Egypt Still Searching for a Way: MD of Misr Capital Investments

 Sherif Samy, managing director of Misr Capital Investments – 99% owned by Banque Misr – and a member of the board of directors of General Authority for Investment, said the economic situation in Egypt has not changed a lot since last year’s revolution.  The current policymakers also want to establish a free and disciplined market, but the only difference is in the enforcement mechanisms and transparency standards.

Samy said in his interview with ‘Amwal Al Ghad’ that regaining the confidence of local and foreign investors in the Egyptian market necessitates respect for previously signed state contracts, without waiving the country’s rights. Legal procedures should be taken without prejudice to the contacts previously signed by former regime officials, so as not to send a negative message about the Egyptian economy to investors. Samy warned that investors do not inject funds into uncertain markets or those ruled by weak governments.

How do you see the current Egyptian economic situation?

It has not changed a lot since last year’s revolution. The current policymakers also want to establish a free and disciplined market which will achieve development, increase exports and attract direct investments. Therefore, the policymakers nowadays are implementing the same principles that were implemented before the revolution.

However, the enforcement mechanisms and transparency standards have changed. In addition, the aspirations of the workers have increased, resulting in many labor strikes and protests that hinder economic recovery.

In what way do these factors affect investments?

Investors prefer to invest in stable countries, as they do not inject funds into uncertain markets or those ruled by weak governments. Many businesses owners are still uncertain and suspicious, wondering whether the Government will respect the land sale and privatization contracts signed before the revolution or not, as many contracts are now being reconsidered. This has shaken the investors’ confidence in the market.

How do you suggest restoring investors’ confidence in the Egyptian market?

This will happen by removing all the things that have shaken the confidence of investors. First of all, people should stop holding strikes and protests, in order to make the country more stable. The Government also shall respect the contracts signed before the revolution.

The performance of the Egyptian Exchange reflects the economy. When the EGX fell sharply after it rose 60%, investors sent a negative message to the Government.

Such a retreat in confidence came as the Government started to file tax evasion lawsuits against companies, although such violations occurred many years ago. In addition, the Government has not respected previously signed contracts, as we have seen in the Centamin case.

Moreover, the Government seems uncertain in its decisions. For example, it ordered the closure of shops at 10pm and went back on this decree after failing to implement it.

The unclear political situation has also affected the economy, as the new Constitution has been delayed and there are still parliamentary elections to be held and new government to be formed afterwards.

All these factors are a matter of concern to business owners and stock market investors.

What are the main economic obstacles facing the Government just now?

The public budget deficit is the main obstacle facing the policymakers, as the Government is obliged to decrease subsidies to reduce expenses, and to effect a reconciliation with businessmen to increase revenue. Four months after the beginning of FY 2012/2013, the country has missed its target to reduce the deficit. Therefore, the budget deficit may grow wider than expected.

What do you suggest should be done to reduce the budget deficit?

Egypt must ‘grasp the nettle’ in order to survive. The decision makers must rationalise expenses, while still distributing subsidies to the deserving.

Egypt is rich in its lands and companies and, if it issues clear laws and regulations, investors will compete to purchase these lands. In addition, the country owns 154 public-sector companies, subsidiaries of the Ministry of Investment, and many other companies which are subsidiaries of the ministries of communications, petroleum, housing and electricity, as well as the Suez Canal Authority.

Private-sector management and public-private partnership management have proved to be more successful than public-sector management. Therefore, the country should not reject the principle of privatization as it can provide the country with billions of pounds by expanding the ownership base of its subsidiary companies through direct investment or selling some of the capital shares on the Egyptian Exchange. The EGX-listed companies are more compliant with transparency standards than close corporations.

If companies are privatized at the right price, revenues will increase and the ownership base expand, while firmly supervised, the Government should not reject privatization.

The main role of good governance is to organize, monitor and develop the market, not manage companies. The Ministry of Investment focuses on attracting investors as well as organizing and developing the market, in addition to managing the country’s investment portfolio which includes stakes in 154 companies. The Government should not be responsible for corporate management.

What is the importance of public-private partnerships (PPP) in the current economic situation?

Public-private partnerships are important at this time, as a widening budget deficit is delaying the establishment of large infrastructure projects, such as constructing roads, water stations and sewage stations.

Establishing PPPs in infrastructure will solve a lot of problems, as these projects will be paid for without imposing any additional costs on citizens, while a minimum return on investments is guaranteed.

Does the Egyptian Exchange need to activate the anticipated mechanisms in order to improve?

The Egyptian Exchange has enough mechanisms, but there is no harm in increasing the number of mechanisms. The point is that these mechanisms are not the main factor needed to improve the market. The market has witnessed many gains when there is stability, without these mechanisms. However, these mechanisms should be brought into play. The restrictions to investors entering and exiting from the market are an obstacle to investments.

Therefore, the fewer the restrictions, the better the performance of the Egyptian Exchange will be. It also needs exchange-traded funds (ETFs) which benefit those who are not specialized in investing in the stock market. ETFs guide investors with by providing them with certain economic assumptions which are a true copy of the components of the index. Thus, they reduce the need for research teams, studies and technical and financial analyses. Accordingly, customers will have more commissions. Such funds do not require legislative amendment.

The Egyptian Exchange is a democratic mechanism which allows investments in the listed companies, unlike close corporations which have many restrictions to investing in them. The stock market neither creates new jobs nor achieves development, but rather it creates liquidity for investors. As for non-experts, they can invest in investment funds and employees’ insurance funds.

The stock market reflects the economic situation; the higher the stock index goes, the better the economy will be. The stock market gains at times of political stability. Stock market recovery does not means higher stock prices, but rather a larger volume of transactions.

What about the increase of Islamic financial transactions and their effect on the stock market?

The demand determines the volume of any financial product or service. Islamic investment funds are available for those who prefer to conduct their financial transactions in compliance with the Sharia (Islamic Law). These transactions are controlled by company selection criteria, in line with some guidelines. The company’s indebtedness must not exceed a certain value in relation to its volume of assets and the company must not invest in some activities.

Launching Islamic debt instruments (sukuk), widely used in Arab Gulf and East Asian countries, in the Egyptian market will benefit the market, as it will attract a new segment of customers who prefer to conduct Sharia-compliant financial transactions.

What is the volume of your company’s investments?

My company’s investments have reached EGP 11 billion, diversified in the petrochemical, urban development, food industry, fertilizer and banking sectors. The company also manages two funds owned by Banque Misr; the first is a balanced fund and the other is a growth fund with s volume of more than EGP 200 million. The company plans to expand its asset base.

What is the volume of the company’s capital? Are there plans to increase it in the near future?

The company’s issued and paid-up capital has hit EGP 1.5 billion. The company plans to increase the volume of capital by EGP 1 billion to EGP 2.5 billion. Such a move must be made by the shareholders.