Wednesday, 11 January 2017

The Enterprise 2017 CEO Poll, Day Three


It’s CEO Week at Enterprise

** The Enterprise CEO Week continues today. We’re running interviews with 13 top corporate leaders all week long — 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 in “as told to” format — that’s journalism speak for “in their own words.”

Today’s participants are:

  • Raouf Ghabbour, chairman and CEO, GB Auto
  • Wael Fakharany, MD Egypt & SVP for Government Relations, Careem
  • José Maria Magrina, CEO, Suez Cement Group
  • Magued Sherif, CEO, SODIC

Yesterday’s participants included Hani Berzi (Edita), Hisham Ezz Al Arab (CIB), and Ahmed El Sewedy (Elsewedy Electric). Meanwhile, Monday’s installment is here.

On The Horizon

Bloomberg took note of Egypt’s planned eurobond roadshow,with a government source saying that officials “want to gauge the likely response from investors before announcing the planned sale amount.” The roadshow is slated for next week and should get underway by Monday or Tuesday, according to comments by Finance Minister Amr El Garhy. French-language African financial news website Financial Afrik suggests the roadshow will be in Dubai on Tuesday, 17 January.

A delegation of aviation security experts from Russia is expected in Cairo sometime next week, the Civil Aviation Ministry told Sputnik.

The Petroleum Ministry will launch an international gold exploration and mining tender covering blocks in the Eastern Desert and Sinai Peninsula on 15 January, according to Youm7.

Enterprise+: Last Night’s Talk Shows

World Bank Country Director for Egypt, Yemen and Djibouti Asad Alam was Lamees El Hadidy’s guest on Hona El-Assema last night. Alam said the government reform drive will create jobs, boost exports and attract investments. Key takeaways from the interview (watch; runtime: 24:51):

  • The high inflation rates which came after the EGP float will be a short-term phenomenon;
  • 2017 will be better in terms of growth and job creation. The director observed palpable changes in the markets: “Now I am seeing locally produced goods, whereas before I was only seeing imported products.”
  • “We support the government’s strategy for the energy and transportation sectors,” but Egypt still needs investment in the infrastructure sector.
  • “I’m happy that the government submitted a draft investment law to parliament to improve the business climate…but the issues facing investors should be addressed faster than that to make it easier to do business.”
  • Social safety net programs, such as World Bank-funded Karama and Takaful, are crucial to fighting poverty.
  • Education system needs to produce graduates with skills business needs.

No cabinet shuffle (thank you, very much): Ismail cabinet spokesperson Ashraf Sultan threw cold water on talks of a cabinet shuffle in a call-in to 90 Minutes’ Moataz El Damardash. Sultan also denied that the government was considering raising the minimum wage to EGP 1,500 per month from a current EGP 1,200 (watch; runtime: 3:16).

Still no Daba’a contracts: Yahduth fi Masr’s Sherif Amer spoke to Electricity Ministry spokesperson Ayman Hamza who told him that the government will be signing the agreement for the Daba’a nuclear power plant with Russia’s Rosatom “in the first few months of this year.”

Kol Youm’s Amr Adib showcased a report about the deteriorating conditions of the textile sector in Egypt. (Watch: runtime: 3:35). Industry insiders tell Kol Youm reporters that the industry is working at 10% capacity. The report blames the float for hindering imports of raw material.

Speed Round

Speed Round is presented in association with

Franklin Templeton’s MENA CIO explains why Egypt is attractive: The economic trajectory, valuations and the “undervalued” currency make Egypt have “one of the most attractive growth profiles in the MENA region,” Franklin Templeton Investments MENA equities chief investment officer, Bassel Khatoun, told Bloomberg TV. The EGP devaluation addressed a serious imbalance in the economy and Egypt has seen years of underinvestment and an ever-expanding population. Following 2003, Egypt had “five golden years” of economic growth, Khatoun says, “and we don’t see any reason we Egypt shouldn’t achieve those growth rates going forward.” Globally, it is difficult to discern whether US President-elect Donald Trump’s campaign rhetoric will be translated to policy action, but for emerging markets, Khatoun says, 2017 will be a year of “differentiation and of divergence … some of the stronger economies will get stronger and some of the weaker economies may just show their vulnerabilities.” He adds that Middle Eastern markets are trading in line with emerging ones but offer a higher dividend yield and recommends a highly selective investment approach even within the region. Khatoun’s remarks on Egypt echo similar ones he made in December (runtime 04:07).

Inflation rates hit mid-twenties, enter uncharted territory: Egypt’s headline inflation rate closed 2016 by recording 23.3% in December, up from 19.4% in November, according to the monthly release by CAPMAS. The headline rate was driven in part by a 28.3% rise in food prices in December, Reuters notes, as well as a 32.9% rise in healthcare costs in the same month. Transportation prices in cities and towns were up 23.2% y-o-y in December following the rise in fuel prices the month before. December’s core inflation reading remains higher than the headline rate, registering 25.9%, according to the central bank.

On a monthly basis, December’s headline and core inflation rates are the highest on record since 2003, surpassing the 23.6% headline rate and 23.0% core rate recorded in August, 2008. Looking at annual IMF WEO data that go back to 1980, the headline figure is only surpassed by the average recorded in 1987 (or 1986 if you look at World Bank data, which goes back to 1960).

…Expect inflation to remain “high” until dropping to single-digit levels by the end of 2019 or early 2020, notes Reham ElDesoki, senior economist at Arqaam Capital, as per Bloomberg. She says, “Egypt now is in the eye of the policy restructuring cycle, and the price is higher inflation and an overall fiscal deficit pending a structural change in government spending and general repricing of goods and services … reversal of over 50 years of comprehensive government support will take time and is a welcome change to put Egypt on a more sustainable path to growth and fiscal consolidation.”

House puts discussion of automotive directive on hold pending further study: The House of Representatives’ Industry Committee has decided to postpone discussions on the automotive directive pending further study, Al Borsa reported. The hope is to come up with a bill that “would satisfy all industry stakeholders,” an MP said, adding that a contentious article that imposes a 0.5% tithe on industry profits for an industry development fund is being scrapped. The House industry committee had rejected some of the law’s clauses last month. The directive would give incentives to local assemblers to go further up the value chain into manufacturing through a series of incentives.

In other legislative news, the Industry Permits Act is only a month or two away: The Industry Committee approved 28 articles from the 45-article Industry Permits Act on Tuesday, Al Borsa reported. Committee head Ahmad Samir said that the legislation, which aims to minimize the wait time for industrial licenses to as little as 30 days, should come into effect within a month or two at most, as the cabinet and House are in agreement over its clauses.

Speculation is rife about what’s coming after the fuel smart card system. The government denies yesterday media reports that it map cap the volume of subsidized fuel each motorist can buy at 150-200 liters, according to AMAY. Anything over that would sold at full price, and families with multiple vehicles will only receive one ration of subsidised fuel. The smart card system was rolled out at the start of the year.

Meanwhile, the government plans to distribute 7 mn land-holders’ ID cards to farmers in a bid to assess how to disburse cash, fertilizers and fuel subsidies and wean out farmer Kramers, according to Agriculture Ministry sources, Al Mal reports.

The government will pay arrears to international oil companies in part through the second tranche of the USD 3 bn World Bank development loan, an Oil Ministry official tells Al Shorouk. Arrears owed currently stand at USD 3.5 bn as December, Oil Minister Tarek El Molla had previously stated. This comes as the ministry has requested that the CBE allocate USD 270 mn per month to cover daily gas imports of 1.4 bcf, starting from June, Al Borsa reports, citing an unnamed ministry source. The ministry’s request comes as CAPMAS announced that natural gas consumption is on the rise, climbing by 11.8% last October.

The CBE has decided to extend the debt-relief program for the tourism sector for an additional year to February 2018, according to a CBE statement. Loans for sector workers were extended an additional six months.

MOVES- CIB has appointed Ahmed Issa as CEO of consumer banking, according to a bourse statement. Issa, who succeeds Mohamed El Toukhy, was previously deputy CEO of CIB’s consumer banking as well as CFO.

Does Vladimir have dirt on The Donald? US intelligence officials briefed Donald Trump and President Barack Obama last week on allegations that Russia has a kompromat dossier on Trump that included “compromising and salacious personal information,” the New York Times reports, adding that, the dossier was allegedly generated by “political operatives seeking to derail Mr. Trump’s candidacy. Details of the reports began circulating in the fall and were widely known among journalists and politicians in Washington.” At issue is a dossier of information prepared by an alleged former UK intelligence agent alleging Russia has compromising information. Buzzfeed has published the dossier in full, stressing that “The allegations are unverified, and the report contains errors.”

The 2017 Enterprise CEO Poll

Raouf Ghabbour, CEO, GB Auto

Raouf Ghabbour is one of our favorite people. Brilliant, passionate and creatively (and wonderfully) profane when called for, he is the distillation of all that makes a great entrepreneur. He’s at ease with cross-border negotiations, has repeatedly proven his ability to deliver greenfield projects, and built a business in an active war zone (he’s the Hyundai distributor for Iraq). But his favorite business tool? That would be the old-fashioned calculator that literally sits at his right hand. Ghabbour, who began his career in his family’s automotive business and made his name in its tire division, has transformed his company from a one-trick pony — at the time of its IPO, it was (and remains) the sole Egyptian assembler and distributor of Hyundai passenger cars — into a diversified group that assembles, manufactures and distributes cars, buses, trucks, motorcycles, three-wheelers (tuktuks), tires and more in partnership with global OEMs. Whether it’s building the region’s the first fully robotic paint shop or launching a greenfield financing arm that works with everyone from the largest of corporations down to the humblest tuktuk driver, GB Auto has proven it can execute on its founder’s strategy. Edited excerpts from our conversation:

2017 will be the year of adaptation to a new reality. It’s as if we’re kicking an addiction — to subsidies, to cheap energy, to an artificially overvalued currency — and now, all of a sudden, we’re having withdrawal symptoms. There’s no more drugs.

The best-performing sector next year will be healthcare. Hospitals, not pharma — the pharma guys face too much pressure with price controls. I’d also keep an eye on education. And food.

The biggest issue our industry will face is without a doubt working capital. Across the industry, our working-capital requirements have more than doubled in EGP terms, our input costs are rising and we’re all going to have to increase payroll to ensure staff can cope with inflation: Medical, transport, cars, food — everything is rising in price. We see the business climate will be challenging in the first half of the year and that we’ll be facing cost pressure at the same time, so it’s going to be all about working capital.

If the average wage rise was 10% in the past, then we need to be looking at 15-20% this year. And the salary increases shouldn’t be across-the-board: You’re going to need to give larger raises to give protection to lower-wage earners, then it tapers down the more senior the person is.

2017 is going to be a year of opportunity. The opportunity to grab new representations, because weaker players won’t be able to cope. It will also be a great opportunity in terms of hiring. I believe there will be companies that won’t be able to adjust their salaries to ensure their people are comfortable, so you’ll see good talent looking for new opportunities.

What new business would I start today? I’m too old to think outside my business. [laughs] Really. As long as your business has growth opportunities, why would you look outside that? I’m passionate about what I’m doing. I would diversify — I’ll look at new segments within our financing business that serve the core business or in which we have developed expertise. I’ll definitely look at expanding into manufacturing to reduce my foreign currency needs. Just going into body-part stamping, rims and tire manufacturing would give me 20% of the cost of a vehicle right there.

Luxury products will underperform in 2017. Any product at the higher end of the price range is going to suffer. Listen, I am not that concerned. The hiccup we’re facing is less about “people do not have money” and more about “consumers need to mentally cope with price increases.” It’s more psychological than financial, and the more we can pull the gray economy into the formal economy, the faster consumer sentiment will improve. Consumers need six to eight months to adapt to the notion that what they used to buy for EGP 100k is now EGP 220k.

What am I tracking on the legislation or regulatory front? The automotive directive, of course. And taxation. The most anti-investment thing we could do right now would be a corporate tax increase. The government needs to grow the tax base by pulling-in the 95% of companies and white collar professionals who are not paying taxes and making them part of the system. I have confidence our Finance Minister is not looking at a tax increase. We also need a sensible investment law with solid tax and investment incentives for the industries we’re looking to attract, such as automotive manufacturers and pharma manufacturers in the Suez Canal Economic Zone.

There will definitely be an uptick in IPO and M&A activity this year. There are businesses out there that need financing, and they’ll look to sell equity rather than take on debt, because the cost of debt is simply too high. And there will definitely be M&A opportunities — there always are in stormy times.

It’s a question of timing: Do you buy in when an opportunity is on offer, or do you wait until it goes underwater and then take it? That’s a different question.

What’s my banker asking me? Nothing. If I was a banker, I would be the happiest person on earth. They make a fortune. Two institutions are making the money in Egypt now: The banking sector and the customs authority, with all of the demurrage and storage fees. For the past 24 months, banks are taking a 2% allocation fee and a 1.5% fee to open an LC. That’s 3.5% straight to them, and they don’t lift a finger. The central bank needs to interfere — we’re being strangled by the prices banks are charging their clients. And that’s before the impact of the interest rate hike.

My message to the rest of the business community is simple: We all need to think about local added value. We need to manufacture. It’s difficult, but I think the float of the EGP is the best decision a policy maker has made since I joined the business in 1977. I’m living a dream — I’ve literally been dreaming about a free float since the 1970s. It’s brilliant, because the only way out is to work harder, to cut imports and to produce more here. We were spoiled by relying on tourism revenues and remittances and Suez Canal revenues. It’s time we took responsibility for ourselves.

Wael Fakharany, MD Egypt & SVP for Government Relations, Careem

Wael Fakharany recently woke up one morning and decided to leave what he calls “one of the best jobs I ever had” at Google X to join regional ride hailing startup, Careem. The bold move that baffled many in the community, but made perfect sense to Fakharany, ended a nine-year run at Google that began in 2008 and included stints as regional head of Google in the Middle East and Africa, head of agencies for the Middle East and North Africa as well as regional manager of Google in Egypt and North Africa. Fakharany says it wasn’t a midlife crisis that prompted his decision to leave Google, but rather the dissatisfaction with the view that we as a region were not seen as able to create a multi-bn USD company that could provide services just as good as — if not better than — a global giant. Just six months after he joined Careem as Egypt managing director, the company has closed a USD 500 mn funding round and is now valued at USD 1 bn with plans to IPO within the next two years. With 25 years of experience in tech, Fakharany is a leading figure in the regional IT industry. He’s passionate about the development of young entrepreneurs in the MEA region and the use of technology to solve local problems.

2017 will be the year of speeding up in a slowdown. At the risk of sounding too optimistic, I’m extremely hopeful and excited about the year ahead for us and for Egypt. The reforms that the government has undertaken are painful but necessary. The thing to do now is to just push through without losing momentum. I think the theme of the year for us is going to be expansion, scaling, and taking risks.

The best time to take risks is in a challenging economic environment. We have already launched operations outside the major cities of Cairo and Alexandria. We’re now present in Damanhour, Mansoura, Tanta and Hurghada, and we have very ambitious plans to expand even further in the next two years. Within the next two years, we will be present in every Egyptian city. So I guess you can say we are pretty optimistic and excited about our prospects in Egypt. I think this is the best time to invest.

The Middle East’s latest unicorn. Yes, we have reason to be excited. Our unicorn status along with (who were the first) is something that we are very proud of, but the optimism is really about more than just the buzzwords and what Careem has achieved. It’s about the fact that we can see an ecosystem being created in the region, and we can see the rise of local companies that can sort out local problems in a way that simplifies the day-to-day lives of ordinary citizens while simultaneously creating employment opportunities for our youth.

The biggest challenge for the economy will be speed of execution and the ability to adapt to new structures and institutions. The ability to be agile and move across those new structures and policies that we are not yet used to will present a big hurdle for businesses. The quicker we can accept and adapt to these new realities, the better off we will be. Taking too long will result in missed opportunities.

The biggest challenge for the ride-hailing industry is the regulatory framework or the lack thereof. We are building something much bigger than just Careem. I’m very excited about this industry as a whole; it’s growing at tremendous speed and it has multi-stakeholder benefits including financial inclusion and economic empowerment. The biggest challenge for us going forward is that as of yet we don’t have a regulatory framework in place. Right now, we have 450 employees and 45,000 drivers [Careem calls them “captains”]. Having the proper regulatory framework will allow us to have the proper documentation so that we can provide a safer service. We are here to invest in the local market and open avenues of employment for young people while providing safe, affordable, comfortable rides for citizens.

We don’t need a new regulatory framework, we need new executive regulations on the existing traffic law. We are regulated by the Ministry of Interior, they are the legal Godfather of this industry. The new executive regulations will ideally allow the ride-hailing industry to thrive and grow by making it possible to document everything. We have already vocalized our concerns to the Ministry of Interior and they are receptive to our ideas. In February 2016, a ministerial committee was formed to issue a draft law for the ride-hailing industry; we didn’t think this was the right law, so we are still waiting. It’s normal that the regulatory framework lags behind the industry. The telecom law for example was only issued in 2003-2004, long after we began using mobile phones.

Best sector to invest in other than our own? Fintech. Companies that can use technology and innovation to leverage resources that can compete in the marketplace and disrupt industries. In Egypt, we have lots of unutilized assets. I am also personally interested in data analytics. Car leasing is also very interesting because a car is an income-generating asset. Simply having possession of a car allows otherwise unemployed people to go home with money in their pockets every day.

I wouldn’t invest in anything to do with luxury goods right now. I think even in our own households we will be limiting our consumption of luxury goods in 2017.

What business would I start today if I had to start a new business? I would look into a business that makes use of the sharing economy; unutilized and unused assets present countless opportunities, like vacation homes in Sahel, for example, that go unused for 8-10 months of the year. Any business that can make things more efficient, anything that utilizes white space.

What are the low hanging fruit? Where there are challenges, there are opportunities. All of the problems that Egypt currently faces present us with incredible opportunities that can be solved with technology. The fact that you can’t live a single day in Egypt without coming across a challenge means that there are plenty of opportunities. Technology is pervasive enough to solve those problems.

What question will we be asking at the end of next year? I think there will be three questions: My growth percentage, the cost of growth and whether or not this growth is sustainable. I think that by the end of 2017 Careem can be a significant contributor to Egypt’s GDP. The speed with which we already see things changing in our industry is amazing. What is most gratifying is seeing what economic empowerment can do. Seeing someone transform from a desperate grumpy individual to a productive, income-generating member of society is incredible.

Jose Maria Magrina, CEO, Suez Cement Group

José Maria Magrina is that rare foreigner who not only does business here, but truly loves the country — and intends to make Egypt his family’s home for the long term. We enjoy Magrina’s company because he balances an incredible appetite for work with being an engaged dad and active sportsman. The fact that he’s an active member of the Cult of Mac doesn’t hurt. On the professional front, Magrina has earned our respect for how he handled the IPO of Arabian Cement (the first IPO in the market after the events of January 2011) and for his quick, incisive thinking on everything from the economy to corporate strategy. Magrina is now the CEO of Suez Cement, at 12 MTPA the largest cement group in Egypt by capacity. With five plants and c. 7k direct and indirect employees, it is also the largest German industrial group in Egypt and one of Heidelberg Cement’s largest subsidiaries globally.

2017 will be the year of reforms, and I don’t think we’re over the hump just yet. The government took the right measures. They’re painful, but they’re steps that have set us on the path for medium- and long-term growth and recovery. Now, other things need to fall in place, like a further reduction of fuel subsidies given rising international oil prices. To date, the government has concentrated on reducing subsidies to industry, so it’s now time also to tackle the lion’s share, the subsidies that go to the majority of the population. Key to this is making sure that welfare benefits are directed to those in need. Subsidized utilities, food and fuel should be a matter of the past, and moving away from it will help rationalize consumption and alleviate the burden on the state, which can in turn use those funds to invest in more pressing needs including health, education and investment in infrastructure.

In the meantime, we have to see how these reforms settle into the population. How will the government shield low-income earners from the impact without continuing with the current subsidy system? They need to speed up the introduction of cash transfers to qualified beneficiaries.

The biggest challenge for the economy will be regaining our footing as a competitive exporter. We’re all presuming that in the short-to-near term, the economy will start exporting and generating foreign currency to maintain the deficit at a sustainable level. But we import more than we produce, and shifting the balance will demand new regulations and an investor-friendly environment. This isn’t just an issue for foreign investors — local investors will lead this recovery, they’re the ones who will push the economy forward. We need to go from an inward-looking economy to an export one. With the EGP now competitive, we need to take advantage of this to export.

Our industry faces a couple of significant challenges. First of all, the construction industry is going through a period of instability. 2016 will close with 7% growth in cement consumption, but there’s overcapacity and other state actors are building the world’s largest cement plant. The industry will definitely want more visibility on the role of the state in supply. Then there’s logistics: We’re on the verge of becoming export competitive, but that’s sapped by the cost and efficiency of logistics on the roads and in ports. Arbitrary toll fees and taxes on the roads are the main challenge.This is critical: Exports could be very important to our industry given both oversupply and the risk that the government pulls back from stimulus spending on infrastructure.

The biggest opportunities for us? Exports and serving government demand. From the Suez Canal to the New Capital, we’re delivering to major government installations right now, and if they keep investing in infrastructure like this, it’s a massive opportunity for everyone in the industry. The downside risk is the disappearance of this opportunity if they need to pull back on the spending front to redress the budget deficit. We’re also working to develop a nascent market for more sophisticated products. Through our ready-mix subsidiary, we are working with the biggest construction companies to develop extra-durable concrete for its use in heavy-duty applications as well as special mixes for underground applications and other interesting uses.

All of our natural export markets are at war or embroiled in conflict right now. Libya, Syria and Yemen. We’re starting to see exports to Libya and Yemen, and we’re hopeful about Syria, but not in the immediate term. We previously exported a lot of gray cement to other, more mature markets when we enjoyed a better cost structure, but that’s off the table now. We’re now exporting white cement to Europe, Saudi Arabia and the United States. It’s used as a plastering and decoration material, and our plant in Minya produces with a degree of whiteness equivalent only to Carrara in Italy. And on a same-price basis, the market typically prefers Minya.

Our group is going through difficult times right now, so it’s difficult for us to talk about exceptional salary rises. We’ll follow through on the basic increase specified in our collective agreement – high single digit. We just can’t afford to do more. We’ll have losses for FY2016 and we’ll probably still be in the red in 2017 despite everything we’re doing to turn the corner.

There will definitely be M&A activity this year — there are three companies in the market right now that are actively looking to sell. The economics are definitely more in favor of M&A than of a greenfield plant — there were no fundamentals for the new licenses. The market is already in oversupply and we already have some of the lowest prices in the world. In Spain, during the worst years of the global financial crisis, prices were still at EUR 52 per ton, and in Egypt we are currently at EUR 31 per ton. The return on investment to build a factory — where 60-70% of your equipment will be imported — is simply non-existent. We’re not in the market to buy — we’re comfortable where we stand. But there will definitely be M&A activity in our sector.

Who’s going to do best this year? Bankers and investment bankers always make out well in times of turbulence. The best opportunities are typically well-priced when there’s turbulence. Financial institutions are also going to make a lot of money this year — they have leverage and they tailor the regulations in their favor.

Give you an example? Why are capital gains made on the stock exchange exempt from taxes, but my company’s dividends would be taxed? Dividends have already been taxed — and those who created those dividends typically create a lot more value for the economy in producing them than do speculators in the stock market.

Automotive will be one of the worst performing sectors this year. They’re going to sell lower volumes of higher priced goods. I wouldn’t want to be in pharma. They had a reasonably profitable industry in the past, but they’re challenged now. I would be selectively bearish on some segments of the food industry because of the import component.

If I were to start my own business today, it would absolutely be in waste management. There’s a massive opportunity to transform waste into energy, whether it’s for my industry or the new power plants. We have tremendous potential, particularly with the new Siemens electrical stations and in industries such as ours, to transform waste into energy — but we’re held back by supply and quality. Suez Cement could use refuse-derived fuel for up to 25% of our energy needs, but we can’t because of a lack of reliable suppliers — today, you need to collect and treat from so many small landfills. The main hurdle for the growth of that industry is in the regulations around collection and landfills as well as the lack of clarity on which authority is the regulator for the market. A clear effort should be put in place to allow for higher use of alternative fuels in all industries, but the government has to start by drafting a comprehensive legal framework. The opportunity is huge, there are power plants in Europe that run almost entirely on waste, and when you see the price differential, it’s clearly a business opportunity.

The biggest regulatory issue on which we’re keeping an eye this year is definitely the role of the government and state-affiliated institutions in our industry. They should not be active players, but regulators and consumers.

The question that’s keeping me awake at night is “What can I do to alleviate the burden of rising costs for my staff in the current circumstances?” We can’t raise wages beyond what’s in the collective agreement due to our company’s circumstances, but I can also understand that purchasing power has been eroded. We have to find a medium-term solution.

The other question that keeps me awake is, “Is this the going USD/EGP rate? Or will it be closer to EGP 14 by the end of the year?” We all know that the overshoot to 19 is pent-up demand, but I’m a bit nervous. 19 is difficult to swallow.

Magued Sherif, CEO, SODIC

Magued Sherif is an early-rising exercise addict who thought he was starting a new life (with a new business) in the United States when he got a call from then-SODIC chief Dasha Badrawi: Would he be interested in speaking about returning home to helm SODIC? An architect and former consultant, Sherif joined SODIC with a proven industry track record, having been general manager and a member of the board at Palm Hills Developments for more than a decade before becoming CEO of Majid Al Futtaim Properties in Egypt (2008-11) and then CEO and MD at Hyde Park (2012-14). He now has the challenging task of managing the nation’s premier property developer through a year that many expect will be challenging for his industry. Edited excerpts from our conversation:

2017 will be a painful year for pretty much everyone, but we all knew this was inevitable and largely overdue. The key will be to remember that taking the pain this year will put us on the right track in 2018 and position us for growth that was simply not possible before.

The biggest challenge for the economy? Unquestionably how every business adapts to the float of the EGP. This affects every business, it impacts every person in Egypt. Everyone I speak with is having the same challenges we are: How do you budget given the uncertainty? What exchange rate will we use? Will FX be available in the bank?

We’re budgeting at around EGP 20 to the USD right now. That’s the latest, and the figure has been marching up consistently since we began the budgeting process.

I think our industry faces a number of challenges in 2017, the first being the need to replenish our land banks at what are presently very expensive rates. The government remains the primary source of land, and even before the float, they had raised land prices beyond what we as an industry feel are already prohibitive levels. Over and above that, there is a direction that new land auctions by way of partnership with the government will give priority to those paying in USD, putting local developers at a real disadvantage.

On construction, obviously, the continuing increase in the prices of raw materials is going to squeeze. So far, our offering has been mainly core and shell products, so we have limited exposure to imports, but devaluation and inflation are still flowing through to local materials. Not as badly as imported materials, but we’re still affected. We’re seeing construction contracts being revised for the price of cement, of rebar, and this is on contracts backed by sales at the pre-November 2016 selling price. As we speak right now, we’re forecasting a 25-30% rise in the cost of construction.

The opportunity for our industry is unchanged: There are very strong fundamentals based on real demand for property and a limited supply from formal developers. We are a home-buying culture, and the lesson many have learned in the past couple of years is that with prices appreciating very rapidly, it’s always better to buy now. Serious, credible developers who stay on track will continue to sell despite the conditions.

Residential offerings will outperform other asset classes given the strong fundamentals. The outlook for office space is less rosy — we may see some businesses compromising quality and specs or foregoing moving given the general economic stress. I believe retail will suffer: Developers, operators and retailers will struggle to achieve economically feasible agreements given that rents are in some way or another linked to the USD. That’s before you factor in how retail itself will perform this year, especially those offering imported products with prices doubling with the float.

We’ve been studying the market on pay rises, and we are looking at diverse and creative ways to address the hike in prices faced by our people. We are working out a balanced approach to relieve our employees and at the same time not compromise shareholder value.

We raised our prices by 20% for core and shell and 30% for finished products directly after the float. We think this is a fair rate of increase. It’s difficult to predict what’s going to happen this year and whether we will need to increase further and, if so, by how much. We’re staying close to the market and we’re working closely with our suppliers. We are aware affordability will be an issue in the coming period and we are trying to be as sensitive as possible to all stakeholders.

We’re absolutely open to opportunities to add to our land bank through acquisition or partnerships with other developers who have substantial holdings but not the capacity to develop them. That said, the government will remain the primary source of land for real estate developers, and we are hoping to see more reasonable land prices and land allocation mechanisms in these already challenging times.

I think the IPO outlook is reasonable. Valuations are looking cheaper after the float, volumes on the stock market are up, we’re seeing renewed appetite from Europe and the GCC. I think the climate could be interesting for someone with an IPOable business.

The best-performing sectors will be basic commodities and any business that exports. It is a great time for someone with a competitive locally produced product.

The worst? Look, everyone will suffer, to be honest. There are just some that will suffer more than others — any industry that is heavily or wholly reliant on imports, such as the automotive industry, for example.

If I had to start a new business today, it would be something having to do with food. Egyptians love food. It is the one industry that consistently does well even in times of economic pressure and sometimes especially during these times as a pressure valve.

The biggest regulatory issue I’m watching for is how the state will react to the stress our industry faces today. I want to see some relaxation of payment terms for existing contracts. Perhaps extensions on project timelines given the challenges we’re all facing with contractors — and that some are facing with collections. And obviously I’d like to see something done to curb the price of land and extend payment periods — we need new mechanisms, and we’ve seen nothing to that effect so far. From East to West Cairo to the New Capital, land prices are either very high or expected to be very high with prohibitive stipulations.

Bottom line: We need to ask ourselves what happens to the real estate industry if the government continues to raise land prices — let alone demand that land be paid for in USD. Those notions raise very big questions about the future of our industry.

The markets yesterday

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EGP / USD CBE market average: Buy 18.3675 | Sell 18.5283
EGP / USD at CIB: Buy 18.555 | Sell 18.655
EGP / USD at NBE: Buy 18.5 | Sell 18.6

EGX30 (Tuesday): 13,014.54 (+1.83%)
Turnover: EGP 1.753 bn (303% above the 90-day average)
EGX 30 year-to-date: +5.42%

THE MARKET ON TUESDAY: The EGX ended Tuesday’s session 1.8% up. CIB, the heaviest stock of the EGX30 supported the index as its share price jumped 2.9%. Thursday’s top performing stocks were ACC, Eastern Co, and Heliopolis Housing. Thursday’s worst performing stocks included Amer Group, Arabia Investments, and Orascom Telecom Media and Technology. The market turnover was EGP 1.8 bn and foreign investors were the sole net sellers.

Foreigners: Net short | EGP -20.0 mn
Regional: Net long | EGP +13.5 mn
Domestic: Net long | EGP +6.5 mn

Retail: 71.1% of total trades | 72.5% of buyers | 69.7% of sellers
Institutions: 28.9% of total trades | 27.5% of buyers | 30.3% of sellers

Foreign: 14.6% of total | 14.1% of buyers | 15.2% of sellers
Regional: 8.4% of total | 8.7% of buyers | 8.0% of sellers
Domestic: 77.0% of total | 77.2% of buyers | 76.8% of sellers

WTI: USD 50.78 (-2.27%)
Brent: USD 53.62 (-2.40%)
Natural Gas (Nymex, futures prices) USD 3.27 MMBtu, (+5.38%, February 2017 contract)
Gold: USD 1,187.60 / troy ounce (+0.23%)

TASI: 7,008.03 (-1.04%) (YTD: -2.81%)
ADX: 4,668.31 (+0.10%) (YTD: +2.68%)
DFM: 3,725.06 (+0.10%) (YTD: +5.50%)
KSE Weighted Index: 388.71 (+0.07%) (YTD: +2.27%)
QE: 10,700.47 (-0.01%) (YTD: +2.53%)
MSM: 5,779.81 (-0.30%) (YTD: -0.05%)
BB: 1,210.00 (+0.30%) (YTD: -0.86%)

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13 January (Friday): Egypt to attend Africa-France Summit 2017 in Mali.

15 January (Sunday): 19th session of the Egypt-Jordan Business Council, Cairo, Egypt.

15-17 January (Sunday-Tuesday), International Conference on Improving Sustainability Concept in Developing Countries, Cairo.

15-20 January (Sunday-Friday), bidding window for Petroleum Ministry’s gold exploration tender in eastern desert and Sinai, Egypt.

17-18 January (Tuesday-Wednesday), Underground Infrastructure & Deep Foundations Egypt, Nile Ritz-Carlton, Cairo.

22-31 January (Sunday-Tuesday): 28th African Union Summit, Addis Ababa, Ethiopia.

24 January – 26 January (Tuesday-Thursday): Global Oil & Gas Middle East and North Africa 2017, Cairo International Convention Center, Cairo.

25 January (Wednesday): Revolution (police) day, national holiday.

28-29 January (Saturday-Sunday), International Conference on Computers, Data Management and Technology Applications, Intercontinental City Stars, Cairo.

January 30-February 1 (Monday-Wednesday): Beltone Financial’s Africa’s Era, Egypt’s Moment Conference, Cairo.

30 January – 2 February 2017 (Monday-Thursday): Arab Health Exhibition, Dubai International Convention & Exhibition Center, UAE.

14-16 February 2017 (Tuesday-Thursday): Egypt Petroleum Show 2017 (EGYPS), CIEC, Cairo.

15-16 February (Wednesday-Thursday): International Conference for Globalization & Emerging Economies, Alexandria.

21-23 February (Tuesday-Thursday): Egypt Energy Investment Summit, Nile Ritz-Carlton, Cairo.

06 – 08 March: 13th EFG Hermes One on One Conference, Dubai, United Arab Emirates.

07-09 March (Tuesday-Thursday): Microfinance forum, Nile Ritz-Carlton, Cairo.

09-11 March (Thursday-Thursday): Egypt Projects Summit, Cairo International Convention Center, Cairo.

29-30 March (Wednesday-Thursday): Cityscape Egypt Conference, Nile Ritz-Carlton, Cairo.

31 March – 03 April (Friday-Monday): Cityscape Egypt Exhibition, Cairo International Convention Center, Cairo. Register here.

01 April (Saturday): SEOcon, The Greek Campus, Cairo.

03-06 April (Monday-Thursday), Agri & Foodex Africa, Khartoum International Fair Ground, Khartoum, Sudan.

08-10 April (Saturday-Monday), Pharmaconex, Cairo International Convention Center, Cairo.

16 April (Sunday): Coptic Easter Sunday.

17 April (Monday): Sham El Nessim, national holiday.

24-25 April (Monday-Tuesday), Renaissance Capital’s Egypt Investor Conference, Cape Town, South Africa.

25 April (Tuesday): Sinai Liberation Day, national holiday.

30 April – 3 May (Sunday-Wednesday): Cement & Concrete 2017, Riyadh International Convention & Exhibition Center, Saudi Arabia.

01 May (Monday): Labor Day, national holiday.

27 May (Saturday): First day of Ramadan (TBC).

26-28 June (Monday-Wednesday): Eid Al-Fitr (TBC).

30 June (Friday): 30 June, national holiday.

23 July (Monday): Revolution Day, national holiday.

02-05 September (Saturday-Tuesday): Eid Al-Adha, national holiday (TBC).

22 September (Friday): Islamic New Year, national holiday (TBC).

06 October (Friday): Armed Forces Day, national holiday.

01 December (Friday): Prophet’s Birthday, national holiday.

08-10 December (Friday-Sunday): RiseUp Summit, Downtown Cairo.

01 January 2018 (Monday): New Year’s Day, national holiday.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Mashreq (tax ID: 204-898-862), the MENA region’s leading homegrown personal and digital bank; Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt; Hassan Allam Properties (tax ID:  553-096-567), one of Egypt’s most prominent and leading builders; and Saleh, Barsoum & Abdel Aziz (tax ID: 220-002-827), the leading audit, tax and accounting firm in Egypt.