This week saw the sale of a 10 per cent stake in Telecom Egypt (TE), Egypt’s incumbent landline telephone operator.
The sale, executed without much fanfare, was carried out through the Egyptian Stock Exchange. Some 9.5 per cent of the shares, the equivalent of 162.2 million shares, were sold to institutional investors, bringing in LE3.75 billion in revenues. The remaining 0.5 per cent are to be sold to TE employees.
The sale signals the government’s seriousness about its privatisation programme, Khaled Al-Sayed, managing director at the Synerjies Centre for International and Strategic Studies, told Al-Ahram Weekly, adding that “it would give reassurances to other investors that there are deals that can be made.”
The TE deal came a few days after 80 per cent of Paints and Chemicals Industries (Pachin) were sold to the Dubai-based National Paints Holding (NPH) for around LE770.5 million through a tender offer.
Rating agencies, the International Monetary Fund (IMF), and international investment banks have been criticising the slow pace of the privatisation programme. The sale of stakes in government-owned companies was one of the criteria for the IMF’s $3 billion Extended Fund Facility (EFF) loan programme to Egypt.
Egypt received the first tranche of $347 million in December.
The government announced in February that it intends to sell stakes in 32 state-owned companies to allow broader private-sector participation in the economy and secure hard currency. It is targeting to raise some $2 billion from the asset sales, required to meet its financing needs for the current fiscal year.
“I assume that only around 30 to 40 of the deals in the pipeline will be executed, but that will still be higher than the execution rate of the 2018 IPO programme when 17 per cent of the companies that were shortlisted were eventually sold,” Mohamed Abdelmeguid, French bank BNP Paribas’s senior Middle East economist, told Bloomberg TV, in a reference to the government’s initial public offering (IPO) programme.
“The reasons are the lack of capacity to absorb such a heavy or busy pipeline of companies. Thirty-two companies are a lot to sell in one year and are bound to drive down equity valuations,” he added.
Wafd Party MP Ayman Mehasseb, head of the National Dialogue’s subcommittee on state ownership, said offering 32 companies for sale in one year was a troublesome task, especially as the government is keen to implement it in the most efficient way to avoid mistakes made in previous privatisation deals.
Egypt’s track record on privatisation is not good, as the previous Mubarak regime sold 127 companies between 2004 and 2007 and many were referred to court after the January 2011 Revolution.
A number of deals were voided on the basis that the government had substantially undervalued the companies. Among the annulled deals were Tanta Flaxseed Oils, Omar Effendi, Nasr Boilers, and the Nile Cotton Ginning Company.
Valuations have been an issue in recent attempts to sell stakes in government-owned companies. The two most recently privatised companies, Telecom Egypt and Paints, and Chemicals Industries, are believed to have been sold at below their fair value.
Mehasseb said that current share prices do not reflect the real value of the offered companies. He gave the example of Paints and Chemicals Industries, which was offered at LE57 when the foreign-exchange rate was LE15, so it was expected that the share price would be much higher than LE40 at LE50 at least.
However, the shares were sold in a tender offer from the Emirati National Paints Company (NPC) that put the value of each share at LE37.75.
“This is not all negative, as low-priced shares are grabbed by investors looking for lucrative investments, however,” Mehasseb said.
Mohamed Radwan, chairman of AF-Securities, recalls that in 2005 TE offered 30 per cent of its shares for sale, with the shares selling for the equivalent of $2.5. “Last week, we sold a share for around 74 cents,” he said.
“This means we have problem. Eighteen years on, the prices have not appreciated due to the performance of the company, as well as problems in the macro picture at large. Fears of further devaluations are weighing on investors’ sentiments,” Radwan said.
Differences in the fair price are attributed to what each party considers is the true value of the pound. While the pound is trading at around LE31 per dollar in the banks, it is changing hands at around LE38 to LE40 on the parallel market. International observers have called for a flexible exchange-rate system.
Both BNP Paribas and the US bank Citigroup said in reports issued last week that it was unlikely that there would be another steep devaluation of the pound before the end of this fiscal year in June, because the government wants to limit increases in borrowing costs and inflation until it can secure the foreign currency needed to cover its financing needs.
Al-Sayed supports the Central Bank of Egypt (CBE) in not wanting to devalue the pound again before it reins in inflation. “Inflation needs to be under control before proceeding with another devaluation; otherwise, it will have negative repercussions for the whole economy,” he said.
Inflation has been on the rise for 10 months to reach 32.7 per cent in March, its highest level in five years, before cooling down to reach 30.6 per cent in April due to a favourable base effect and the relative stabilisation of the exchange rate throughout the month.
Deals like those of Paints and Chemicals Industries and TE could be the panacea for now, as they signal that the programme of sales of government assets is starting to move and therefore comfort investors.
But there are other factors to be considered. “In the TE deal, only nine to 10 per cent of the company was sold, and 90 per cent of this was sold to locals. You didn’t get foreign investment or dollars, which is the main aim of the privatisation programme this time,” Radwan said.
“We should be targeting foreigners. We should not be hesitating to offer larger stakes or important entities for privatisation.”
Radwan suggested that instead of offering a minority stake in Banque du Caire, Egypt should sell up to 60 to 70 per cent of it or sell five to 10 per cent of the larger and more appealing National Bank of Egypt.
He said that Saudi Arabia sold a stake in the oil giant Aramco, its crown jewel and now the largest oil company in the world.
Al-Sayed recommended that Egypt market its assets on a broader scale. Marketing has been carried out mostly in the Gulf countries, while potential investors can be found in the US, China and Asia, he said.
He said that they “all need to see that we are serious about reform, transparency and the proper fiscal and monetary management of the economy.”
Policymakers also need to be more accommodating to investors. In green hydrogen projects there are requests for tax exemptions, for example. “We need to give them those tax cuts because the investment that will come in is worth much more for us,” he added.
“Egypt needs to be flexible and agile in its approach to investors because competition for investments is tough in our region,” Al-Sayed said. It is also important to cater for local investors’ needs.
“What will attract investment is not the government, but our national investors, the old investors who are well established,” he said. They are the ones that the government needs to win, because they are the ones who will convince international investors to come as well.
“If they speak to investors abroad and tell them they are happy, they are more trusted than any testimonial from the government.”
Al-Sayed said that “we are borrowing at a very high rate to repay installments of much cheaper debt. Credit ratings downgrades should push the government to sell more speedily.”
“The TE sale will not be enough regarding the credit ratings, but coupled with a couple more sales, it will be a positive move,” he concluded.
* A version of this article appears in print in the 18 May, 2023 edition of Al-Ahram Weekly