Sunday, 22 January 2023

A new subsidized loan program for industry and agriculture could be a lifeline for struggling businesses

New subsidized loan program gives hope for a light at the end of the tunnel: A government decision to implement fresh 11% subsidized loans for industry and agriculture this week is giving manufacturers a sense of optimism amid a wave of turbulence for struggling industries, according to industry insiders Enterprise spoke with. The collective sigh of relief comes a few months after the Central Bank in Egypt (CBE) scrapped the 8% subsidized loans for industry, agriculture, and construction players in November. Our sources praised the government for swiftly responding to the needs of industry, which can underpin significant (and quick) economic growth, along with an uptick in tax revenues, they said.

REMEMBER- The state is using its own balance sheet to subsidize the cost of the loans — taking over a program that had previously been under the CBE’s purview. The IMF had pushed Egypt to move responsibility for the program — which lent to strategic sectors and initiatives (including, at a time, mortgage finance) at below-market rates — to the fiscal side of the house.

Crossing the T’s: The new EGP 150 bn program will include EGP 140 bn directed to financing working capital transactions, while the remaining EGP 10 bn will be poured into financing the procurement of capital goods for five years upon Cabinet approval. Here are some of the initiative’s terms:

  • Setting a maximum cap for the volume of credit available to each company depending on its size of business and banking regulations. This would unlock a maximum of EGP 75 mn per company, and around 150% maximum for associated companies given.
  • Each company is limited to working with at most two of the banks participating in the initiative.
  • Any client who uses the funding accessible under the initiative to repay arrears will be banned.

…And dotting the I’s: The ambitious initiative will be financed from the state budget reserves and aims to back the industrial sector in the upcoming five years by gradually increasing the loans’ interest rates to 20%, from the proposed 11% starting point. Banks have agreed to incorporate their standard 0.75% administrative fees in the 11% total interest rate.

Industries have been out of pocket: The sector has suffered significant losses when the previous subsidized loans initiative was scrapped, with manufacturers incurring the difference between the subsidized rate and the corridor interest rate imposed on remaining tranches, Chairman of the Federation of Egyptian Industries’ (FEI) engineering industries division Mohamed El Mohandes told us, calling for a quick implementation of the new initiative.

Gov’t did its homework: A study before drafting the initiative showed that 4.8k firms benefited from the old 8% subsidized loans initiative, SMEs Union head Alaa El Saqty told Enterprise. 87% of the beneficiaries received loans under EGP 100 mn, with a minority receiving high-value loans, he said. The new initiative sets a lending cap that is a good fit for most companies, allowing a larger number of companies, especially medium sized ones, to benefit from it, he added.

Altogether, it’s a strong step in the right direction: Although this iteration of the initiative comes with a set of conditions (while the previous initiative did not), industry players speaking to Enterprise described the program as a lifeline from higher capital costs amid a high interest rate environment. The initiative’s introduction signals government confirmation that industry is the engine of development and requires considerable state support, El Mohandes said.

And there are plenty of upsides: Both El Mohandes and FEI member Mohamed El Bahy agree that placing a ceiling for the volume of credit available to firms would allow more companies to benefit from the initiative, thereby ensuring it won’t only be limited to large companies. El Saqty also praised the requirement that loans be directed towards manufacturing and procuring production inputs, rather than allowing for arrear repayments.

But there could be some obstacles: Companies are required to submit three balance sheets showing them in the black to be able to unlock financing, which could be a “debilitating” requirement and could limit potential beneficiaries, El Bahy said. Instant loans under a cashflow mechanism should be accessible to startups to support innovation and help resolve a production crisis despite sizable expenditure. Separately, the initiative also doesn’t cover funding for production input shipments that are being imported under futures contracts, which needs to be looked into, Badr City’s Investors Association Chairman Bahaa El Adly told us.

Still, it’s a positive across the board: Industry heads have agreed with the Cabinet to direct EGP 140 bn to switch loans received under a 17.25% interest to the lower 11% interest per the new initiative in a bid to alleviate pressures on companies, El Saqty said. The introduction of the initiative, along with other clear steps to support industry, are signals of more policy harmony that will bring a great measure of relief for manufacturers, El Saqty said.

REMEMBER- The CBE scrapped in late December the requirement to use letters of credit to finance imports in an effort to clear a backlog of imports. Importers will now be able to use documentary collection to bring goods into the country, reversing a decision taken in February of last year to curb large outflows of foreign currency triggered by the war in Ukraine. A shortage of FX has made it difficult for importers to access L/Cs, leaving them unable to bring goods and raw materials into the country, and leading to shortages of industrial and consumer goods, and higher inflation.

But that backlog is diminishing: The current backlog of imported goods at our ports stands at some USD 5.3-5.4 bn, of which USD 3 bn is pending documents from importers rather than FX to be released, Prime Minister Moustafa Madbouly said last week. The total value cleared since 1 December by the government has now reached c. USD 13.9 bn by our math.

All eyes on what’s next: The industrial sector is looking to see how the initiative will be implemented to assess its efficacy in lowering costs amid a spike in the prices of raw material and local and global inflation.

Your top industrial development stories for the week:

  • BMWs are now being assembled in Egypt for the first time in almost five years: Global Auto Group — the new agent and importer for BMW in Egypt — has begun assembling BMWs in Egypt.
  • Five local and international consortiums have submitted offers to establish three cooking oil complexes with investments of up to USD 321 mn.
  • A syndicated loan for Qena industrial complex: An alliance comprising Emirati fertilizer company CFC Group’s Egyptian subsidiary CFC Feed and Chemicals and local fertilizer firm Evergrow is mulling three syndicated loan offers for its USD 400 mn industrial complex in Qena.
  • The Finance Ministry has issued the amended executive regulations for the VAT Act, which contain new targeted tax breaks designed to support manufacturing and boost exports.
  • Backing Egyptian exporters: The Islamic Trade Finance Corporation, the government’s Micro, Small, and Medium Enterprises Development Agency (MSMEDA), and the Trade Ministry’s Foreign Trade Training Center launched the STEP Training Program to boost the capacities of Egyptian exporters under the second phase of Aid for Trade Initiative for Arab States.

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