If it was not for the flotation on the pound, the Egyptian pound would have exploded and all economic indicators would have collapsed, according to the vice chairperson of Arabian Food Industries Company (Domty), Mohamed El Damaty. In an interview with Daily News Egypt, he stressed that inflation and price hikes are much more bearable when weighed against economic collapse.
Daily News Egypt conducted an interview with El Damaty after one year from the flotation of the pound. The interview touched on the elections of Al-Ahly Club, in which El Damaty is a candidate for the first time as part of Mahmoud El Khatib’s list.
He pointed out that he is running in the elections with his mind and vision, not his money, in a response to talks about him being a candidate that will finance the club. He noted that Al-Ahly is bigger than asking for a dime from any businessman.
Founded in 1989, Domty has been one of Egypt’s largest cheese and dairy manufacturers. The company has also entered the competition for the production of juices in 2013.
After one year from the flotation, was this the right decision? And were we ready for its consequences?
The decision to liberalise the exchange rate of the pound was 100% correct. Its timing was long overdue, which exacerbated the economic situation. All economic indicators have been worsening: debt has increased, growth had fallen back, and the country’s foreign exchange reserves have been plummeting.
But the fact is that the economic management of the country, whether financial or monetary or investment, was not ready for post-flotation consequences. This caused economic and social distortions, as price hikes found its way to all Egyptians.
Inflation recorded 35% in July, setting a new high record. It has since declined, but still higher than average, settling at 33% in September.
Egypt floated its national currency on 3 November 2016 as part of the economic reform programme that aims to rectify the economic path and achieve sustainable development that creates new jobs, through eliminating the currency exchange parallel market, adjusting the currency exchange market, attracting foreign investments, stimulating tourism, and promoting exports.
The economic reform programme being implemented by the government of Al-Sisi also includes the value-added tax, cutting the subsidies for electricity and petroleum products, and reducing imports of non-basic commodities.
The flotation of the pound should have been preceded by arrangements, the most important of which is the inventory of all categories of beneficiaries of subsidies, which will be affected by the flotation, as well as an inventory of all economic sectors that will be affected by the flotation and how to support them.
Are there no positive signs of flotation?
Yet, it did put Egypt on the map of global investments, evident by attracting some $18.8bn of foreign investments in government debt instruments, next to EGP 13bn ($750bn) that are the net foreign investments in the Egyptian Exchange (EGX), according to the latest figures announced by the Central Bank of Egypt (CBE) and the EGX.
It is likely that all emerging economies in the stages of economic transition go through a correction cycle that begins by testing investment in high-yielding debt instruments and then investing in the stock market before it turns into investing in the real industrial economy.
But the fact is that foreign investment is loaded with high-interest debt. The high interest rates should be reconsidered, especially since the country’s foreign exchange resources have not recovered as much as hoped so far, including tourism, exports, and foreign direct investment.
We have positive indicators, most of which are financial, such as the rise in foreign exchange reserves to reach $36bn.
Additionally, there has been a 5% growth recorded at the end of the first quarter (Q1) of the past fiscal year (FY). The balance of payments has also recovered and had an impact on the trade balance, where exports were up and imports down. Unemployment fell to 11.9% for the first time in six years to stay under 12%.
There was also a slight improvement in foreign direct investment.
However, there are signs of concern, such as the hike in external debt, which soared to $79bn, and inflation that reached over 30%.
In your opinion, what is the fair rate of interest rates?
In the food industry, the most important aspect is the recovery of consumer purchasing power, as inflation weakens consumption and frustrates corporate expansion efforts.
The decision of the CBE to raise interest rates to 4% twice in a row, next to 3% on the day of the flotation was not correct. Inflation at the time was caused by the high cost of the production process and not to increased liquidity in the market. This type of inflation was given the wrong treatment, which did not reduce prices, but rather had a counterproductive impact.
I think interest rates should return to pre-flotation rates to some extent at about 12% so that companies can carry out their expansion plans and unlock access to consumption loans, which could stimulate the market.
But foreign direct investment is still weak, and exports have not grown enough. How do you explain that?
Foreign direct investment only grew by $1bn on the first day of the flotation, reaching $7.9bn, up from $6.9bn, most of which are investments in the oil sector, which is a low labor consumption sector. This begs the question: when will foreign direct investments begin to flow in?
And the answer is absolutely when the local investment is reassured and could find guarantees, incentives and tools, such as the interest rates to implement its expansion. The growth in local investments is the best stimulus for foreign investments. I do not understand. Where is the investment map?
I cannot find a reason for the one-year delay awaiting the new investment law and its executive regulations.
Moreover, export growth is not only linked to the price. The exchange rate has fallen much, but exports did not see improvement. Export growth is linked to our production base and its competitiveness. We are still suffering in this regard.
Egyptian authorities concerned with the economy should prioritise the investment map for the labour-intensive low-energy industries, such as textiles. The government needs to put together policies and stimulus programmes to promote their production, competitiveness, and survival.
How did you see Egypt’s ranking decline in the Doing Business index?
It was expected. The surprise however, was the sharp decline of six rankings. Honestly, the fault was clear when we prioritized the flotation over improving the business environment. It would have been better to finish the investment laws and industrial licences first, before floating the currency, so that we get the benefit required from the flotation on investment, manufacturing, and exporting.
As investors, we are still suffering from deadly bureaucratic problems. We see efforts and promises, but without tangible results. Where is the one-stop shop? And the investment law has yet to be activated.
What about your investment plan in Domaty?
The company invested some EGP 240m in 2016 to implement new expansions and enter the bakery and yellow cheese sector, along with increasing production capacity.
The company’s new factory in 6th of October City has been opened on an area of 26,000 sqm. This raised the juice production capacity from 65,000 tonnes per year to 100,000 tonnes.
However, due to the decline in the purchasing power of consumers, we decided to delay the production of baked goods and cheese until the recovery of consumption power.
Our market share in white cheeses reaches 40%, and 7% of the juice market, which is expected to increase to 9-10% soon.
The size of Romy Cheese market in Egypt amounts to EGP 3bn, while the remaining yellow cheese market is worth EGP 1bn. Most of these cheeses are imported. Amid the dollar availability crisis, we should have a good share from the market.
You have experience in stock market financing by offering 49% of the company’s shares on the EGX?
The experience of stock market financing was great. It enabled us to collect some EGP 1.1bn to finance the expansion plans.
Domty currently owns two factories in 6th of October City with a fleet of 700 cars that will increase to 1,100 by the end of October 2017.
There are 3,500 employees at Domty after the new expansions.
Has the food industry absorbed the effects of the flotation?
We began to absorb the negative impact of the flotation on the sector. Domty sales plunged by 25% in quantity in the first quarter after the flotation. The company has just begun to recover in the second and third quarters. We expect a better improvement by the end of the year.
The food market in Egypt is growing up after the 25 January Revolution, as consumers are turning to packaged products.
Egypt’s population is the largest amongst Arab countries, with over 104 million people and 2.6 million births per year. Domty and other food industry companies in Egypt aim to benefit from this.
What about your exports after the flotation?
The company’s exports currently represent 7% of total sales, and we have an ambitious plan to raise the share to take advantage of the flotation decision.
We have appointed a new head of the export sector, and we are studying several African markets, including the Kenyan and Rwandan markets.
We left about 80% of the distribution market outside the company through agents. We will keep 20% only to distribute the products, as part of the company’s plan to raise the distribution efficiency.
We import 50-60% of raw materials, but without a crisis in obtaining dollars.
Why did you decide to run for Al-Ahly club elections?
I belong to a family that loves Al-Ahly. One of my dreams has been to contribute in building and developing the club.
We have a plan to better promote Al-Ahly’s brand. This is one of the main objectives that we will work on if we win the elections. We have another plan to improve construction and development of social services and support football.
Is there a link between being a businessman and running for the elections, such as providing funding for the club?
I reject this completely. I am running in the elections with my mind and vision, not with my money. Al-Ahly is bigger than begging for money from businessmen. Al-Ahly is bigger than any businessman.
How do you see the fortunes of Captain Mahmoud Khatib’s list, as you are one of its members?
Captain Mahmoud Al-Khatib is a great sportsman with an administrative thought that matches the global professional management of football clubs, especially in terms of making strong revenues for Al-Ahly’s brand.
I trust in God that we will win the elections.