Egypt aims to double private sector to tackle economic woes

By Digby Lidstone

October 17, 2022, 8:51 AM

Egypt plans to sell off Wataniya Petroleum to bidding Gulf investors

Privatisation of public companies is key to government recovery plan
Potential sale of state-held stakes in gas, comms, education and banking
Country keen to target Saudi, UAE and Qatar investors

Weakened by the consequences of the war in Ukraine, Egypt has been forced to negotiate a new loan from the International Monetary Fund and wants to double the private sector’s share in its economy.

By 2025 Egypt’s government wants the country’s private sector’s investment contribution to more than double to 65 percent from the current 30 percent.

Key to this is the privatisation of 10 public companies, two military-held, and the creation of two listed companies, one of which would absorb the seven main Egyptian ports and the country’s best hotels.

President Abdel Fattah said in April that the partial privatisation of state assets would raise $10 billion every year for four years. And in a sign of the government’s haste, the 10 sales were to be completed by year-end, though that plan has now been revised to seeking to raise $6 billion by the end of June 2022.

Given the government’s previous ambition set out in 2018 to sell minority stakes in 23 state companies and list army-owned companies on the Egyptian Exchange (EGX) yielded little, there is no reason to believe progress will be any quicker this time.

But analysts have said the privatisation plans could be seen as a statement of intent.

“A vast programme of sales is plausible, given the scale of public sector ownership at present,” Daniel Kaye, acting group chief economist at National Bank of Kuwait’s economic research group, told AGBI.

“Moreover, given Egypt’s huge economic potential, there is scope for big local and international appetite for these assets if the government manages it well.”

There is broad consensus that the state needs to rein back its dominant economic position. While the divestment plans are underpinned by the need to replenish state coffers, the primary driver is the need to expand the role of the private sector and boost underlying growth.

Egypt’s military-owned National Company for Producing and Bottling Water (Safi) is being restructured in preparation for being offered on the Egyptian Stock Exchange

“There is a widely held view, including by international organisations, that the state controls too much economic activity, perhaps as much as three-quarters, according to the minister of finance,” said Kaye.

“Reducing this share will improve levels of service as well as macro-level performance. But there’s a financial angle too. Since state firms often end up running at a loss, privatisation offers scope to move those losses off the government’s books and generate cash from the sale.”

“In Egypt’s case, this dovetails well with the government’s aims of lowering the fiscal deficit and cutting public debt,” he added.

The sense among analysts is that Egypt is keen to target Gulf investors. Qatari, UAE and Saudi money has proved indispensable to Egypt in recent years, but now there’s a clear sense that GCC investors want a return on their capital.

“A lot of IPOs are targeted at the Gulf states,” said Callee Davies, economist at Oxford Economics Africa.

“That’s good in that they stand to get more foreign investment and more FX inflows. But there are issues around the fact that a lot of investment opportunities are being limited to Gulf players, and not the rest of the world,

“There’s also the issue that military companies likely won’t be offered for sale.”

There are clear advantages in seeking out Gulf investors. For one thing, the likes of Saudi Arabia’s Public Investment Fund are flush with cash and keen to pick up competitively priced assets.

Also, as James Swanston, MENA economist at Capital Economics, said, such investment would come with fewer contingencies.

“The Egyptian government is obviously keen to get this privatisation going and having very wealthy neighbours is probably a win for both parties,” he said.

In August the PIF-controlled Saudi Egyptian Investment Co bought minority stakes in four Egyptian companies for $1.3bn.

Overall, Egypt’s IPOs bode well for investor confidence, in signalling that the state is opening up to more private sector involvement – even if the timings might slip.

Yet as Davies pointed out, emerging market sentiment is weak.

“I doubt a sudden rush towards listing companies on the stock exchange will necessarily have the desired impact on investor interest that it would have had a few years ago,” she said.

What’s for sale?

A “sub-fund” has been established within the Sovereign Fund of Egypt, through which the shares that are scheduled to be presented to the IPOs committee will be prepared.

One leaked government document flagged 79 sectors from which it intends to fully exit, including automotive and fertilisers, and to partially withdraw from another 45, including education, transport and water.

Privatisation plans would envisage sales of state-held stakes in gas plants, communications towers, renewable energy, desalination, education and banking sectors.

In terms of companies to be sold, some meat was put on the plans in August, when the cabinet greenlit prelisting procedures in Wataniya Petroleum and the National Company for Producing and Bottling Water, both owned by the military.