Does the industrial sector respond to stimulus in an inflationary environment and high interest rates?

Fatma Salah
5 Min Read

The effects of the rise in the price of the USD against the EGP on the industrial sector are numerous, especially with the conditions the world is witnessing in the disruption of supply chains as a result of the impact of the coronavirus coinciding with the Russian-Ukrainian war.

Consequently, Egypt has recently adopted a strategy of supporting and stimulating the industrial sector through a number of initiatives launched by the president of the republic according to an integrated plan to advance the industrial sector.

The industrial sector contributes about 17% of the GDP and absorbs 15% of organised labour, and its share in export activity reaches between 80-85% of the total merchandise exports. It also helps to provide foreign exchange resources and treat the problems of the balance of payments deficit.

Beltone Securities Research said that the depreciation of the EGP has a positive impact on the industries and materials sector, as most companies have a mixed — albeit positive — impact by the devaluation of the currency.

Sidi Kreir Petrochemicals and AMOC own the vast majority of their selling prices according to global price indices, which directly reflect any changes in the exchange rate, while 80-90% of the cost of goods sold is denominated in USD.

Beltone added that fertiliser companies have been affected positively by the devaluation of the EGP against the USD, as Abu Qir Fertilisers and Misr Fertilisers (MOPCO) export 45% of their total production.

Furthermore, it added that Ezz Steel and Al-Ezz Al-Dekheila will witness higher profits because steel prices are largely related to international steel prices, especially since imported steel represents 20-30% of the Egyptian market, in addition to huge exports that exceeded $1bn in 2021.

Beltone also pointed out that this is partially offset by raw materials imported by Al-Ezz Al-Dekheila and its dependence on natural gas denominated in USD as raw materials, making 65-75% of the cost of goods sold in USD, however, the net effect is still positive.

Research findings indicate that the devaluation of the currency is casting a shadow over domestic cement manufacturers, where the cost in USD represents 20-30% of their total costs, while exports are negligible.

It is likely that the Alexandria Container and Cargo Handling Company will be a major beneficiary of the recent decline in the EGP exchange rate, since 100% of its revenues are denominated in USD while more than 80% of its costs are denominated in EGP.

Mostafa Shafie — Head of the Research Sector at Arabia Online Securities Brokerage — believes that the challenges on the global scene were brought about by the US Federal Reserve’s decision to raise its interest rates by the, which has and will continue to have major effects on financial markets and emerging market economies especially.

He added that the monetary tightening policy pursued by central banks worldwide is killing investment due to high interest rates, which means an increase in the cost of borrowing for investors.

This coincides with the high prices of basic commodities and raw materials that enter the manufacturing process, which means high production inputs and a great challenge for the industrial sector.

He pointed out that the impact on the final consumer will be directly reflected in the rise in commodity prices, and despite the positive impact of industrial sector companies according to their activity, the crisis may outstay its welcome due to the suffocation of supply chains.

Shafie also stressed that the aluminium manufacturing sector is at the top of the list of beneficiaries, especially with the change in raw materials prices, which is evident in the results of Egypt’s aluminium business, which achieved a profit of EGP 1.68bn during the period from July to last March, compared to losses amounting to EGP 347.72m in the corresponding period of the previous fiscal year.

He pointed out that the steel sector is one of the beneficiaries as a result of it being an economically inflexible sector, and it is possible to see the positive impact through the results of Ezz Steel and Al-Ezz Al-Dekheila operations during the past year.

He aexplained that the rest of the industrial sectors have also been positively affected to varying degrees according to the nature of each industry.

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