The Enterprise 2017 CEO Poll, Day Two

** Our Enterprise CEO Poll continues this morning. We’ll be running 13 interviews over the course of this week — ordered alphabetically by last name — in the place of our industry news roundups, which will return next week.

The format: Each CEO answered roughly the same set of questions, tailored only for their industry. The interviews have been condensed and edited for clarity and are presented “as told to.”

Today’s participants are:

• Hani Berzi, chairman and CEO, Edita
• Hisham Ezz Al Arab, chairman and managing director, CIB
• Ahmed El Sewedy, chairman and CEO, Elsewedy Electric

Yesterday’s interviews included Karim Awad (EFG Hermes), Ahmed Badr (Renaissance Capital) and Ahmed Badreldin (Abraaj).

Their interviews begin after our Worth Reading section.

South Sudan President Salva Kiir Mayardit arrived in Cairo for a two-day visit to meet with President Abdel Fattah El Sisi, unnamed sources told Al Masry Al Youm.

The Health Ministry is expected to unveil on Thursday its pricing formula for meds to allow manufacturers and importers to cope with the impact of the float. A cabinet spokesman has said Prime Minister Sherif Ismail wishes to see the formula implemented by the end of this month at the latest.

The roadshow for Egypt’s eurobond offering should get underway Monday or Tuesday of next week, according to Finance Minister Amr El Garhy.

A Russian delegation of aviation security experts is expected to visit Cairo sometime next week, the Civil Aviation Ministry confirmed to Sputnik. It is not entirely clear what the delegation will be doing, but the visit follows an inspection conducted last month.

The Egypt-Jordan Business Council meets on 15 January in Cairo.

Our last holiday until April is 25 January (Police Day, Revolution Day — take your pick). That’s two weeks from tomorrow. Are you planning to bridge?

Finance Minister Amr El Garhy phoned in to Lamees El Hadidy’s Hona Al Assema to recap President Abdel Fattah El Sisi’s meeting with a group of tier-one regional and global fund managers yesterday, which he said reflects “their confidence in the economic reform measures.” The fund managers are in Cairo at the invitation of EFG Hermes for meetings with senior government officials and a number of top Egyptian companies.

(Some 27 regional and international funds met with the president yesterday, a separate statement from the Ministry of International Cooperation said yesterday. The investors’ sit-down with El Sisi was also attended by the ministers of finance, trade and industry, investment, petroleum and international cooperation. Ahram Online has coverage.)

El Garhy also said the roadshow to promote treasury bonds will kick off on 16 or 17 January, beginning with Gulf countries and moving on to the US and Europe. The minister also told El Hadidy that the external debt, which has reached USD 60.2 bn, remains within “safe levels” (watch, runtime 6:18).

No cabinet shuffle is in the offing ahead of the government’s scheduled review meeting with the International Monetary Fund in March, MBC’s Sherif Amer says, citing unnamed sources with knowledge of the matter.

President Abdel Fattah El Sisi used ONTV’s Amr Adib as a platform to tackle the ongoing war against terror in parts of Sinai, saying, “We know this terrorism would come with financial cost and also human cost, as we’re losing people and souls” and that “Egypt is fighting terrorism alone.” El Sisi talked about the financial cost of the war on terrorism in Sinai, and delved into the security forces’ anti-terrorism efforts and operations (watch, runtime 19:40).

State-owned fertilizer producers to the rescue? State-owned fertilizer producers have presented the government with a solution to limit their losses following the float of the EGP, Al Mal reported. They suggest paying for the natural gas used to produce fertilizers for domestic production at the fixed pre-float exchange rate of EGP 8.88 per USD 1, but the whole price of USD 4.5 per mmBtu for gas used in producing fertilizers that will be exported. The producers also asked the government to allow them to export 45% of their production. State-owned producers say that they are contracted to sell to the government at a price of EGP 2,000 per tonne, but the production cost following the flotation and given that energy prices are charged in USD, are now at EGP 3,100 per tonne.

In other FX news, international oil companies operating in Egypt are now paying contractors at an exchange rate set weekly by EGPC, sources told Al Mal. That exchange rate represents the average at which EGPC is able to access credit from domestic banks.

Some companies are still facing USD shortages: A number of Japanese companies have reportedly resorted to the Japanese Embassy in Cairo to help with securing foreign currency, Al Mal said. A diplomat at the embassy said meetings were being planned with central bank staff to discuss the Japanese companies’ concerns.

Singapore’s Hyflux will reportedly develop the USD 500 mn Ain Sokhna Integrated Water and Power Project on a BOT or BOO basis, according to The Business Times, saying the project will be awarded by the General Authority for Suez Canal Economic Zone (SCZone). The project was being developed on an EPC contract, which was formalized last April, with Hyflux also saying it would take on the operation and maintenance of the facilities over a 25-year period.

Oi! Got a distressed network for sale? Naguib Sawiris is set to travel to Brazil in two weeks’ time to “persuade the government his bid [to acquire the telecommunications company] is the best option to rescue Oi SA,” Reuters reports Sawiris told Brazilian newspaper Folha de S.Paulo. The Brazilian telecom company had filed for bankruptcy protection for USD 19 bn in debt last June after failing to reach an agreement with creditors. Sawiris, who had begun negotiations to acquire the company before it filed for bankruptcy protection, said he will turn the company around in one year and plans to merge the restructured Oi with one of Brazil’s largest wireless carriers.

A suicide bomber driving a garbage truck packed with explosives drove his vehicle into a security checkpoint outside a police building in El Arish, killing at least 10 people and injuring 22 more, according to the Associated Press. The attack was followed by smaller explosions as militants wearing black masks fired rocket-propelled grenades at the troops around the checkpoint. Officials said the death toll could be higher.

MOVES- Saudi’s Etihad Etisalat (best known as Mobily) has tapped Mobinil and GTH veteran Ahmed Abou Doma as chief executive officer. He takes over from Ahmad Farroukh today. After a 10-year run with Mobinil (now Orange), Abou Doma was parent company Orascom Telecom’s CEO for Bangladesh before CEO of Global Telecom Holding and executive vice president of Vimplecom for Asia and Africa. Read the official announcement on Saudi’s Tadawul.

International Cooperation Minister Sahar Nasr speaks with the Financial Times’ Heba Saleh in this 13-minute news podcast released overnight. (Listen)

An Egyptian at the center of an American success story: CNN Money’s Octavio Blanco profiles Moawia Eldeeb, an Egyptian who immigrated to the US when he was nine years old and ended up founding SmartSpot, a company that uses interactive mirrors that help athletes train without a human trainer. “Eldeeb and his incredible rise out of poverty was recently honored with the Robin Hood Foundation’s Heroes Award,” Blanco writes. Eldeeb says an explosion in the boiler room of the family’s apartment building destroyed their home and had them move to a homeless shelter. He was working at a pizza restaurant off the books when he was supposed to start ninth grade.

“That year, I went to a public library next to the shelter in Harlem. One of the librarians asked me why I wasn’t in school. She created a whole curriculum for me. For a year, I basically did every single lesson on the Khan Academy website, from pre-algebra until I finished algebra. A year later, we moved to the Queensbridge projects… a local private Islamic high school, tested me and let me attend tenth grade on a full scholarship… I graduated in the eleventh grade.” SmartSpot made it to Y-Combinator, finishing the program by January 2015 and raising USD 1.5 mn by the following May. Eldeeb is worried about the prospects of a Trump presidency: “I worry a lot about the future. He wants to ban people like me from coming here. I would have never had a chance to come here. I worry about leaving and seeing the rest of my family. I might not be allowed to come back in.”

The Antiquities Ministry is looking to strengthen cooperation with China in archaeology, Xinhua reported. An Egyptian delegation is currently in China discussing preparations for the first Chinese excavations in Egypt," Minister Khaled El Enany said. El Enany had said Chinese archaeologists are very interested in starting excavations in Egypt.

Also on archeology, apparently Tutankhamun’s mask, currently displayed at the Egyptian Museum, might be going on a world tour to be rented for display, as a way of generating money to an ailing tourism sector, reports François Hume-Ferkatadji for Radio France. The Antiquities Ministry is considering the measure, which it expects to be able to finance salaries of its employees for ten years.

You thought losing David Bowie, Muhammad Ali, Prince, Umberto Eco, and Carrie Fisher made 2016 a pretty tough year? Well … we have bad news for you. MIT researchers from the Center for Research in Social Complexity believe that we should expect the number of famous people to die each year to continue to increase probably for the next years, but not forever. They say “we should expect more famous people to die in 2017 than in 2016. Why? The answer is simple: because the number of famous people has increased over time.” In their methodology, they defined a “famous person” as someone present in more than 20 Wikipedia language editions as of February, 2016. There are 29,421 of those. They also show that the increase in expected number of deaths is not just a function of population growth, as “for centuries, the growth in famous people has been outpacing that of global population.” We are now also observing the death of increasingly older famous people, who did their best work in their 60s, 70s, and 80s, and whose fame was amplified through television. The reason why the researchers believe that this trend of increased number of famous people deaths is set to continue is that “we may soon reach a time when what will limit the number of famous people we produce will no longer be our means of communication, but our limited attention and human memory. Maybe, we are already there.”

You know a company and its brands have enduring credibility with consumers when the only CEO our resident nine-year-old knows is “the man who makes Todo Bombs. They’re the best — when you let me have one.” Hani Berzi began his career in 1986 at his family’s snack food business before going on to create Edita, which he’s transformed into a publicly traded corporation that is both Egypt’s largest snack food maker and a burgeoning exporter. Berzi is a man who knows his numbers, but we were most impressed by his laser focus on strategy and blunt assessment of strengths and weaknesses across the economy, including his own organization’s. Edited excerpts from our conversation:

2017 will be the year of unpredictability, the year of surprises. Those surprises could be good, they could be bad, but one thing is certain: There will be little predictability.

The biggest challenge for the economy will be how to redress our trade imbalance — that and the availability of foreign exchange. I’m particularly concerned about the measures the government could take to redress the trade deficit and the impact on our trade agreements, whether those are free-trade agreements or the WTO. We always have a window in which to protect the market — that’s provided for under most agreements — but we can’t let that become a crutch.

It’s also going to be key for the government to start making progress on overhauling the bureaucracy. Cabinet-level decisions and cabinet’s vision need to cascade downward to lower-level employees in a very heavy bureaucracy.

The biggest challenges for the food industry come on the regulatory side of the equation. Regulators need to work on how they interact with businesses — the types of raids we’ve seen on factories, whether from health, supply or the interior ministries, send the wrong message. I’m thinking here of what happened to us with sugar and to Heinz with tomatoes. Yes, there could be some deviation from good manufacturing processes, but good businesses redress these. Your thinking something happened here doesn’t mean you take a business owner directly to the press before an investigation is complete and not think about what that means for that company, for the industry or for our export prospects. Doing this type of thing shoots in the foot every effort we make to grow exports.

Our country has more than 90 mn citizens, and our population is growing at a rate of 1.6-2.0% per year. It’s an amazing market, and it’s particularly fertile ground for the snack food industry as eating habits change. We’re also going to find opportunities in the trade barriers — tariff and non-tariff — the government is implementing to slow down imports. The playground will be empty of suppliers, giving local companies the opportunity to substitute for imports.

We’re going after this opportunity by investing in improvements to our manufacturing process, improving product delivery. We’re continuously working on new products — we’re spending more on R&D to come up with new, non-traditional products that offer good value for money so we capture a bigger share of wallet. The opportunities we have today won’t come free of charge. Consumers are going to be very selective with post-float inflation. They won’t buy simply because something is cheap; they’ll direct their disposable income to things of quality.

We’re definitely still in investment mode this year. The opportunity is just too significant — we can feel it. We like to invest when others are afraid to move. We did that in 2011, and we’ve reaped the benefits since. We’ll be investing EGP 350-400 mn in 2017. Our biggest outlay is in Sixth of October, where we’re hoping to finish construction in 2Q2017 of what will be our largest factory.

The minimum raise any employer should go with in 2017 is 20%, and we’ll do anything we need to do to ensure that lower income employees get up to 30%. We’ll do tiered raises across our employee base, and blue collar labor will be the biggest beneficiaries in percentage terms. We think CSR starts by paying a living wage, regardless of what that means when your P&L is under external pressure.

What sector will do best in 2017? Food. Certainly food. Egyptians love to eat, and the fundamentals dictate that there are more and more Egyptians every year.

What sector will fare worst? Real estate, in my personal opinion. And when real estate goes into recession, the whole country goes into recession. This is why I said the year will be highly unpredictable.

We haven’t seen much M&A opportunity in recent years because people were doing well. You don’t typically think of selling when growth is high. It’s a very different environment now. We’ll see lots of opportunity in the market, and we’ll also see companies in a variety of sectors going out of business. The cost of investment is horrendous. You won’t see many players able to afford EGP 400 mn or EGP 500 mn in capital expenditure to support growth — and that’s modest capex at today’s exchange rate. So yes, we definitely have our eye on M&A targets.

Plenty of business owners have looked at the successes of IPOs in the past two years and think they should go. So there’s no question 2017 will have an IPO pipeline of maybe three to four this year. The question is whether they’re really IPOable — whether they have what it takes to be a listed company.

If I had to start a new business today, I would invest in education. Not higher education, but vocational education and vocational training. We’re all struggling with the difficulty of finding skilled labor, whether that’s electricians or pipefitters, plumbers or cooks. All of these people learn through on-the-job experience, and there’s no single credential. Vocational training is key, and all of the big funds investing in education — Actis, Abraaj — nobody is looking at vocational training.

Exports are life and death for Egypt. Non-petroleum exports are the biggest provider of foreign currency to the Egyptian government, and cabinet knows very well they need to make this a priority. We need a Higher Council for Exports, just like we now have a Supreme Council for Investment. And please remember: There will be no sustainable export growth without an investment in vocational training. What are we exporting today? USD 17-18 bn? That’s nothing. If we had done what others have done on this front in the past decade or two, we could be doing 30-40x that.

I’m optimistic about exports — if Cabinet takes the right steps. It’s not going to be push-button, it’s a whole program. Call it what you want, but we need a strategy, and that starts with having incentives, land, and a trained workforce. It needs to be a national priority.

Hisham Ezz Al Arab has quarterbacked CIB since 2002, during which time he has led the bank’s transformation from a wholesale lender into the nation’s leading private sector bank. The corporate banking powerhouse’s stock has for years now been treated as a proxy for the Egyptian economy by many foreign investors. A veteran of the banking industry in London and New York, Ezz Al Arab was managing director at JP Morgan and Deutsche Bank before joining CIB in 2001 as a board member and deputy MD. In discussions over the past year, Ezz Al Arab keeps circling back to the force he sees reshaping the industry: Technology will drive innovation and financial inclusion in the sector, helping reshape the national economy in the process. Edited excerpts from our conversation:

2017 will be the year of change across all sectors of the economy as the structural reform program continues and the reforms start to take effect.

The biggest challenge for the economy will be the impact of the structural reforms and the pains that are naturally associated with it. That having been said: The measures are exactly what the economy needs and will place us on a much better footing in the medium and long term. But the interim period is going to be painful for many.

Egypt needs to find its economic mainstream. We need to set a target for what we want the economy to be and formalize that in the nation’s economic DNA. Are we an exporting nation? If so, where are our natural strengths? What are our natural markets? What do we import today that can be substituted for by domestic products? What is the role of the private sector, and where and when does the government step in to direct stimulus?

The biggest challenge for our industry will be helping our clients cope with the challenges arising from the reform program while also managing our costs. It’s not just staff costs — the cost of everything from electrical power to what it takes to open new branches will all rise given we’re in a high-inflation environment. The hope, of course, is that the inflationary hit right now is a one-off related to devaluation. But in all of this, we’re no different than any other Egyptian corporation — we need to manage costs so we can still deliver a strong bottom line for our shareholders.

Our market remains fundamentally underpenetrated, and that remains the biggest opportunity for our industry. It’s clear that the Central Bank of Egypt and the government are prioritizing financial inclusion going forward, and this will have a significant knock-on effect — not just for our industry. The more companies and individuals that enter the formal banking system, the more significant will be the economic growth. Movement in the banking sector mirrors that in the wider economy. We see significant room to widen our customer base beyond corporates to include retail and SME clients, and that sets off a virtuous cycle of deposits and loans that stimulate spending and economic growth.

I do expect to see further consolidation in the banking and finance sectors with the ongoing structural reform program. I would expect this to be particularly pronounced in the non-bank financial services sector, where we’ll see smaller players joining forces to create larger entities or being bought out by larger institutions. Smaller brokerage houses will come under pressure to merge. This will be more apparent in the non-bank financial services sector in 2017 than it will in the banking industry.

Export-driven industries will be the best performers of the year, hands down. The worst-performing sectors will be those reliant on imports. One of the keys will be how traditional exporters and those with newly competitive exports treat the domestic market. Will they continue to earmark their best product only for foreign markets? Or will we see an improvement in what’s available domestically, from furniture to food? With 90 mn citizens suddenly finding imports are rather expensive, the question is how cost-competitive manufacturers can make their goods so they make their margins, but local consumers can save what would normally be factored into a price for logistics, customs, et cetera.

If I were to start a new business today, it would be in microfinance lending. The opportunity is simply massive — demand is huge, and the sector is still very much underpenetrated. The industry is profitable, well-regulated, and very appealing.

On the regulatory and legislative front, I think we need to keep an eye on opportunities to deregulate. Our industry is very well-regulated, but we’re going to need to look at how this changes as we push for better financial inclusion and the first steps on a multi-year journey to becoming a less cash-based economy. We need to make it easier for retail clients to open accounts, to communicate with their banks electronically. Look at blockchain: In its simplest form, three people approve your application for a bank account, and that’s confirmation enough of who you are — there could be a day when you can open an account without ever stepping foot into a bank branch. From electronic approvals to a shift to electronic record keeping, we need to help banks become more creative about using technology to bring people into the banking system, manage risks, innovate on products, and save on overheads.
There is so much being done now in technology that can increase penetration and prompt more competition in the marketplace, resulting in more financial inclusion, better products and better service.

We need to be asking ourselves today, “How will we benchmark success at the end of 2017?” In any institution, at any private sector company, you have tangible goals that you need to achieve before you can say, “I was successful, I deserve a promotion, a raise, whatever.” I think we would benefit from a national discussion about what kinds of measurable targets will mean success.

We first met Ahmed El Sewedy “before the events of 2011” — a standard break point for those of us of a certain age — on his way to a major global industry conference. We were struck at the time by his gutsy bet on Africa and on manufacturing, here and abroad. That wager has paid back in spades: If there’s anyone well-positioned to benefit from the float of the EGP in November 2016, it’s Elsewedy Electric, the export powerhouse that bears his family name. The soft-spoken El Sewedy has led the transformation of the family business once known as Arab Cables into a giant with more than 30 production facilities in 16 countries that sells its wares today in more than 110 markets, making it one of the world’s largest providers of integrated energy solutions. Edited excerpts from our conversation:

2017 will be a year of change and adaptation. We’re not even two months into the float, but I see the changes are very positive, even though it’s going to be challenging for some companies. You’re going to see those changes hit the banks — any borrower with USD debt on their balance sheet is going to be hit.

This much is clear to me: The factors that made for a successful business over the past decade will be very different from what will make a company thrive over the next two to three years.

The past six years were horrible for industry, and it all came down to the USD. For manufacturers, it’s not about price, it’s about availability, and the USD at 19 or 20 is very, very positive for industry. Starting in 2011, so many business owners — large and small — idled their plants and focused instead on buying land, flats, property. The real estate market was a much better bet than industry — at EGP 8, our exports were just too expensive. We couldn’t compete with China, India and Turkey, and that’s why you saw manufacturers stop manufacturing and instead import finished products from China and India.

Imports from China are going to start to fall off at EGP 20. They’re expensive, as are other imports. Local industry is going to boom. The businesses that will thrive in the next two to three years are those that are either exporters or import substitutes. This is both the challenge and the opportunity for Egypt. Our future is in industry.

The biggest challenge we face is the need for the government to give us policy stability. We need stable rules and regulations — no monthly change in what’s allowed or not, what’s a priority or not. We need clear, five-year frameworks for taxes, customs, the availability of land for industrial projects. We need stability, and with this, the outlook for Egypt is excellent.

I’m very comfortable with where our business is positioned. We’re running a 70-30 split on exports vs. the domestic market, and our local market focus is very much where the government is moving. We’re building three big power plants now, and the focus going forward will move to transmission — to the cables and towers that are part of our core business.

I see great growth in Egypt and Africa for the next four years. I’m really very optimistic about Africa going forward.

Our natural export markets are the Gulf, Africa and, to an extent, Europe. These are the regions with which we have preferential trade agreements and to which we have the benefit of physical proximity.

Am I an outlier when it comes to salary rises? I like to think that we’re typical of exporters. Our costs are USD-denominated and have fallen 50% in USD terms, so as we grow our exports, we’re going to be growing our profits, and our staff will absolutely benefit from this. Raising salaries isn’t an option — it’s a must. We’ve already announced salary increases. I think for everyone it’s not an issue of the payroll costs rising, but of growing your revenues so you can do right by your employees.

There won’t be much privatization in the electricity industry. The government has invested in more than 25 GW of generation capacity in the past three years. The nation has excess capacity now, and it’s all state-owned. They’re not planning to sell it, and I don’t think the government is planning to see the private sector own generation. There may be room for the private sector in distribution.

With the USD at EGP 20, there will definitely be more IPOs. Companies are going to run into cash problems, and the banks are re-examining every company individually, so I’m not sure you’ll see a wave of borrowing, particularly not with interest rates where they are now. Combine the two and you may see companies looking at IPOs as a means of improving their cash position and ability to expand.

I’m optimistic about M&A prospects for the same reason, but we’re not in the market. We’re good with where we stand now. We’re focused on operations, we’re focused on improving our corporate structure. For us, 2017 is going to be about operations, not M&A.

Agriculture and food will boom in 2017. Any sector that substitutes for imports, particularly if those are expensive imports. I also like any export that’s based on local materials.

Anyone in luxury will suffer over the next two years. Cars will also be difficult, at least at the higher end.

If I was starting a new business today? I would love to go for the food industry and produce for domestic consumption.

The government’s legislative priorities should focus on how to double exports in two years’ time. This will demand support to local industry, including investment incentives. The government needs to help local companies improve quality to meet export standards. Manufacturers need help learning to penetrate new export markets.

I’m really quite optimistic about 2017. It will be a really good year for us, especially since the last five years saw Egypt deliver horrible growth and job creation numbers. Companies have been shrinking, firing people.

Industry needs to go on a two-year hiring boom. That’s what we’re doing. And it’s why our CSR initiative focuses on building technical schools. We’re using German management and we have 1,000 students today — our goal is to reach 10,000 in five to six years. We take them from primary school through until they’re qualified as a technical expert, and it’s not just about technical skills: We give them a daily meal, a stipend, language training, soft skills.

Let me tell you, the quality of these students is just excellent— and they’re the key to doubling exports. More industrialists need to invest in vocational training. Skilled staff are the key to doubling exports.