.

Egyptian firms, many facing strikes and other pressures to raise pay, in particular want assurances that economic policy will not become more populist. They fear the government could hike taxes on firms and introduce legislation or administrative steps to push up wages as it tries to placate protesters angry at the deep divide between rich and poor.

“The question is how do you pay for social justice without harming business to the extent that in a free market economy, investment stops and job creation stops?” said Taher Gargour, deputy CEO of ceramics firm Lecico, who negotiated worker pay raises this year that ended a series of strikes.

The longer uncertainty over this issue persists, the longer companies will hold off on investment, sapping the economic growth that is needed to improve mass living standards. Businesses also fear that some of Egypt’s brightest minds may start leaving the country and, with the economy stagnating, the poor will also step up their street protests.

Lecico warned in mid-August that 2011 might be its worst year since 2004 after second-quarter net profits plunged 80 percent from a year earlier to 5.1 million Egyptian pounds ($857,000), because of weaker demand in European export markets and a nine-day strike that halted operations at its Alexandria sanitary ware and tile factories. Disarray in the Egyptian government after the political upheaval also hurt its business. Lecico said it took five months to receive official approval to turn on gas supplies at its new tile factory, which began operating in July.

Meanwhile, Mobinil says several of its businesses plans are on hold, including the installation of a fiber optic network for high-speed Internet services. “In our activity, one year of delays is too much. One year makes a big difference in technology,” said Kabbani. “We need to keep Egypt on the technology map, in the digital world.” He added: “The telecoms sector is not seeing a dialogue between the private and public sector. We are seeing a lack of decisions … which is keeping us on hold for unnecessary reasons, delaying projects that might help the Egyptian economy.”

Mobinil has also suffered in Egypt’s new political environment from a loss of subscribers who protested at a cartoon posted on Twitter in June by one of its founders, which was seen as lampooning ultra-conservative Muslims and was taken by some as an offense against Islam.

Ashraf Naguib, CEO of private sector think tank Global Trade Matters, said the government and the new political players in Egypt were failing to engage with the business community. “Neither the prime minister, nor the presidential candidates, nor the new parties or any of these people is saying, ‘This is the economic transition that we’re going to do, here’s the economic reform plan. Let’s sit down, let’s discuss it, because without it we won’t have political transition.’”

So far, the interim government appears too distracted by the challenges of maintaining stability to commit itself on sensitive issues such as wage policy and the redistribution of wealth; even if it did so, there would be uncertainty over whether its policies would persist next year under a new government. Predicting the shape of the new government is highly uncertain with roughly 50 political parties competing in a new electoral landscape.

Egypt’s economy, which sailed relatively unscathed through the global financial crisis of 2008-09, was heading back toward annual growth of 6 percent before the uprising erupted, analysts say.

Now it has been knocked back hard. The economy grew by 1.8 percent in the year to June 30. The government has said it may expand by 3-3.5 percent in the 2011/12 fiscal year, nowhere near the 6 percent which economists say is needed to create enough jobs to lower unemployment.

There are some positive signs. The drain on foreign reserves has slowed, although they have dropped by about $11 billion since December to $25.01 billion at the end of August. “For the long term, I’m definitely positive. Lots of people from the business world are interested in coming and investing in Egypt. They believe in the potential of this market. All the fundamentals are there. The issue is the short and medium terms,” said Mobinil’s Kabbani. But the longer it takes for Egypt to regain political stability, the more problematic the long-term outlook starts to appear. In addition to opening the door to more workers’ strikes, the political upheaval has led to an increase in crime, many Egyptians say. The interim government has stepped up the use of emergency security laws since demonstrators attacked the Israeli embassy early this month.

The new military rulers have pressed on with trials of Mubarak’s former associates and ministers, responding to a demand by protesters to clean out corruption. While businesses say they welcome the anti-graft drive, it can be unsettling.

Egypt’s stock market tumbled to a 29-month low last week after a court sentenced a steel magnate and former chairman of Ezz Steel to 10 years in jail on graft charges. His company lost two licenses, hurting its outlook. Some of Egypt’s largest firms are reeling under a string of legal challenges to their land holdings, including property developers SODIC and Palm Hills. Plaintiffs complain land was sold off at far too low a price by Mubarak’s government.

Hisham Metwally, a trader at Arab Finance Brokerage, said the cabinet, stock exchange officials, investment banks and the firms involved in the legal wrangles should meet to arrange better public disclosure for investors on factors affecting these firms’ operations and stock prices. When bigger firms start hurting, the effects quickly filter down through supply chains to small and medium-sized enterprises, estimated to account for around 70-80 percent of Egypt’s economy. Economists say these are the kind of firms that will create the jobs which Egypt needs.

Companies say they hope November’s parliamentary election will begin to restore predictability to Egyptian politics, making it clearer what economic policies are likely to be on the table and how much support they will command. “The longer we wait to begin this political journey, the bigger the risk may be,” said Gargour.


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