Egypt’s Bow to Unions Stalls State Asset Sales, Investing Boom
|Thursday, April 26,2007 01:43|
Mahmoud Abdel Latif, who was appointed chairman of Egypt"s Bank of Alexandria SAE in September 2002, says he knew as soon as he walked in the door of the main branch that he had a big job ahead. The paint on the walls was peeling, and the offices had an unsavory smell. It took customers an hour and a half and a visit to at least seven different tellers to cash a check. The bank was mired in bad debt. ``Everything was collapsing,"" Abdel Latif says of what was then Egypt"s fourth- largest state-owned bank.
Last year, Sanpaolo IMI SpA of Italy bought an 80 percent stake in the bank for $1.6 billion, the biggest sale of a state company in Egypt"s history. As a result, assets have grown. The bank has recouped 11 billion Egyptian pounds ($1.9 billion) in bad debt. Clients can now cash a check in six minutes. There are even flowers to greet visitors in the odor-free main branch.
Bank of Alexandria has become a showcase in Egypt"s effort to privatize its stagnant state-owned companies and attract foreign investment -- an effort that has proceeded in fits and starts for more than 15 years. In the year after President Hosni Mubarak appointed a new free market-oriented cabinet in July 2004, the government sold 28 companies, garnering $974 million for the Egyptian Treasury. In addition, since 2004, Mubarak has knocked down barriers to foreign investment and stripped away some of the red tape that hampered private businesses.
Egypt"s gross domestic product grew 6.8 percent in the 2005-06 fiscal year, its fastest growth rate in two decades. The government is targeting 7.5 percent growth in the fiscal year ending on June 30. Direct foreign investment in 2006 was $6 billion, up from $2 billion in 2004, according to the investment ministry.
A 408 Percent Gain
Egypt"s CASE 30 stock market index of the biggest and most- liquid publicly traded companies rose 408 percent from July 1, 2004, to April 23. Much of the investment was fueled by record oil prices that allowed Persian Gulf investors to spread their wealth across the Middle East.
Now, the drive to sell state companies is slowing. The government, stymied by unions and the political opposition, has canceled or postponed several planned sales. Egypt"s stock market has cooled along with enthusiasm for privatization. After dropping sharply in the first half of 2006, the CASE 30 Index was up 5.5 percent for the year. As of April 23, it was up 5.2 percent in 2007. Trading volume, which reached more than 1 billion Egyptian pounds ($176 million) a day in 2005, is now half of that.
Sawiris: Move Faster
The slowdown in the sale of state assets frustrates Egypt"s capitalists. ``The economy is growing -- we are moving in the right direction -- but it is taking us too much time to build jobs,"" says Naguib Sawiris, chief executive officer of Orascom Telecom Holding SAE, Egypt"s biggest private company, with a $16 billion market value and 20,000 workers in offices from Algeria to Pakistan. ``The main issue is to change ownership, introduce new management, increase productivity and efficiency and raise employment,"" Sawiris says. Unemployment, officially 9 percent in December, was down from 9.6 percent a year earlier.
The government began putting the brakes on asset sales in early 2006. That March, it postponed the auction of Egypt Aluminium, 17 percent of which is held by the state, after it failed to attract buyers amid the stock market slump. It also delayed a planned initial public offering of state-owned Middle East Oil Refinery SAE.
In March of this year, the bureaucracy rejected an offer by Cimpor-Cimentos de Portugal SGPS to buy state-owned cement company Misr Cement Qena.
Striking Over Jobs
In February, 5,000 workers at Misr Shebin El Kom Spinning & Weaving Co. went on strike after the state-owned textile and clothing company was sold to India-based Indorama Co. The 10-day strike ended after the Egyptian government promised the workers health benefits and an increased percentage of profits.
``When the government sells companies to international investors, workers tend to lose their jobs,"" says Kamal Abbas, general coordinator of the Centre of Trade Unions & Workers Services, a union-affiliated group that helped negotiate an end to the strike. ``The workers at Shebin were justified in being frightened.""
Abbas says that when Torah Portland Cement Co. was privatized in 2000, about 2,500 of the 3,500 workers were given early retirement. Torah spokesman Ahmad Sadek confirms that number.
The prospective sale of some companies has raised a furor in parliament. Eastern Co., the country"s monopoly cigarette maker, and several state-owned pharmaceutical firms have been slated for sale for years; the process is continually postponed to put off the price rises that would likely accompany privatization.
Department Store Sale
When the government proposed to sell Omar Effendi, an 80-outlet department store chain, some MPs objected to the size of the bids and the prospect of job cuts. The deal eventually went through, in November. The buyer, Anwal United Trading Co., a Saudi Arabian retailer, paid 589.5 million pounds. The government promised there would be no job cuts as a result of the sale.
Investment Minister Mahmoud Mohieldin says politics always plays a role in the government"s divestment plans. ``Some describe us as driving a fast train; others say we can go even faster,"" he says. ``We need to maintain stability in the workforce and not have a major shock."" Mohieldin, who has a doctorate in economics from the University of Warwick in the U.K., says he plans to try to sell 45 state-owned companies.
Orascom"s Sawiris says the problem in government is a longtime prejudice against private enterprise. ``They"re scared of the old leftist camp who still believe in public-sector ownership and management, which is a joke,"" Sawiris says. ``They need to move faster on privatization.""
Mehmet Simsek, head of fixed-income strategy and economics research for emerging markets at Merrill Lynch & Co., says Egypt"s economic expansion will slow if the government isn"t able to generate internal growth through privatization.
``Without further micro and macro reforms, it may prove difficult for Egypt to sustain a high growth rate of 7 percent per annum,"" he says. ``If Egypt runs into reform fatigue, it will have difficulties attracting foreign investment.""
Among the strongest skeptics on state company sales is the Muslim Brotherhood, one of the oldest Islamist organizations in the Middle East. Though the group, founded in 1928, is officially banned and its leaders are frequently jailed, affiliates of the Brotherhood are now the biggest opposition group in parliament, with 88 seats in the 454-member lower house. Abdel-Hamid al- Ghazali, an economic adviser to the group, says that in many of the state sales, the government has been cheated. ``We are for privatization provided that the assets of companies to be sold receive a fair valuation,"" al-Ghazali says.
Tradition of Socialism
With a population of 72.6 million, Egypt is the largest Arab nation. It also has the longest tradition of socialism. After the military overthrew King Farouk in 1952, the new government nationalized big companies, putting generals in charge. State control of the economy was a prime tenet of Gamal Abdel Nasser, who ruled Egypt from 1954 until his death in 1970.
The state didn"t begin to loosen its grip on the economy until 1991, when, under pressure from the International Monetary Fund, Mubarak relaxed price controls, reduced subsidies on consumer items such as tea and butane and took steps to liberalize trade and encourage foreign investment. GDP grew to $89.3 billion in 2005 from $60.2 billion in 1995, according to the World Bank.
The shift to a free market economy came to a halt after the November 1997 massacre of 58 foreign visitors at a temple in Luxor scared away international investors and tourists. The situation wasn"t helped by the 1997-98 East Asian economic crisis, which hurt Egypt"s exports.
New Economic Team
The pause in Egypt"s transformation didn"t end until 2004, when Mubarak installed a new free market-oriented government, led by Prime Minister Ahmed Nazif. The head of Nazif"s economic team is Finance Minister Youssef Boutros-Ghali, who was educated at Massachusetts Institute of Technology and is the nephew of Boutros Boutros-Ghali, former secretary general of the United Nations.
``Suddenly, the majority of those in the cabinet were born in the second half of the 20th century, which created reformers,"" says Boutros-Ghali, who himself was born in 1952. ``Before, there weren"t enough of us.""
Boutros-Ghali has taken a series of measures to speed up the modernization of the world"s oldest bureaucracy. In 2005, the legislature cut income taxes by half, to 20 percent from 40 percent. Boutros-Ghali also reduced tariffs on imports to 6.9 percent from 14.6 percent. That, plus a reduction in red tape for importers, means that Egyptians for the first time can buy Levi"s jeans, compact discs from Virgin Megastore and coffee from Starbucks without leaving the country.
Buying Brand Names
``Many brand names that you couldn"t find in Egypt before have started to appear all of a sudden,"" says Fady Badie, a 27- year-old insurer who lives in Cairo.
Exporters have benefited from the rewriting of arcane regulations that forced them to negotiate with dozens of bureaucrats in order to get a shipment approved. Sherif El-Maghraby, CEO of Cairo-based El-Maghraby Agricultural Group, a fruit exporter, says his cargoes now have less trouble getting through customs.
``You could miss a flight because things were not ready,"" El-Maghraby says. ``Paperwork would stop you, or a government export inspector would say, "No, stop, the produce should be wrapped in white paper, not yellow."""
Egypt"s economy still lags far behind the developed world. Annual per-capita income is $1,250 compared with $37,600 for the U.K. and $11,770 for Saudi Arabia, according to the World Bank. Inflation, which hit 12.8 percent in March, eats away at the meager earnings of the poor. ``People are starting to eat out of the garbage; you never saw that before in Egypt,"" says Hisham Kassem, a newspaper publisher and vice president of the opposition Al-Ghad party. ``This government isn"t working any economic miracles.""
Protecting the Poor
Boutros-Ghali says that as the economy is modernized, the poor will be protected by channeling subsidies to those who most need them. ``In these transformations, poverty tends to increase in the initial phase,"" he says. ``We are taking all the necessary measures to reverse any poverty increase.""
Bank of Alexandria"s Abdel Latif says his own experience shows that the sell-off of state companies will create jobs. His bank has introduced new products such as auto and marriage loans since it went private. And he"s hired 100 new employees, taking the total workforce up to 5,600.
The challenge for private sector bankers, he says, is to persuade potential customers to trust banks with their savings. Only 10 percent of Egyptians have bank accounts, according to Moody"s Investors Service. ``We still have a bit of a way to go until the mentality of people regarding finance changes,"" Abdel Latif says.
The same could be said about releasing the broader economy from state control.
To contact the reporters on this story: Mahmoud Kassem in Cairo at. Dania Saadi in Cairo at .