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Privatisation becomes urgent.

THERE ARE promising signs that, after several frustrating delays, the Egyptian government is now prepared to move more aggressively to enact its economic reform programme. Much of the groundwork has now been completed to realise an ambitious privatisation programme which is to be the centrepiece of those economic reforms.

Last year, most of the government's substantial industrial assets (representing 85% of Egypt's manufacturing capacity) were placed under 27 new holding companies, which control 314 subsidiaries with assets exceeding $21bn. This follows enactment of a series of laws and structural changes, reforming the nation's economic infrastructure. New laws liberalise labour relations, foreign investment procedures and banking.

Now the government is starting to create the facilities and venues in which former state holdings will be sold and traded. A Capital Markets Authority (CMA) is now examining plans to revamp Egypt's stock exchanges, which are expected to play a major role in the privatisation process.

"We are working to build up a proper mix of institutions and tools, to create a good, functioning capital market in Egypt," says CMA's chairman, Mohamed Hassan Fagannour. Among the institutions and tools being considered are mutual funds "and all sorts of other collective investment vehicles", and introduction of derivatives (futures and options) trading.

At present, Egypt's two stock exchanges in Alexandria and Cairo are quiet institutions with one or two hours' trading a day. Although total capitalisation exceeds $1bn, the markets rarely see trades exceeding 100,000 shares in a given day. In 1991, the most recent full-year accounts show that less than 200m shares were traded, in about 7,500 individual transactions, with a value of $105m.

The new Capital Markets Law No 95 is intended to revolutionise the trading environment. Fagannour points out that "it will pave the way for private corporate institutions to operate in the capital markets, rather than individual brokers, as is now the case".

Institutional trading will be necessary to generate the funds needed to purchase shares which holding companies are expected to put on the market in coming years. Consider the requirements of just one holding company and its affiliated companies. The Holding Company for Housing plans to sell its shares in joint companies, and its ten affiliated companies plan to sell between 5% and 10% of their shares. Without reforms, the stock market would be flooded with $30m in new equity from what is only a medium-sized holding company and its affiliates.

Various provisions of Law 95 make it unlikely that the markets will suddenly be swamped with shares, even if all 27 holding companies seek a similar course of action. For one thing, there is a vast surplus of latent demand in the market (some analysts believe it could allow for as much as a ten-fold increase in current volume). More important, holding companies would have to go through an approval process before they could sell any shares. Under the new law, listed, traded companies must provide reliable financial data, using international accounting standards.

Government officials expect the first sales of major state-owned entities could be realised in the second quarter of this year. Fouad Abdel Wahab, head of the Public Enterprise Office overseeing the creation of holding companies and the subsequent sale of assets, believes 25 companies or major assets can be sold in 1993, and another 25 companies can be restructured. Abdel Wahab expects the same number of entities can be sold or restructured in succeeding years.

Reform may ultimately depend on Kodachrome film and sun-tan lotion. The government is at the financial mercy of the millions of tourists who flock to the pyramids of Giza and beaches of Alexandria. They are the country's chief source of hard currency and its largest single employer after agriculture. Without that income, the government would be unable to comply with IMF-mandated reductions in the deficit.

The tourism industry has gone through a remarkable boom-and-bust cycle in the past two years. Devastated by the Iraqi invasion of Kuwait, it rebounded in 1991-92, to post a record $3bn. In late 1992, however, the October earthquake and fundamentalist-linked terrorist incidents killing some foreign tourists put the resurgent tourism industry into a tailspin. Bookings dropped 50% nationwide; in Luxor they plunged almost 70%.

Despite the formidable economic and political problems he now faces, President Hosni Mubarak could still pull a rabbit out of his hat. By aggressively pursuing his reform programme now, he could succeed in attracting enough foreign capital to outweigh this year's expected drop in tourism receipts, and even boost economic activity to offset unemployment in the tourism industry.

Much groundwork remains to be completed, particularly in the privatisation process. Potential investors and government accountants have been unable to agree on how companies should be sold, much less what value should be placed on them. No two ministers provide identical figures, which has raised serious questions about the veracity of any government accounting. However, after complaints from both businessmen and reporters protesting excessive secrecy, the government recently released a 38-page report providing a much needed glimpse of the properties which could be sold.

Conspicuously absent from that list were some entities many foreign investors would like to bid on, including banks, insurance companies, the petroleum sector, the Suez Canal and Egypt Air, the national airline. But the report marks a significant step forward, providing potential investors with long-awaited information.

Delays in the process have been frustrating. Company evaluations have only recently begun, and the government has had to balance its commitment to privatise with its sensitivity to the pressures brought by subsequent dislocations. Thus, some fear that the liberal nature of the general laws governing privatisation could be offset by the executive regulations which give them substance.

Regulations notwithstanding, the promise of sales in the near future has attracted a number of interested investors. They include local Egyptian businessmen, union members, Gulf-based Arabs, as well as European and American multinational corporations interested in developing their Middle East presence. Among the potential bidders are such well-known institutions as Merrill Lynch, Morgan Stanley, Barclays, as well as the National Bank of Kuwait and the Misr Iran Bank.
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Title Annotation:Special Feature; Egypt's economic reform program
Author:Martin, Josh
Publication:The Middle East
Date:Feb 1, 1993
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