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cinema finally gets a (tax)
break
[“lights, camera ...,” april 1997]
in late january, the egyptian cabinet finally took a step to cut
the taxes levied on tickets to entertainment events, a cut the government
promised private businessmen two years ago as part of an initiative
to restore egyptian cinema to its former glory.
the cabinet’s draft law, slated for submission to the peo-ple’s
assembly in this parliamentary session, slashes taxes on cinema
tickets to 5 percent from 20 percent for egyptian and joint production
films, and to 10 percent from 55 percent for foreign films. the
bill also reduces taxes to 5 percent from 30 percent for opera and
ballet tickets; to 5 percent from 55 percent for circus tickets;
to 10 percent from 30 percent for theater tickets; to 10 percent
from 60 percent for tickets to amusement parks, sporting-club festivals,
ar-cades and skating rinks; and to 20 percent from 60 percent for
car, boat and horse races. although taxes on casinos will remain
the same, taxes on discos, concerts and video-club films are to
be cut to 25 percent from 60 percent.
entertainment industry insiders said the proposed re-forms, although
long overdue, were a step in the right direction. “the reduction
in taxes will improve movies in egypt, extend the cinema and make
a profit for companies invol-ved in this field,” said hatem
hosny, financial manager of egyptian renaissance cinema co. “it’s
a gain for the companies, a gain for the customers and a gain for
cinema. it’s really a gain for all.”
in addition, lower taxes means cheaper tickets, which should translate
into bigger audiences and consequently more taxable revenue for
the government.
cinema buffs said the cabinet’s decision couldn’t have
come at a better time. according to the egyptian chamber of cinema
industry, egypt has about 140 movie theaters serving an audience
of 60 million. as we reported in april, another 310 theaters sit
closed, because the bulk of the population can’t afford ticket
prices that average £e 10 and be-cause heavy tax bills keep
theater owners from lowering their prices.
industry insiders said that the reduction of taxes on tickets would
give theater owners room to boost revenues and increase their investments
in new theaters even as they slash ticket prices, a move that should
bring back lost audiences and resuscitate a suffering industry.
renaissance – a £e 100 million private consortium whose
shareholders include orascom’s naguib sawiris, mobica’s
farouk abdel moneim and banque misr – was formed almost two
years ago following a meeting of businessmen, cinema-industry veterans
and prime minister kamal el-ganzouri. at that meeting, businessmen
proposed to launch a multimillion-pound effort to build, renovate
and operate theaters throughout the country, thus eliminating the
shortage of box-office receipts that was crippling the film industry’s
growth prospects. in return, the government pledged to cut taxes
on tickets to ensure that the whole effort would pay off. in addition,
the government added cinema to its list of industries enjoying tax
exemptions under an investment law passed in 1997.
with the tax reductions that are being proposed by the draft law,
renaissance’s vision may be realized sooner than expected.
“we are planning to build 100 new cinemas over the next two
years,” hosny said. but he warned the plan wouldn’t become
reality until the ticket tax cuts had passed the parliament.
leila atraqchi
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cib managing director resigns
[“the financial sector’s boot camp,” september 1998]
commercial international bank (egypt), the nation’s largest
quasi-private-sector bank, announced in mid-february that its embattled
managing director, adel el labban, had resigned to work outside
of egypt.
cib later announced that it would decentralize its top management,
moving the control of day-to-day affairs to a committee reporting
to chairman and managing director mahmoud abdel aziz, who is also
chairman of the state-owned national bank of egypt.
analysts welcomed the move away from the tight control exercised
by el labban, a savvy if reportedly abrasive strategist who is credited
with bringing the bank to its market-leading position but whose
relations with shareholders and management were often fractious.
but analysts and ratings firm moody’s, which put cib on watch
for a downgrade of its financial-strength rating following el labban’s
resig-nation, expressed concern that the former managing director’s
initiatives might not be pursued with equal vigor by the new team.
cib’s shares rose £e 1.35 to £e 39.01 on the day
the bank announced el labban’s resignation, which observers
said was expected and which was welcomed as a step that could im-prove
shareholder relations. “it has been ru-mored for some time
now, so this ends the speculating period,” said amr el-kadi,
banking analyst and director of research at efg-her-mes. “people
interpreted it as the bank’s management opening a new page.”
cib, with perhaps the most liquid and widely held shares on the
cairo & alexandria stock exchanges and with global depository
receipts listed on the london stock exchange, is one of egypt’s
most important stocks. with £e 222 million in net profits
in the first nine months of the fiscal year ended dec. 31, versus
£e 200 million the year before, cib also has some of the highest
earnings in the sector.
yet cib’s share price fell 49 percent in 1998, under the pressure
of tax-law changes that threatened banks’ earnings and the
general malaise in egyptian shares. investors charged that the bank’s
management had contributed to the share price’s collapse by
taking what was seen as excessive provisions in 1998 and by trying
to push through a dilutive employee rights issue last spring.
“this might be viewed as removing a block on the interest of
some of the investors in the bank,” angus blair, head of middle
east and north africa at abn amro in london, said of el labban’s
resignation. but he also lamented the departure of a good banker
and said cib’s failure to name a successor immediately had
created uncertainty at a time when investors had been waiting for
the bank’s results for the full fiscal year. “it’s
not to say the problems are entirely over,” he said. “it
would be useful to know the details of this.”
cib later reported that it earned £e 310 million in the full
1998 fiscal year, up from £e 268 million the year before.
el labban, who had been managing direc-tor since 1990, led cib into
investment banking, brokerage, portfolio management and life insurance
in an effort to transform the bank into a financial-services company.
he also played a key role in the issuance of cib’s global depository
receipts in july 1996, the first such issue for an egyptian company
and one that blair said did a great deal to raise international
interest in egyptian shares.
cib was established in 1975 as a joint venture between the nbe and
chase manhattan bank of the u.s. the nbe retains a stake of about
18 percent.
andrew dowell
top
economy warnings proliferate
[“waiting for the growth spurt,” november 1998]
egypt has grown accustomed to being praised by analysts. six months
ago egypt was being touted as an unpolished gem among emerging markets.
interna-tional monetary fund officials were calling its privatization
effort a model of success and praised the government for its efforts
in achieving macroeconomic stability.
but lately, not everybody is giving egypt high marks for economic
progress and prospects for growth. in fact, a number of commentators
have begun to sound truly dire, saying egypt must pick up the pace
of its privatization program, do something about its monetary policy
and exports, and puncture its bloated bureaucracy if it’s going
to meet its economic growth targets.
first on the list of concerns is excessive bureaucracy. at a february
conference called by the egyptian center for economic studies to
point the way beyond macroeconomic stabilization, jeffrey sachs,
director of the harvard institute for international development,
said egypt ranks 38 out of 53 countries on a scale of competitiveness
produced by the world economic forum. a harvard survey found that
many of egypt’s own business people are less optimistic this
year about reform and are more worried about increasing corruption
and a lack of management talent. “this is the country that
invented bureaucracy,” sachs said, drawing laughter from the
audience. but he and others maintained that egypt needs to cut through
legendary bureaucracy before its economics worsen.
one area that needs to be targeted is the nation’s swamp-ed
courts. without a transparent mechanism for investors to know their
rights will be observed by the courts, egypt isn’t going to
attract foreign investment, said sara sievers, executive director
of the center for international development at harvard. she said
the lack of an adequate system for settling commercial disputes
is equivalent to putting a 25 percent tax on doing business in egypt.
observers have even begun to question egypt’s near-legendary
macroeconomic performance. a january country report from deutsche
bank – titled “egypt: in danger of losing its sparkle?”
– concludes that egypt’s progress could soon be interrupted
by a failing monetary policy, increasing current account deficit
and faltering privatization program. the author of the deutsche
bank report, hanno sonntag, said that his outlook “shifted
somewhat to the concerned side,” largely due to the gap between
the government’s pronouncements regarding structural re-form
and its actual implementation. sonntag said that he is especially
concerned by the lack of progress toward privatizing a state bank,
although legislation was enacted last june authorizing the government
to do so. an-other expert at the feb-ruary conference, charles dallare,
managing director of institutional interna-tional finance, agreed
that bank privatization was “long overdue.”
nnegypt government officials defend the pace of privatization and
assert that they won’t be rushed to privatize a state bank.
although privatization of a state bank was on the agenda for last
year, it has been removed. minister of economy yous-sef boutros
ghali said there is no target date for privatization of a state
bank, although he expects it to happen sometime this year.
there’s also concern about the slow pace of privatization in
general. in 1998, according to the government’s own figures,
23 companies were privatized. but of those, only six were thought
to be attractive enough to sell on the stock exchange. seven others
were liquidated, and 10 were being sold to their employees.
sonntag said the remaining privatization candidates are barely profitable
and strict labor legislation makes it difficult to restructure them.
“only at very low prices might investors be induced to buy
these companies,” he said. “however, low prices are politically
not acceptable.”
another concern is currency. several analysts are saying that they
expect egypt to give up its dollar peg and move by the end of the
year to a more flexible exchange rate policy, perhaps one involving
the euro. pressure on egypt’s currency began building last
year, when high demand for dollars pushed the pound down from 3.46
to 3.48 to the dollar as the central bank tried to avoid releasing
too many dollars. central bank sub-governor faika el refaie said
in an interview that she thinks egypt shouldn’t be worried
about spending some of its $19.9 billion in foreign reserves on
projects that would spur economic growth. but she said there is
great psychological resistance to spending reserves. instead, the
government has pressured commercial banks to tap their foreign assets
to bring more foreign exchange into the economy, refaie said.
the pressure has since eased, but analysts aren’t encouraged.
“with its current muddle-through approach, the central bank’s
policy is putting the credibility of economic policy to the test,”
said sonntag, who argued that delaying the availability of dollars
would backfire. “this can be regarded as a de facto limitation
of the convertibility of the egyptian pound,” he said. “foreign
investors are therefore hesitating to invest in egyptian pound-denomina-ted
assets.”
another issue is the growth of egypt’s current account deficit,
which has been rising due to the fall-off in tourism revenues, oil
export revenues and remittances from egyptian expatriates working
in the gulf. oil prices remain weak, which sonntag said has multiple
negative effects for egypt. in addition to the decline in oil export
revenues, egypt’s non-oil exports are hurt by reduced demand
in weakened gulf markets. declining growth in the gulf also cuts
into remittances from egypt expatriates working there. and although
the number of tourists visiting egypt has somewhat recovered from
the terrorist attack at lux-or in november 1997, tourism sour-ces
said that tourism revenues are still considerably down because rates
have been discounted. because the bulk rates to tour operators are
negotiated a year in advance, it will be next winter before rates
can kick in at normal levels.
given all that, sonntag expected the current account deficit to
in-crease to $3.6 billion, or about 4 percent of gross domestic
product, from what he estimates is the present level of $2.1 billion,
or 2.5 percent of gross domestic product.
actually, yearend figures from the central bank put the current
account deficit for the fiscal year ended june 30 at $2.7 billion.
the central bank said the deficit narrowed in the first quarter
of the 1998/99 fiscal year, but again analysts aren’t encouraged.
according to sonntag, the 50 percent growth rate in non-oil exports
can’t be sustained, and an analyst who follows egypt’s
trade figures closely said the current account deficit is likely
to climb even higher than reported, a situation that has become
clear only in the last few months. he estimates it at $5 billion.
“the pros-pects are quite dim in the medium term, the next
four to five years,” said this analyst. “they’re
in bad shape. exports are growing very slowly, if at all, and they’re
locked into buying a certain level of imports ... i think the economy
is pretty sick, and they have to do something.”
quite a change from last year’s plaudits.
susan postlewaite
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egypt issues longer bonds
[“bond,” april 1998]
egypt’s ministry of finance in late feb-ruary offered £e
2 billion worth of 10-year treasury bonds at a fixed interest rate
of 9.5 percent, with allocation favoring in-dividuals and mutual
funds.
the issue had been expected since feb. 1, the date cma chairman
abd el hamid ibrahim had said £e 3 billion in bonds would
be issued, in part to set a benchmark for local companies looking
to tap the nation’s bond market. (the date came and went with
no offering and no ex-planation save a brief warning from the cab-inet,
published in the semi-official daily al ahram, that only the cabinet
was authorized to speak about new government bonds.)
officials said the issue of 10-year bonds – the first at that
maturity, and egypt’s longest – was part of the government’s
effort to revitalize the bond market and restructure its £e
150 billion in domestic debt, the bulk of which is financed by short-term
treasury bills.
the issue brings the number of egypt’s outstanding treasury
bonds to seven – all but two issued in the past year –
and will help define a yield curve for egypt’s most creditworthy
bonds, those issued by the government. defining a yield curve, in
turn, will help issuers to price corporate bonds. “the main
objective of this is to create a benchmark for the private sector
to resort to bonds,” ibrahim told a meeting of business people
in january.
at that time, capital market professionals welcomed the then-expected
offer, saying it would draw investors to egypt’s slowly awakening
bond market. moustafa assal, head of fixed income at efg-hermes,
said then that the direct effect of so much new supply would be
to push down the prices of government bonds, correcting the distortions
created by tax benefits that have encouraged banks to hoard them.
lower prices, he said, would attract investors. “three billion
is a big amount,” assal said. “i think it’s a major
push for the market.”
as we’ve reported in previous issues, the ministry of finance
began the process of restructuring the domestic debt and reinvigorating
the bond market with a £e 500 million offer of seven-year
treasury bonds with a 10 percent in-terest rate last august. the
ministry followed with identical offerings in september, october
and january, each time allocating the bulk of the oversubscribed
issues to mutual funds and individuals in an effort to boost trade
in the secondary market.
andrew dowell
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