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Arab Credit Crisis Squeezing Egypt Manufacturers

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Egypt’s balance of payments crisis is putting the squeeze on credit and fuel supplies, as depleted foreign reserves have prompted 11 rating cuts since the 2011 revolution which ousted dictator Hosni Mubarak. The revolution saw the installation of a provisional council made up of generals who have allowed the security situation to deteriorate and have mismanaged the macro economy.

In the near term, this is causing higher costs for exports and manufacturers, squeezing the country’s weakened garment sector. Mohamed Talaat Khalifa, chief investment officer at Al Arafa Investments & Consulting, says that global banks are demanding more collateral when financing imports of raw materials. His firm works with Zara and Banana Republic.

The Egyptian pound has fallen 6.6%, making exports cheaper, but rising costs for fuel, financing, and insurance have canceled out the gains. Political unrest and the currency crisis has dramatically increased perceived risk in Egypt, as the government spends dwindling foreign reserves on increasingly costly import subsidies for food and fuel. Much of the money is being spent on wheat, which the government uses to produce bread sold for as little as a penny a loaf.

Manufacturers are feeling the crunch and trying to avoid passing higher costs on to buyers. If the situation continues, they will have to raise prices and will risk losing customers.

The cost of insuring debt in Egypt is up 1.88% and borrowing costs for the government has risen to 14.5%. The country is rated Caa1 at Moody’s and B- at S&P, giving their bonds low-junk status on world markets.

At this point, the central bank is only holding enough currency reserves to finance three months of imports. They’ve begun limiting access to dollars in order to conserve those reserves. The governor of the central bank, Hisham Ramez, said his focus is on securing “essential” imports, including wheat and fuel, while the government negotiates a bailout loan from the International Monetary Fund. The loan is expected to improve liquidity and assist with balance of payments issues.

Due to the lack of dollar availability, some firms have begun switching their debt into pounds, putting them at the mercy of higher interest rates. Dollar-denominated shares have been falling on Egyptian markets, partly on concerns about debt refinancing.

Exporters are hoping that the IMF loan will further weaken the Egyptian pound, allowing firms to boost margins as they export to countries that can pay in dollars. Non-deliverable forwards trading shows that the markets expect the pound to fall by about 7% in the next three months, according to Bloomberg. For now, letters of credit are more cost and letters of guarantee are hard to come by, making import activity difficult.

Despite this, firms with less than 40% imported raw materials can profit from the currency weakness. But according to Magdy Tolba, head of exporter Cairo Cotton Center, some firms use as much as 70% imported materials, making them vulnerable to the fluctuations.

After the revolution, Tolba lost contracts from Macy’s Inc. and Calvin Klein Inc. He then started supplying Levi’s jeans through a Turkish partner. He has held on to his remaining clients, but has had to offer discounts and promotions as well as airfreighting, which has cost him his margins.

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