Trade Conditions Weaken Egypt Textiles; FT Report

The slide in the value of the Egyptian pound since December is good news for the textile industry, but its impact is blunted by the deterioration in economic and business conditions since the 2011 revolution, exporters say.

Manufacturers have been arguing for years that the currency is overvalued, damaging competitiveness and business. Though they now welcome the devaluation of the pound, they are deeply anxious about the upheavals in the exchange market and the more general deterioration in the business climate.

The pound has lost 8 per cent of its value against the dollar since the end of December when the central bank introduced a new system of foreign currency auctions aimed at stemming the depletion of the country’s international reserves.

The textile industry is one of the biggest employers in Egypt providing a quarter of all industrial jobs and accounting for 27 per cent of non-oil exports, including 60 per cent of exports to the US. In the first nine months of 2012, Egypt exported $2.2bn worth of textiles which is 10 per cent less than the same period the year before.

The cheaper pound, exporters say, should make their products more attractive, but it is a mixed picture because the garment industry also relies heavily on imports such as yarn, fabrics and accessories.

Egypt is known for the high quality of its cotton, but the local crop, most of it long-staple varieties, is mainly exported because it is too fine and too expensive to use for denim and T-shirts, the main items manufactured for western markets.

“The impact of the devaluation is not as positive as it could have been, because the problem here is that we have not deepened the industry so we still need to import a lot,” says Magdi Tolba, chief executive of the Cairo Cotton Center, an Egyptian manufacturer which supplies retailers in the US and Europe such as Macy’s, Nike and Marks and Spencer.
“All fabric for exported garments comes from abroad. Even the yarn for T-shirts comes from southeast Asia.”

He complained of the emergence of a black market in dollars in recent weeks as people rushed to hoard the US currency anticipating a steeper slide of the pound. Another gripe is the delays and restrictions imposed by banks on transfers abroad which, he says, held up needed imports and disrupted production schedules.

Other issues plaguing the industry include high interest rates which top 15 per cent and onerous charges levied by banks to roll back the debts of companies in trouble, Mr Tolba says.

He added that the government had not introduced measures to support companies facing hardship by allowing them, for instance, to reschedule debts to utilities. As a result many plants had to shut down.
He and other manufacturers say they have had to scale down expansion plans over the past two years. The Cairo Cotton Center exported $38m in 2010, but has seen sales tumble to $32m in 2012.
“It looks like we will be limping along in 2013 unless there are radical changes,” says Mr Tolba.

Alaa Arafa, chairman of Arafa Group, one of the country’s biggest manufacturers of ready-made garments sold by western brand names told the Financial Times that for his company the devaluation of the pound should translate into a 6 per cent reduction in costs as a result of savings on local inputs.

But even so, he is critical of the manner of the devaluation, arguing that it has come too late and that the decision to allow the pound to slide gradually has led to the creation of a black market. A sharp steep fall to a level at which the currency could edge up would have been a better course, he said.
Like other exporters, Mr Arafa has seen revenue drop and he has had to hold back expansion plans.

“There is no happy man in an unhappy country,” he says. “You can just be less unhappy than others. What we are finding is that clients are wary about coming here. If they still are prepared to take the risk of delays in delivery because of labour or port strikes, they demand a benefit in the shape of a financial reward.”

Mr Arafa said that business is about 20 per cent less than it was before the revolution. A plant opened in 2010 in Beni Suef in the south was projected to lead to the creation of 10,000 jobs but has had to stop at 2,000.
“We had plans to grow, but we can’t convince foreign partners to take more risks,” he says.

Financial Times