Egypt’s plan to sell stakes in 23 state-owned companies as part of its state privatization program has stalled for nearly two years, with a series of announced sales by the government repeatedly falling through. Analysts blame bad market conditions and weak company results for the delays.
The sales are part of an economic reform package tied to the US$12 billion loan agreement the government signed with the International Monetary Fund three years ago. The final disbursement of the loan was approved by the IMF in July.
But while the government has successfully pushed through a series of harsh austerity measures — including subsidy cuts to fuel and electricity and a 50 percent currency devaluation — as part of the reform package, it hasn’t been able to do the same with the privatization program. Egyptian authorities have postponed the program’s launch date and the list of affected companies several times, usually abruptly and without explanation, thrusting the entire project into a state of uncertainty.
Analysts say the government is reluctant to go through with the plan because of a lack of liquidity in the stock market and weak performance of the targeted companies. The diverging priorities of the various government ministries in charge of the offerings are also complicating matters, they added.
The privatization program involves listing 14 companies on the Egyptian Stock Exchange (EGX) for the first time. The remaining nine are already trading publicly, and the government said it plans to increase the percentage of their floating shares. The plan, expected to raise about LE80 billion, was set to be concluded in 24 to 30 months, beginning in the second quarter of 2018.
In the 20 months that have elapsed, the government has managed to sell a stake in just one enterprise: Eastern Company, Egypt’s largest cigarette maker.
The process began in March 2018, when the Finance Ministry announced that the government planned to sell stakes in publicly listed companies in which the state has large holdings. The nine companies identified were:
It also said the following 14 companies would make a debut on the EGX:
Four months later, in July 2018, the Cabinet selected five of the identified companies already listed on EGX for the initial phase of the offerings. The plan was to kick off with Heliopolis Housing in October 2018, followed by Alexandria Mineral Oils Company and Alexandria Container and Cargo Handling in November, and Abu Qir Fertilizers the following month. No time frame was set for the Eastern Company offering.
However, in September of the same year, the government adjusted the plan, announcing it would begin by selling 4.5 percent of Eastern Company. Then, a month later, while the market was preparing for the offering, authorities postponed it indefinitely.
The finance minister blamed the delay on the global crisis in emerging markets, saying it had caused a drain on liquidity in Egypt. The rapid rise in US interest rates at the time had encouraged investors to channel funds into American assets, triggering an interest rate race among emerging economies to remain attractive. Egypt was no exception.
In January 2019, Minister of Public Enterprise Hisham Tawfiq removed Alexandria Mineral Oils Company from the program’s initial phase, bringing the number of companies down from five to four.
Two months later, on March 1, the government suddenly announced it would sell a 4.5 percent stake in Eastern Company within two days. At the time, Egypt was awaiting approval for the final $2 billion tranche of the IMF loan. The sale of the 4.5 percent stake was completed on March 3.
The sale of the other company stakes was expected to follow. Instead, the program was plagued by additional delays and setbacks.
In April, authorities removed Heliopolis Housing from the program, leaving just Alexandria Container and Cargo Handling and Abu Qir Fertilizers on the initial phase list. Tawfiq announced the sale of the remaining two would take place in May, before Ramadan, but the sales never took place.
The program continued to stall throughout the year.
In mid-May, the Ministry of Public Enterprise said that the second phase of the program would kick off in the fourth quarter of 2019 (Sept.-Dec.) with the sale of shares in E-Finance and two mining companies. Then in December, E-Finance Chairman and Managing Director Ibrahim Sarhan said an initial public offering could take place in the first quarter of 2020.
In mid-July, Heliopolis Housing, the holder of the largest land bank in the public sector, announced that 22 percent of its shares will be sold as part of the offering plan. A major investor would buy half the amount while the other half would float freely in the market.
And on September 22, Tawfiq said that either Alexandria Container and Cargo Handling or Abu Kir Fertilizers would be offered within two weeks.
None of the announced sales have taken place.
Behind the delays
While the government hasn’t clarified the reasons for the repeated changes to its plan, analysts and traders point to scant liquidity and low trading volumes in the market as the main pitfalls. The weak financial standing of the companies listed in the program also further complicates matters.
The market has seen weak trading volumes since the beginning of 2019, says Mohamed Kamal, a technical analyst at a Cairo-based brokerage company, with the second quarter averaging just LE200 to LE300 million daily. While volumes rose to a daily average of LE400 to LE500 million during the third quarter, it wasn’t enough to provide for a successful sale, Kamal said. Levels before the 2011 uprising and the ensuing economic upheaval averaged LE1.3 to LE1.8 billion daily.
Amr al-Alfy, head of research at Shuaa Securities Egypt, said the government was able to offer a stake in Eastern Company despite low volumes because it sold 95 percent of the offered shares through a private placement to one investor, the Emirati real-estate tycoon Mohammad Alabbar. Officials may be searching for similar investors for the other companies, he said, and that could be the reason for the delay in sales.
Internal economic developments in 2019 may also be making investors wary of putting money in the market, according to Salah Haidar, an economic analyst at Pioneers Holding. Some investors may be on the lookout for the impact of the increase in fuel prices on companies’ profitability. Additionally, the real interest rate (interest rate minus inflation rate) remains high, Haidar said, making low-risk bank deposits a more attractive investment than stocks.
External factors include tensions between the US, China, and Iran, as well as the fallout from the emerging markets’ crisis that absorbs liquidity from the market, he added.
“After the decline that the market experienced following the September 20 protests, it does not seem that the current conditions are suitable for any offerings,” he said, asserting that the program would not resume without improvement in the market.
Egypt’s stock market lost 11.7 percent of its value in the third quarter to reach LE803.8 billion compared to the previous quarter, according to official data. It lost an additional LE88 billion in the first 20 days of October.
“What was possible at the beginning of the year, became impossible at its end,” Haidar said.
The initial public offering of oil giant Saudi Aramco will have a negative impact on the market in Egypt, he added, as Arab and non-Arab foreign investors will move at least part of their money to the Saudi market, further reducing liquidity in Egypt.
Haidar explained that the drop in market capitalization makes selling stakes in already listed companies difficult because of the consequent drop in their share prices. The best course of action for the government under the current conditions would be to list new companies, he said.
The financial performance of companies included in the program is another reason why the program is stalling, Alfy said. The companies that were better performing took priority over those which posted losses, he said.
Abu Qir Fertilizers saw its net income rise by a third, to LE2.6 billion, in the first nine months of fiscal year 2018/19, which ended on June 30.
On the other hand, Alexandria Mineral Oils Company, which was excluded from the program, saw its profits drop 69 percent in the same period, posting LE329 billion. Similarly, Heliopolis Housing’s net income fell by 67 percent to LE40 million, which could explain why its stake sale was halted.
Alexandria Container and Cargo Handling’s weak results also led to its offering being postponed, with its profits dropping 21 percent in the first nine months to LE1.5 billion.
Kamal, the technical analyst, also blamed government ministries in charge of the program for the disruption, saying they had different priorities and goals. The Finance Ministry focuses on the funds raised by the sales and therefore aims to sell at the highest possible price. On the other hand, the Investment Ministry seeks to maximize indirect investments resulting from the sales in order to increase the market capitalization of listed companies. Meanwhile, the Public Enterprise Ministry wants to fulfill its commitments to the IMF and thus prioritizes the completion of the sales.
As 2019 comes to a close, the government has managed to sell a stake in just one company but vows there are more to come. If past announcements are any indication, those promises should be viewed with skepticism.