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traders herald cotton reform
[“cotton insiders eye liberalization,” june 1998]
by taking a series of painful economic steps in the last few months,
egypt has put itself firmly on the road to cotton reform, giving
hope to an industry that was nearly des-troyed by 30 years of mismanagement,
traders and cotton experts say.
in the last few weeks, the government sharply reduced the floor
price it pays farmers for cotton, propped up its failing textile
industry by selling stocks at a discount and allowed the country’s
exporting agency to sell at internationally competitive prices.
the result is a government retreat from an industry it has ruled
with a heavy hand since the nationalizations of the 1960s, and a
clear path for the private sector to take its place.
“some hard decisions were made,” said ayman nassar of
nassco trading. “we still have problems. stocks are still big.
the spinning and weaving industry is in shambles. there are still
a lot of costs from 30 years of mismanagement. but right now we
are at least structurally sound. i think positive results will be
found in the long run.”
as we reported in june, cotton sector analysts had hoped that long-discussed
reforms would finally be implemented this season. the optimists,
it appears, were on track.
the first step came two months ago, when the government announced
they would no longer pay farmers an above-market minimum price for
their cotton. instead, the price of cotton would be linked to the
export price fixed by the country’s export cartel, alcotexa.
the previous floor price, at around £e 500 per kantar, was
around 20 percent higher than international rates and substantially
higher than alcotexa’s prices. as a result, the government
was forced to buy up huge amounts of cotton, of which analysts said
150,000 to 200,000 metric tons remains unsold.
the government’s second move was to dispose of this surplus
by selling it to the state-owned spinning and weaving mills at a
large discount. the decision further paved the way for entry into
the market by private traders, who would have been hammered had
they bought up this year’s crop only to have the government
dump its surplus on the export market.
the government’s third move was to allow alcotexa, at its yearly
price-setting meeting on aug. 30, to set prices at rates competitive
on world markets.
the price of giza 70, the benchmark grade for the prized extra-long
staple egyptian cotton, was slashed to $1.17 per pound from last
year’s $1.30. the price of giza 86, the benchmark for long-staple
cotton, was cut to $1 from last year’s $1.05.
“it is a positive step that bodes well for the trader,”
nas-sar said. “these prices are considered very competitive.”
nassar, who took part in this year’s price negotiations at
alcotexa, said a lot of intense lobbying had been done in the weeks
before the meeting.
although alcotexa’s 24 members are divided almost evenly between
private sector and state-owned companies, government members were
surprisingly independent and as split as the private sector over
whether export prices should be higher or lower.
“there was no real government intervention,” nassar said.
“for the first time in years, alcotexa took on its real role.”
one cotton sector analyst said he had hoped that prices for the
long-staple grades would have come down a bit more, but allowed
that the new prices were low enough for egypt to sell not only this
year’s crop but also to some some of its stocks from previous
years. “it makes egyptian cotton a lot more competitive,”
he said.
traders and experts said the new prices mean that farmers will receive
up to 30 percent less for their crops this year, but that levels
were still high enough to encourage them to keep planting cotton.
“we don’t want farmers to decrease production,” nassar
said. “i think we have reached a level that is very satisfactory.”
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cib enters brokerage market
[“banks get back to business,” may 1998]
commercial international bank (egypt) has opened a new brokerage
company, which hopes to leverage the bank’s strong retail network
and deep list of corporate customers to dominate the local market.
“at the end of the day, we want to do the biggest flow in the
market,” said amr mostafa, director of international sales
and marketing at commercial international brok-erage co.
cib, the nation’s leading private sector bank, is seeking to
diversify its sources of income, particularly in light of a january
tax-code amendment that limited banks’ once-lucrative business
in treasuries. in april, cib said it had reached a preliminary agreement
with legal & general of the u.k. to form a joint-venture life
insurance company in egypt. both moves are part of the bank’s
effort to reposition itself as a financial services company.
“we will be able to serve them with a package deal,” mostafa
said of the bank’s customers.
egypt’s brokerage market is extremely competitive, and will
become more so with the expected entry of additional international
players. but cib will have a few competitive advantages. chief among
them is the bank’s 27 branch locations. mostafa said the brokerage
company aims to open 10 branch offices in existing cib locations
by the end of 1999. retail clients, he said, will ultimately account
for half the brokerage company’s business.
the brokerage company also will be backed by cib’s custody
department – which mostafa said conducts bookkeeping operations
for 1,500 clients and has about £e 3 billion in shares under
custody – and will have access to graduates of the bank’s
credit analysis training course, of which it has already brought
six aboard to staff its research department, mostafa said.
the brokerage company had a soft opening on july 29 and is operating
from a temporary location, but was expected to be running at close
to full speed by the fourth quarter. “we’re dealing on
a full-scale with institutions, but not on the retail side,”
mostafa said. “we’ll be stabilizing by mid-october, end-october.”
mostafa said cib owns 40 percent of the brokerage company. the bank’s
staff social insurance fund owns another 59.9 percent, with the
remaining 0.1 percent held by the brokerage company’s managing
director.
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suez cement approves buybacks
[“strategic moves could drive the market,” may 1998]
the board of suez cement co. has authorized management to repurchase
the company’s shares on the stock market should their price
fall below “reasonable” levels, a senior company official
said in late august.
board member hatem khalil indicated the company al-ready believes
its share price has fallen below such levels, but said the company
had yet to decide when to begin buying back its shares and in what
volume.
“we have agreed on the principle. the details will be left
to the managing director,” khalil said. “this is an approval
and an authorization to the managing director to start repurchasing
when the stock exchange is less than reasonable, which is the case
for the time being.”
as we reported in may, some analysts have said that egyptian stocks
could get a boost this year from corporate actions like share buybacks
or mergers and acquisitions.
suez shares closed up £e 2.17 at £e 50.56 after the
semi-official daily al akhbar reported that the company’s board
had approved the repurchase of its stock. but at press time, suez
shares, while having risen further after the announcement, were
still down about 22 percent since dec. 31.
that fall, however, is not out of line with the market as a whole.
the hermes financial index of most-actively traded stocks is down
about 23 percent over the same period.
the share repurchase, if it comes to pass, would be egypt’s
first, al akhbar reported. mohamed nabeeh, co-head of research and
cement-sector analyst at cairo-based efg-hermes, welcomed the decision
in the context of a short-term move to boost flagging share prices.
“i think this is a good move,” he said. “if companies
have a lot of excess cash and they want to support their shares,
they should do it.”
suez cement does have the cash: £e 470 million as of june
30, up from £e 460 million the year before.
other analysts have derided buybacks as hurting liquidity in an
already thin market. they have also said egyptian companies should
be looking to use their cash to expand their operations. nabeeh
agreed, but said suez cement is already deep into a £e 610
million plan to boost its capacity by 60 percent.“suez has
enough cash to do whatever it wants,” nabeeh said.
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equities cripple eab’s
first half
[“eab surges back from the brink,” march 1998]
egyptian american bank, one of egypt’s top four private sector
banks, reported that poor returns from its equities operations led
its profits for the first half of the fiscal year ending dec. 31
to fall to £e 31 million, down 22 percent from the year-before
period.
the bank said poor performance by its equities investments resulted
in unrealized losses and extra provisions of £e 7.3 million
– and sharply reduced the bank’s income from other equities-related
operations – eclipsing gains in the bank’s lending business.
the result was a first half that underperformed analysts’ already
low expectations. it looks like we’re still waiting for the
surge.
“not very impressive,” said rana adawi, head of re-search
at intercapital securities. “the operations did not compensate
for that huge drop in non-operational performance.”
as we have reported since march, analysts have afforded eab various
degrees of leniency in judging the bank’s ongoing effort to
reposition itself after a staff walkout in 1996. in 1997 and early
1998, the bank went on a hiring binge, embarked into retail and
investment banking, and expanded its loan portfolio by about a third
– efforts that are expected to take some time to bear fruit.
analysts, however, were decisively negative following the bank’s
first-half report. “you’d never recommend it as a buy
right now,” adawi said.
but in a surreal twist of market dynamics, after the bank reported
getting pummeled by the falling prices of other companies’
shares, its own shares have skyrocketed. eab shares shot up to £e
62.53 on sept. 17, a 25 percent jump from its £e 50.13 close
on aug. 30, the day it issued its report. brokers didn’t have
much of an explanation for the rise, but apparently someone sees
hidden value there.
eab reported that its first-half capital gains from trading shares
fell to £e 661,000 in 1998 from £e 4.6 million in 1997.
first-half dividend income also fell, to £e 3.1 million in
1998 from £e 5.5 million in 1997.
egyptian shares, after peaking feb. 24, 1997, have had a difficult
year, with the hermes financial index of most-actively traded shares
losing about 20 percent of its value between dec. 31, 1998, and
june 30, 1998.
eab also reported escalating losses in a category it called “other
activities,” the bulk of which the bank said reflected unrealized
losses from investments in the eab and bank of alexandria mutual
funds. banks must report unrealized gains or losses from their mutual
fund investments based on the rebate value of the mutual fund certificates.
eab reported first-half losses from other activities of £e
3.5 million in 1998, against losses of just £e 190,000 in
1997.
according to eab reports, unrealized losses from the bank’s
investments in its own mutual fund also showed up under the category
“expenses from other operations.” eab reported that first-half
expenses from other operations in-creased to £e 2.1 million
in 1998 from £e 1.2 million in 1997.
and although eab slashed its provisions for the period, the bank
reported it had taken £e 1.7 million in provisions to cover
losses related to its equities dealings.
declining performance of the bank’s mutual fund also hurt first-half
returns from commissions and fees. income in this category fell
from £e 28.6 million in 1997 to £e 26.9 million in 1998,
led down by a drop in commission and fee revenue from the bank’s
mutual fund to £e 1.3 million in 1998 from £e 4.0 million
in 1997.
otherwise, the bank’s operational performance im-proved, indicating
that some of the bank’s efforts to turn around its operations
had paid off. eab reported an in-crease in first-half income from
lending to £e 141.4 million in 1998 from £e 101.1 million
in 1997, and an increase in first-half income from treasury bills
and bonds to £e 47.7 million in 1998 from £e 44.3 million
in 1997. the result was an increase in first-half net interest income
to £e 42.7 million in 1998 from £e 36.2 million in 1997.
eab reported that its loan portfolio had grown to £e 2.86
billion as of june 30, 1998, from £e 2.0 billion as of june
30, 1997.
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