Egypt: Beyond the anticipated military company IPOs

By The Africa Report
Posted on Tuesday, 31 May 2022 16:28

The Egyptian Exchange bell is seen at the stock exchange in Cairo
The Egyptian Exchange bell is seen at the stock exchange in Cairo, Egypt September 23, 2019. REUTERS/Mohamed Abd El Ghany

Companies owned by Egypt’s military are due to be listed publicly later this year. But is the first-ever IPO listing a sign of the army’s relinquishing control over the economy, or is it simply a way of maximizing profits?

The first-ever initial public offerings (IPOs) of Egyptian military companies may not mean that the government is ready to cede control over their assets, says Yezid Sayigh, a senior fellow at the Carnegie Middle East Center.

“Sisi’s overall strategy of monetizing state assets while retaining ownership and control of them means that the IPOs may be a mechanism for attracting private capital without allowing meaningful control or governance by private investors,” says Sayigh, a Beirut-based expert on the Egyptian armed forces’ economic role, referring to previous offerings of minority stakes in government-owned companies.

“In this case, the IPOs may actually offer the military new ways of muscling in on markets and increase its appetite,” he says.

Nevertheless, military company IPOs will mean that financial reporting will be made public. “[This] could pave the way for wider opening up of the military economy if [President Abdel-Fattah el-] Sisi demonstrates the political will (and power) to achieve this,” says Sayigh.

In a renewed effort to put Egypt’s military companies up for IPO, Sisi in April directed the government to prepare military companies so that they will be able to list before the end 2022. Soon after, Prime Minister Mostafa Madbouly revealed that two military companies will be listed this year.

Head of investment sector of Egypt’s sovereign wealth fund (SWF), Abdullah El-Ebiari, said at a conference late in May that Wataniya Petroleum and bottled water maker Safi are being prepared to be listed before 2022-end. Both companies, affiliated to the National Service Products Organization (NSPO), have repeatedly been tipped over the past three years to kick off the military IPOs.

When asked about the prospect of floating Wataniya and Safi, SWF CEO Ayman Soliman told Asharq Business in April that “major steps have been taken to prepare these companies for private and public placements”, saying he expects some military firms to be ready for listing before the summer vacation.

In a previous January interview with CNBC Arabia, he said floated stakes in both companies could amount to over 40% each. The Africa Report could not reach Soliman for comment on the two military IPOs scheduled for this year.

IPO timeline

But despite the plans, there remains a great deal of ambiguity around the military-run companies’ IPO timeline, given significant delays to listings and unfavorable economic conditions that have upset global capital markets.

The macro environment is not at its best in Egypt due to the rising inflation and ensuing interest rate hike.

The delay “suggests pushback from the military itself, and probably also civilian ministers and experts who insist on following proper standards for IPOs,” says Sayigh. “It is moreover possible that the IPOs will be delayed yet again.”

“The macro environment is not at its best in Egypt due to the rising inflation and ensuing interest rate hikes,” says Sherif Shebl, vice president for the Gulf Cooperation Council (GCC) sales at Al Ahly Pharos, a Cairo-based investment bank.

After urban inflation reached 13.1% in April, the central bank raised rates by 200bps last week, taking the deposit and lending rates to 11.25% and 12.25% respectively. The tightening cycle is forecast to continue this year to rein in mounting inflationary pressures and keep the Egyptian debt market appealing to foreign investors, with the US Federal Reserve set to hike rates to about 2.5% by the end of 2022.

The ensuing increases in borrowing cost would take a toll on the performance of EGX-listed companies, which could dissuade investors from buying their shares, analysts point out.

Moreover, the Egyptian Stock Exchange hasn’t shown signs of a recovery since the peak of the pandemic in 2020 and is still suffering from ramifications of the Russia-Ukraine war.

Some markets were buoyed by a Covid-induced rally of tech stocks and others were revitalized by soaring oil prices during the ongoing fighting in Eastern Europe, particularly in the Gulf. But as an oil importer that does not boast many major listed tech companies, Egypt has not benefitted from either trend, says Shebl. Indeed, the benchmark index EGX30 has lost more than a quarter of its value over the course of three years.

“They have been saying the same thing [about listing Wataniya and Safi] for nearly three years and there has not been a specific timeline for the offerings,” Shebl says. “I don’t think they actually intend to float these stakes now.”

The net value of military businesses and production of goods and services is far smaller than many portray, but it is considerably greater than it was a decade ago.

But there will be come interest even if stocks are listed in the short-term. Gulf investors are likely to show interest in military company shares once up for grabs. “There might be appetite following ADQ’s recent $1.85bn buying spree,” says Shebl.

Abu Dhabi’s state holding company, ADQ, acquired in Egyptian government-owned stakes in five major EGX-listed firms, including the largest private lender CIB and fintech giant Fawry in April this year.

Meanwhile, non-Arab foreign investors, many of whom have shied away from EGX stocks over the past years, may not be attracted to the Wataniya and Safi IPOs with the Egyptian market faltering, says Shebl.

Military control

With Egypt mostly under military leadership since its independence in 1952, the army has long been involved in the North African nation’s economy.

But following the military takeover that toppled Islamist president Mohamed Morsi in 2013 and paved the way for Sisi to be elected into office the following year, the armed forces’ entrenchment in the economy has arguably become more visible, particularly in the massive infrastructure and development projects Egypt has embarked on in recent years.

In an interview with BBC News Arabic last January, Prime Minsiter Madbouly shrugged off the army’s economic involvement, saying military companies account for less than 1% of the Egyptian economy.

“The net value of military businesses and production of goods and services is far smaller than many portray, but it is considerably greater than it was a decade ago,” says Sayigh.

Critics, including Egyptian business tycoon Naguib Sawiris, often argue that military companies’ exclusive perks, such as tax exemptions, leave no chance for the private sector to compete in the business scene.

“These include the exemption of the … NSPO from income tax, [and] the exemption of military-managed facilities from real estate tax,” reads a report by the World Bank dated December 2020.

Government’s ‘large role in the economy’

Madbouly, also said in the BBC interview that the military companies are concentrated in fields where the private sector’s presence is negligible.

Another report the IMF issued last July cites military-owned enterprises as part of the government’s “large role in the economy”. Some entities “are benefiting from an uneven playing field vis-à-vis their private sector counterparts,” it reads.

President Sisi first unveiled intent to float stakes in military firms – which focus on capital goods, durables, food, beverages, and automobiles, among others – in late October 2019.

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