Riyadh - Decypha: As the Egyptian government took the long awaited decision to float the local currency last November, the economy began to respond, with some industries realizing unprecedented profits and others barely holding on.
One question needed a deeper look, what happened to foreign investments? Foreign companies can respond favorably as their currencies have larger impact against the EGP, they can also however suffer in a similar fashion to other local companies.
To answer this question Decypha decided to zoom in on Saudi Arabian companies in Egypt, examining the impact of the floatation of the Egyptian pound on their performance and profitability.
Analysts believe that the EGP flotation’s impact on Saudi companies in Egypt will remain largely based on sector performance. “Saudi companies’ investment in Egypt will be affected differently to the pound flotation based on its activity and the nature of its investments,” Ali Altwati, the Vice Dean for Academic Affairs in the University of Business and Technology in Jeddah told Decypha.
For example, Jarir Marketing was harmed by the pound flotations especially through its fully-owned subsidiary in Egypt for financial leasing. Similarly, Saudi Chemical Company’s profits declined by 45.24% in 2016 due to FX losses that results in freeing exchange rates in Egypt due to the increase in losses for its subsidiary Suez International Nitrate.
On the other hand, some companies forecasted positive impacts, especially those that sell the majority of its products to foreign markets. Lazurde Company for Jewelry, for example, expected positive effects in non-operational profits for its units in Egypt after the flotation, after taking precautions for years in anticipation for such decision.
Companies investing in real estate and hotels will benefit from the rise in the value of assets, which will make up any FX losses; in comparison the retail industry saw the worst negative impacts, due to the weaker demand which affected sales volumes, explained Altwati.
“The solution to these companies may be in reducing the volume of their business in Egypt, or to change its nature; however to completely exit the Egyptian market is not easy to offset, as it represents a major huge market,” Altwati indicated. It is still important to add that some companies may eventually be forced to exit the market, if it couldn’t control the implications of the flotation, he added.
The chairman of Jarir Marketing, Muhammad Al Agil, said commenting on the topic that his company has allocated some provisions to cope with the potential post-flotation losses.
Meanwhile, the CEO of Al Tayyar Travel Group Holding, Abdullah Nasser Al Dawood, told Decypha that his company has no fears regarding the effects of the pound flotation on the group and its investments in Egypt, as the group provisions allocated before the decision, has allowed the company to avoid its negative impacts.
Savola Group, however, has attributed the hike in its 2016 losses primarily to change in exchange rates. Losses were mostly incurred by the company’s subsidiary, United Sugar Company. Takween Advanced Industries also stated the same reason behind the rise in its 2016 losses.
Halwani Bros Company also considered the losses of its operations in Egypt a main reason for the losses in the fourth quarter of last year.
Financial consultant, Ali Al-Gaafari, said that the effects of the Egyptian pound flotation will be mostly negative due to FX losses, but it also has a positive side for other companies.
FX losses were not only due to the Egyptian currency depreciation, as the Turkish lira also dropped for some time, which also had negative impacts on Saudi companies.
Al-Gaafari said that in order to overcome these effects some companies will restructure its investments in Egypt, adding that it will not be easy for these companies to give up the Egyptian market.
The financial expert additionally pointed that companies that depend on exports and sales outside the Egyptian market will benefit from the variation in exchange rates, if they are using local raw materials.
A huge impact is expected during the first quarter of 2017 (Q1-17) due to the Egyptian pound devaluation opposed to other currency, Al-Gaafari stated.
By: Thabet Shehata
