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Telecom Egypt sale foreshadows Cairo's uncertain privatization path
Al-Monitor Pro Members
Marc Español
Journalist covering Egypt and Sudan
June 1, 2023
Egypt’s government sold a 9.5% stake in state-controlled telecommunications giant Telecom Egypt (TE) on May 14 for 3.75 billion Egyptian pounds (about $121.6 million). The sale, albeit to mostly local investors, came as authorities in Cairo move to reduce the state’s footprint on the economy, give more space to the private sector, and secure liquidity to improve the state’s precarious financial position. At the heart of these efforts lies an ambitious state asset privatization program, closely watched by the IMF and the Gulf countries, which is essential for Egypt to close its wide financial gap but whose scope is still uncertain.
- Following the outbreak of Russia's war in Ukraine and the first in a series of interest rate hikes in the United States, Egypt faced a capital flight of over $20 billion and an increase in the import bill that severely weakened its financial position, including its foreign reserves.
- In an attempt to secure new sources of more sustainable capital inflows and to keep its external position afloat at the expense of hot money, the government intends to increase foreign direct investments, boost exports and expand the private sector.
- Yet as these alternatives take time to materialize, Cairo has placed its bets in the short-term on plugging its wide financial gap through more debt and the privatization of state-owned enterprises (SOE) and assets.
- In March 2022, as the economic turmoil unleashed by the war in Ukraine left Egypt in a very vulnerable position, the UAE, Qatar and Saudi Arabia pledged to inject $22 billion to shore up Cairo’s finances, mainly through investments.
- The first to make a move was the UAE. In April 2022, Abu Dhabi’s sovereign wealth fund ADQ acquired stakes in five Egyptian firms, including three SOEs: the country’s two largest companies in the fertilizer sector, MOPCO and Abu Qir Fertilizers, and the logistics player Alexandria Container and Cargo Handling.
- In August 2022, the Egyptian arm of Saudi Arabia’s Public Investment Fund (PIF) bought minority stakes worth $1.3 billion in four publicly listed SOEs, including the same three that ADQ had entered, as well as the fintech platform E-Finance.
- In December 2022, Egypt agreed with the International Monetary Fund (IMF) on a 46-month reform program tied to a $3 billion loan. One of the three main pillars of the program is the adoption of structural reforms to reduce the footprint of the state in the national economy and increase the role of the private sector.
- Substantial financing under the IMF program is expected to come from regional partners. Overall, privatization of state assets should cover about $9 billion of a financing gap that the IMF put at $17 billion over the duration of the program.
- In the document accompanying the agreement, Cairo stated that it had identified a group of SOEs from whose stake sale it hoped to raise $2-2.5 billion by June 2023. In FY2023/2024, which starts next July, Egypt expects to secure $4.6 billion from sales of state-owned assets.
- According to the IMF, there are over 300 publicly-owned companies in Egypt, including military-owned, as well as 645 joint ventures and partnerships involving the state, and they are present in almost every sector of the national economy.
- Within weeks of signing the agreement with the IMF, Egypt approved the State Ownership Policy document, a strategic program that seeks to define the contours of public sector presence in the economy and sets out the economic sectors from which the state plans to withdraw in the coming years.
- In February 2023, the government announced plans to sell shares in 32 SOEs through direct sales to strategic investors or listings, including three banks, two military-owned enterprises, and several firms in the energy and logistics sectors.
- Prime Minister Mostafa Madbouly stated that stakes in some of the companies would be sold within three months, which ended in mid-May. Others would follow within five months, to July, and a final group by the end of the year or Q1 of 2024.
- For now, only a fraction of these privatizations has materialized, mainly owing to difficulties on agreeing on how to proceed, Egypt’s reluctance to sell strategic assets, its volatile economy, and the refusal of Gulf allies to keep disbursing easy money.
- The first sale since the announcement of the privatization program only came in early May, when the Emirati National Paints Holding (NPH) acquired over 80% of Egypt’s Paint and Chemical Industries (Pachin) for about 770 million Egyptian pounds (about $25 million). The state sold off its entire stake.
- The sale of 9.5% of TE, which was not included in the program, followed shortly thereafter. And in that case, only about 9% of the investors who bought shares in the company were foreigners, so the injection of dollars only amounted to about $11 million. About 90% of the shares were held by undisclosed local investors.
- Among the main sticking points holding up the program are the size of stakes for sale, as Cairo favors minority stakes, the firms’ valuation, the volatility of the local currency, Egypt’s dollar shortage, and its reluctance to divest strategic assets.
- An aspect that has raised concern in the country is the lack of transparency and oversight with which the privatization program is being implemented.
- In January 2023, Egypt’s Supreme Constitutional Court upheld a 2014 law that prohibits third parties from filing a lawsuit against contracts with the state, including privatizations. Under the former president Hosni Mubarak, some were revoked following lawsuits that exposed cases of corruption and mismanagement.
Scenario 1: Privatization plans stall after minimal progress
The long-awaited program of state-owned asset sales put forward in February is a revamp of the plans initially announced by the government in 2018 to offer stakes in 20 SOEs to the stock exchange. Most of those offerings were shelved indefinitely on the grounds of unfavorable market conditions, and the funding environment is not substantially different now amid global economic headwinds and growing reservations among Gulf countries.
The current plan is also more ambitious, and there are political reservations and technical hurdles, including the preparations required to IPO a firm, that could stall the plans again.
Scenario 2: Egyptian government capitalizes on momentum, accelerates offerings
Cairo’s increased urgency to secure foreign capital inflows and stabilize the currency in view of its critical financial position, coupled with the greater scrutiny it is now subject to from the IMF, investors — especially in the Gulf — as well as the debt markets, leaves authorities little alternative but to make substantial progress on the privatization program.
For mainly technical reasons, but also owing to the complexity of negotiating the sale of stakes in such a turbulent scenario, it was expected from the outset that little progress would be made in the months immediately following the plan announcements in February, despite the government’s overly optimistic prospects. The most suitable window to get the plans underway and to ramp them up was always the second half of 2023 and Q1 of 2024.
Even if market conditions are far from ideal, Egypt will continue to make some progress in the coming year in its plans to sell state assets, mainly driven by the urgency of securing foreign inflows at a time when it is facing a financial crunch and to show its commitment to the IMF and its Gulf allies. However, the privatization program and the private sector expansion envisaged by the government in the short term is neither realistic nor feasible due to technical, economic and political conditions. Looking ahead, the authorities will most likely offer to the market, especially strategic investors in the Gulf, a rather limited number of the state-owned enterprises earmarked for privatization, including military-owned. A small fraction of these moves could come before the current fiscal year closes at the end of June. Authorities may also look to sell stakes in companies that are not among those flagged in February but which also attract interest, as happened with Telecom Egypt.
Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed).
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