Euromoney Day Two — Kabil on devaluation and SMEs in focus

*** Want to listen to some of Monday’s panels yourself? We have audio. You’ll probably want to download the files and give them a listen on your laptop / desktop, as they’re not set to stream.

• Finance Minister Amr El Garhy
• International Cooperation Minister Sahar Nasr
• CI Capital’s Tarek Tantawi

EUROMONEY 2016, DAY TWO

Trade and Industry Minister Tarek Kabil

Day two of this year’s Euromoney Egypt conference wasn’t quite as exciting as the first. There were no beasts unleashed and not much in the way of IMF chatter. But hot off the heels of Monday’s devaluation talks, Trade and Industry Minister Tarek Kabil kicked off the day with his take on the issue.

Kabil made no attempts to dodge the issue, admitting the FX crunch’s direct and indirect impact on trade and industry. A devaluation would “boost exports by 10%,” said Kabil, adding that not only is FX availability an issue, but so is the differential pricing between the official rate and the black market rate. The “IMF loan will help stabilise that,” he said.

Free float on the horizon? When asked if he would describe a free float as a good thing for the economy, Kabil didn’t mince words. “On the long term, yes. Eventually that is what will happen.” And while the minister declined to give a time frame, he did tack on that he hoped it would happen by the time the next Euromoney Conference Egypt rolled around.

The short term solution is industry: “We need to focus on boosting industry to fill that trade gap,” said the minister. “Last year on the trade balance, non-oil imports totaled USD 67 bn and exports around USD 18 bn, we’re talking about a gap of USD 49 bn. Since January, imports fell USD 7 bn and exports went up USD 1 bn.”

Long term, however, exports are key, with Kabil calling them “the future hope of Egypt” before running down our export strategy. “Our absolute focus will be Africa … because we have a very strong competitive edge in many sectors there,” said Kabil.

“We’re looking to increase our global exports by 10% and Africa about 15%,” said Kabil, touching on the Egyptian-Lebanese initiative to export to African markets, opening the first logistics center in Kenya next month, creating a direct shipping line between Egypt and Kenya, West Africa and Europe, and bolstering Egyptian exhibitions.

Kabil, rightly, called the red tape required to nab industrial licenses a “nightmare” due to the sheer volume of entities required to give stamps of approval. “The best approach is to scrap the whole system,” he said. “The new system will work on almost 80% of the industries, and they will have licenses in less than a month … with everything channeled to the Industrial Development Authority.”

SMEs in focus: Current legislation also largely treats both small and large entities largely in the same way, “which obviously isn’t fair,” he said as “SMEs are the backbone of the economy … they make up 60-70% of it.”

The way we deal with SMEs, however, is largely fragmented, pushing the ministry to set up a new “SME Entity,” as the minister and other panelists throughout the day took to calling it, to act as a regulator. The entity is set to “deal with SMEs from A-Z” including realizing the CBE’s SME lending initiative, with the overall aim of bringing SME’s into the fold of the formal economy. According to Kabil, the new entity for the sector will be discussed during today’s Cabinet meeting. The minister did not make clear whether this was a regulator or an advocate, nor did he specify what it’s powers might be.

SME Panel

Meanwhile, the SME panel members seemed largely surprised at the existence of this new SME entity, “even though apparently it’s been in the kitchen for over 18 months” said Principal Manager at the European Bank for Reconstruction and Development (EBRD) Reem El Saady.

But despite not having clarity on the finer details, most were optimistic on its prospects, with Managing Director of Sawari Ventures Hany Al-Sonbaty saying “forced contact” between SMEs, policy makers, and bankers is already beginning to bear fruit. “Even if we do nothing, if we just make it easier for SMEs to enter and exit the market, we will see a paradigm shift in SMEs.”

On the issue of financing and the CBE’s SME lending initiative, Deputy Minister for Economic Affairs and the International Cooperation Ministry Shehab Marzban commented: “The typical startup isn’t banking material. They’re taking a huge risk.” The ministry is considering using part of the country’s “financing portfolio for SMEs to work with leasing companies, with any non-banking financial services, venture capital funding, including credit-guarantee schemes.”

So what’s the problem with credit-guarantee schemes, despite being the “right tool to finance SMEs,” according to EBRD’s El Saady? “Banks don’t like them because it’s a risk-sharing mechanism that makes them more vulnerable,” she said. “It all relates to the bankruptcy law,” she added, a law that has largely been unchanged since 1883 and leaves the borrower facing possible jail time. On Monday, Investment Minister Dalia Khorshid announced plans to amend the law, “which the ministry is intending to submit to the cabinet soon, before presenting it to the parliament,” according to DNE.

Managing Director and Board Member of Amwal Financial Investments Hanaa El Hilaly chimed in, pointing out that while this is all well and good, it mostly targets ventures in the “A and B class and not the poor and helpless.” El Saady agreed, but pointed out that while helping ventures in the “C class” is important, “we can’t expect the C class to have an impact on the economy.” El Hilaly hit back: “But moving them from the informal to the formal sector would in turn have an impact on GDP.”

While we’re on very small ventures, Head of Microfinance at the Egyptian Financial Supervisory Authority (EFSA) Gamal Khalifa outlined the authority’s efforts to regulate the microfinance sector, which has been largely funneled through NGOs. “If you think working with SMEs is difficult, try NGOs,” he quipped.

On Monday, EFSA finalised the first set of statistics for the microfinancing business in Egypt, Khalifa announced during the panel. The size of the outstanding portfolio of microfinance (excluding banks) reached EGP 4 bn at the end of June, with 1.8 mn borrowers, he said. “Considering Egypt’s population, we aim to enlarge this number.”