December  2001 

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 Understanding The WTO's Doha Ministerial

The WTO looks ready to make concessions to emerging markets.

The bargaining table is set for the next round of global trade talks after World Trade Organization ministers concluded their November meeting in Doha. The place settings hold a potential feast for Egyptian businesses.

Capitalizing on the WTO's need to escape its image as a tool of rich countries, developing nations won major concessions in the Qatari capital. Egypt now has a chance to bargain for terms that could increase its exports of agricultural products, textiles and services.

"If there was any question that developing countries have been able to influence these discussions, I think there is no underestimating that now," said J.W. Wright Jr., chief trade adviser at USAID. "The advanced developing countries are probably going to come out the best, Egypt being among them."

At the same time, China and Taiwan formally became members of the WTO trading club, agreeing to its rules in order to enjoy access to member nations' markets. That will give Egyptian exporters greater access to the world's most populous consumer market--and present a formidable challenge from a giant potential rival.

The gains for the developing world reflect the WTO's effort to rehabilitate its image, battered by the breakdown of talks at Seattle in 1999 and angry anti-globalization street protests ever since. Nations send representatives to the WTO to negotiate import and export rules intended to be applied fairly to all countries. But the WTO has faced allegations that it works in secrecy and supports the interests of wealthy multinational companies at the expense of poorer nations, worker's rights and the environment.

The next round of talks on renegotiating the global trade pact will take many years: Delegates in Doha set a deadline of January 2005, but experts say talks will likely run longer. But the Doha ministerial meeting was critical because it set boundaries for those negotiations.

"Countries now need to figure out what are the most important things they need and how to pursue those objectives," said Irving Williamson, who was involved in the last round of WTO negotiations as deputy general counsel in the US Trade Representative's office.

Opportunities for Egypt are obvious:

Agriculture: Egypt, like many developing countries, has long complained that European countries protect their domestic farmers from international competition by subsidizing exports. But touching the subsidies is an explosive issue in domestic politics. The major coup at Doha: Developing nations were able to get developed countries to agree even to discuss the subsidies.

In an indication of the delicacy of the subject, France agreed to talk about the possibility of phasing out export subsidies only if the rest of the world agreed it was not a foregone conclusion that such a phase-out would ultimately occur.

Textiles: Developing countries had been pressing for faster increases in the quotas that limit how many textile products can be exported into major markets; the US and Canada resisted. At Doha, member nations agreed that raising the quotas faster than previously scheduled will be on the table for the next round.

Technical Assistance: The WTO has faced criticism in the past that it cannot truly allow fair competition because developing nations lack the technical resources to participate in high-tech trade. For example, the global trade regulators were telling countries to enforce international patents, but not helping them set up modern patent offices.

That type of complaint was given short shrift at the WTO's previous agenda-setting meeting in 1999: USAID's Wright recalls being summoned to help assemble a technical assistance proposal just two days before Seattle was to begin. At Doha, by contrast, delegates made technical assistance a major part of the agreement, which says that technical assistance budgets should not decrease over the next five years. But it leaves the exact form and amount of assistance to be determined by international aid bodies.

Intellectual Property: Developing countries have objected that patent protections for prescription drugs make vital medicines beyond reach in their countries. Without actually stating that countries have the right to manufacture drugs in violation of patents in times of health crises, the WTO ministers came close by declaring that "member countries have a right to take measures to protect public health ... and in particular to promote access to medication for all."

Other Issues: The EU won the right to give preferential tariff treatment to African, Caribbean and Pacific countries that are former colonies of its member states. The WTO agreed that the next round will include talks on how trade affects the environment, and there will be negotiations on lifting barriers to importing services. bt

Dan Bernard

A Shake-Up At The Central Bank

El-Oyun takes over after Hassan, reeling from reported policy clashes, turns down reappointment

If wagging tongues in financial circles are any indication, Egypt is in for an interesting ride on the monetary policy roller coaster. Late in October came word that Mahmoud Abu el-Oyun was up for promotion to become governor of the Central Bank of Egypt after his boss refused reappointment. Just two weeks after el-Oyun stepped into his new office, President Hosni Mubarak announced he was considering a shake-up that would strengthen the CBE's role and independence in setting monetary policy while likely phasing out the Ministry of Economy.

Abu el-Oyun, who prior to his appointment was deputy governor of the CBE under Ismail Hassan, has also been appointed to represent Egypt at the Arab Monetary Fund, the African Development Bank and the International Monetary Fund. His appointment was welcomed by many analysts, who view him as a market-friendly figure with an understanding of the need for reform.

"While I think the new central bank governor was a positive hire, he is still much more of an unknown than the team at the Ministry of Economy," Taher Gargour, Middle East analyst at HSBC Securities in London, told Business Today Egypt.

Unlike their counterparts in other industrialized countries, CBE governors have had limited input in monetary policy decisions, which are made by the president and his top advisers with input from the ministers of finance and economy. In the days after his appointment, el-Oyun stopped short of promising sweeping change, noting, "the responsibilities of the governor of the Central Bank of Egypt are always limited and known and there's nothing new in this. It is a change in leadership."

But Mubarak announced in early November that the CBE, established in 1960, would enjoy greater freedom to make policy. "The CBE will be completely independent. It will not belong to any ministry, and the CBE governor will report directly to the prime minister. Independently, the CBE will be formulating monetary and credit policies," Mubarak was quoted as saying by local press. At the same time, Mubarak announced he was looking to revise the mandate of the Ministry of Economy.

According to Egypt's banking laws, the Central Bank of Egypt is an autonomous public legal entity that formulates (and supervises the implementation of) monetary, credit and banking policies. Many observers say the People's Assembly will have to amend existing legislation if the CBE is to exercise more independence.

"President Mubarak announced plans to dismantle the Ministry of Economy and hand over its role in monetary policy to the Central Bank of Egypt," says HSBC's Gargour. "At a time when the currency was coming under increasing pressure, we were unsure if this was the ideal moment to enact such changes." In the short term, he believes, it is often a case of "better the devil you know." In the current climate, uncertainty over central bank policy will only put more pressure on the pound, he says.

Still, Gargour is among the many who see the redefinition of the CBE and Ministry of Economy's roles as likely long-term positives. Minister of Economy and Foreign Trade Youssef Boutros-Ghali will focus more aggressively on improving Egypt's trade profile, and an independent central bank with full control over monetary policy is the international norm.

Analysts attribute Mubarak's decision to fallout from the 11 September attacks on America and reported clashes between Hassan and Boutros-Ghali. But Hassan, whose term expired on 13 October, was firm that he had stepped down for personal reasons. Hassan, 66, is believed to be the first senior government official to refuse to have his term prolonged.

One of the first major clashes between Hassan and the government came during the foreign exchange squeeze in summer 1999. Then-Prime Minister Kamal El-Ganzouri refused to acknowledge there was a crisis, forcing the governor to bring the bank's policies in line with Cabinet's view. As a result, Egypt's foreign exchange reserves dropped from $22.9 billion in 1996 to $15.6 billion when El-Ganzouri left office in October 1999. Reserves now stand at $14.2 billion.

Hassan and Boutros-Ghali also reportedly had strong differences of opinion regarding devaluation of the pound. Hassan is said to believe devaluation would cause an increase in inflation and a decrease in the purchasing power of the nation's poor and those on fixed incomes. Boutros-Ghali reportedly favors devaluation to increase exports and help lower the trade deficit.

The pound was devalued in January and August of this year, dropping more than 15% against the dollar. The CBE rate now stands at LE 1:$4.14, while the market rate is at LE 1:$4.26. The bank also cut reserve requirements from 15% to 14% in October to increase liquidity and lower interest rates.

As recent as late October, the IMF's executive board praised Egypt's commitment to continued exchange rate flexibility, saying it would allow the country to ride out periods of market turbulence while avoiding further significant declines in official reserves. Flexibility is particularly important as Egypt looks to weather global economic turmoil. The Fund's directors also welcomed the slowing growth of private credit--which has reduced pressures on the exchange rate--and are encouraging efforts to strengthen monetary policy tools. bt

Rania Oteify 

Ramadan Karim -- That's LE 20, Please

The meaning of the Holy Month remains unchanged, but the past decade has seen it transformed into a commercial bonanza

It's all about worshiping God and feeling close to Him--that's the true message behind the holy month of Ramadan. But Ramadan is now suffering from the same "commercialism blues" as is Christmas in the West. It's no longer a pure month of worship, but rather one of television, food, advertising and tents.

"People work very hard all through the year," says Mohamed Sadek, chairman of SANO Catering and the Sohbageya Tent. "We rarely eat dinner as families. But every one takes it easy, works less and spends more time with family and friends during Ramadan." While Ramadan once meant an economic slump as people turned their backs on work, shops and consumer goods in favor of families, fasting and prayer, it underwent a commercial facelift in the early 1990s.

It began with the most popular of traditions, the Ramadan lantern. Instead of the custom-made metal and stained-glass lanterns, today's fanoos are mass-produced commercial products. Take a walk down Faisal Street in Haram, for example, and watch children spending hours meticulously selecting lanterns that now sing, talk and blow smoke.

But the biggest changes are beaming through the airwaves on television. "The fact that many people spend so much time at home during Ramadan meant that television had a golden opportunity to make a lot of new dramas," explains Caroline Assaf, senior vice president at Tarek Nour Advertising. "Because viewership was high, advertisers saw a golden opportunity to reach a large base of potential clients." It's a marriage made in heaven: Advertisers pay almost double for the same 30-second commercial spots in return for double the average number of viewers. While the entire month of Ramadan is an advertising high season, the first 10 days make or break a campaign. "We found that during the first 10 days, more people stay at home and watch television as they re-adjust their lives to fasting," Assaf explains. "Advertisers will spend obscene amounts of money on their Ramadan campaigns."

Since watching television plays such a vital part of life during the Holy Month, the sales of televisions inevitably spike. Manufacturers begin advertising their latest models at least two months prior to Ramadan, and the campaigns generally run until the end of the month. Most offer payment plans to entice middle- and lower-income consumers.

As people grow bored with television, they begin to socialize. Their destination? Most likely one of the many Ramadan tents. Tents were also an invention of the 1990s. In 1994, SANO Catering chairman Sadek created Ramadanna (Our Ramadan), the first such offering. "People spent many a Ramadan night in Hussein smoking shisha and drinking sahlab. My idea was to create a similar traditional ambiance in a more controlled environment." While Ramadanna might have been the first tent, it certainly wasn't the last. Sadek says hotels saw a golden opportunity to make up for revenue lost during the month, since no one books wedding halls. They set up shisha corners, brought in entertainment and applied a minimum charge.

Sadek knew that he needed to re-invent the tent to keep people interested, "So we created Sohbageya which serves sohour, shisha and traditional drinks, but it also has live entertainment. Some of the biggest names performed, and people seemed amused by it."

By 1999, Sadek decided that it was time to tinker with the image again. He moved the tent from an outdoor steel structure into an abandoned 125-year-old warehouse next to the World Trade Center, and decided he would no longer bring in a famous performer every night. "I was more interested in having my customers come more than once a week. When I had a performer, the minimum charge was between LE 60 and LE 70 per person. But when I just arranged for a DJ or another decent act, I was able to drop my price by half." His targets were not the rich to whom a few hundred pounds were no big deal, but rather those with more limited disposable incomes.

Towards the end of the month, the focus shifts to Eid Al Fitr and suddenly the price of sheep is sky high. In fact, if one plans correctly, there's money to be made in a small investment. Sameh Abbas is a teller at a private bank by day. But by night, he breeds sheep for the Eid. "It's actually very simple. You make an arrangement with someone who owns a sheep farm and invest at least LE 5,000 six months before Ramadan. He takes the money, buys the sheep, raises them and then sells them at the end of Ramadan and takes a share of the profit. You can make up to one and a half times what you put in."

It may be inevitable that religious holidays in capitalist countries gain a capitalist air, but the essential meaning of Ramadan remains unchanged--except that it has become one of the biggest money earners of the year. bt

Réhab El-Bakry

Cementing The Deal

A flurry of acquisitions in the cement sector has buoyed the stock market

There are precious few bright spots on the Cairo and Alexandria Stock Exchange these days, but one of them is the cement sector. In the last three months of 2001, cement stocks have become the darlings of the exchange as established players consolidate and foreign firms move into the market.

While cement companies may not, at first glance, seem like the sexiest of investment options, rising interest in the sector is well founded. Performance in the sector is closely correlated to the performance of the economy as a whole, in much the same way that oil is. Factories don't run without oil, and they're not built in the first place without cement. New industries, commercial centers and residential areas are all served by the cement industry. This makes cement stocks a safe long-term investment: Analysts predict annual returns on investment as high as 15% for some of the strongest performers in the sector.

But the interest in cement is not only due to the role of the sector in the economy at large. In fact, prior to the last three months, many cement stocks slid on fears that projected growth in capacity would outpace the increase in demand. In the 1990s, the industry was plagued by the opposite problem: undersupply. Capacity grew during that decade at an average annual rate of 5.9%, while demand grew at 10.7%. In the last few years, cement companies have responded by redoubling efforts to improve capacity: 23.5 million tons of cement were produced last year, and an additional 18 million tons are expected to be added to annual production within a few years. Analysts say this will result in oversupply and ultimately lead to a crunch in the sector. One might have expected these fears to have been even more pronounced in the new era of global economic uncertainty. It seems a bit strange, then, that the sector should suddenly become the darling of securities traders.

Much of the interest is founded on speculation over which companies will survive the coming cement crunch and which will fold or be bought up. To answer this question, traders on the CASE have been taking their cues from foreign investors, who have favored three established producers: Suez Cement, Torah Cement and Helwan Portland Cement. Together, these three account for about 10 million tons of Egypt's 23.6 million tons of annual production.

In September, Ciment Français bought 25% of Suez Cement, which in turn bought 100% of Torah Cement. Just weeks earlier, the Arab Swiss Engineering Company (ASEC Group), a Swiss-Egyptian joint venture with a 25-year history in Egypt, had bought 100% of Helwan Portland Cement from the state holding company in one of the year's few privatization deals. Not surprisingly, the three producers received the biggest boost on the CASE.

Aside from sparking interest in the otherwise anemic stock market, the spate of deal-making is worth a close look because it is likely a harbinger of things to come as the cement sector sheds its state-run past and deals with the oversupply problem of the coming years.

French kiss

Ciment Français entered the Egyptian market in the biggest possible way. Suez and Torah are the sector's two biggest producers: Suez supplies the market with 3.72 million tons per year, while Torah supplies 3.35 million tons. For now, the French concern owns only a quarter of that capacity through its stake in Suez, for which it paid LE 515 million, but if the government follows its traditional pattern of privatization, its share is likely to grow in the coming years.

The deal could ultimately be hugely beneficial to both parties. The Egyptian firms will get technical support and modernization assistance, and Ciment Français will find itself with a new source overseas as tighter European environmental restrictions constrain its ability to produce at home. Ultimately, this arrangement could lead to a lucrative export market for Egyptian cement, although some pundits worry about the environmental impact of enhanced foreign interest in domestic cement producers.

"It's not a complete privatization yet, but it's an important deal because it shows that foreign firms think the cement market in Egypt has potential," says Joseph Iskander, an investment analyst at Prime Research. "In 2004, European cement companies will be limited by EU environmental laws. So there may be some potential to export within two or three years, but for now the biggest market will be domestic."

Management at Ciment Français/Suez confirms that this is a possibility. "Some Egyptian cement companies are exporting already," says one Suez official. "This is definitely something we have in mind, although prices in the local market are still higher than prices in overseas markets." But that situation may change drastically in the coming years as the supply glut undercuts prices at home and the EU's laws undercut homegrown supply in Europe.

And, of course, there are other potential benefits to the deal: Suez is looking forward to the possibility of modernizing its operations. "You have to have a strategic partnership to modernize," says the Suez official.

Still, performance in the cement sector is closely correlated to GDP growth, which looks set for a steep slide as the global economy takes a turn for the worse. That didn't stop Ciment Français from investing in the sector (two weeks after the terrorist attacks threw the world economy into doubt), implying that at least the French company is confident Egypt's overall economy will continue to grow. "I don't believe GDP is falling," the Suez official says simply.

Iskander is not quite so certain, but he explains that while there is no disputing a close relationship between GDP growth and demand for cement, the cement sector draws 60% of its business from the informal economy, which is not included in GDP calculations and may provide the industry with a degree of insurance. Expanded markets in Europe would also provide Ciment Français with a cushion against fluctuations in Egyptian demand.

Swiss watch

ASEC's involvement in Egypt is not quite as new as Ciment Français', but the Egyptian-Swiss concern's purchase of Helwan Portland (annual capacity: 2.95 million tons) is likely to provide many of the same benefits as the French deal.

Although it has ties to Switzerland's Holderbank, ASEC's corporate structure is as intricate as a Swiss watch and ultimately includes majority ownership of a consortium of Egyptian cement firms. The company has been working in the Egyptian cement sector for 25 years and its structure reflects the various stages the Egyptian economy has passed through in that time. Originally, it was jointly owned by all nine state-run cement companies (including the two now owned by Ciment Français, as well as Helwan itself). The purpose of the joint venture was to disseminate Swiss production methods throughout the Egyptian cement sector. Although ASEC, until now, never directly ran any of the companies in the sector, it provided guidance through feasibility studies and a team of 400 engineers and 5,000 technicians, all Egyptian.

Technically, the old ownership structure is still in place, but prior to buying Helwan, the ASEC Group spun off the ASEC Cement Company, the organ that actually closed the deal. Observers say ASEC's experience in the cement sector and its reputation as the technical backbone of the sector as a whole will ease its transition to owning and running Helwan.

The $321 million deal will result in the formation of the ASEC-Helwan Cement Company. Corporate leaders say one of the first orders of business will be modernizing production methods and making the plant more environmentally friendly.

Helwan has developed a somewhat spotty reputation for environmental friendliness, as its outdated wet kilns have received much of the blame for the cement dust that billows from around Helwan and clogs Cairo's air with particulate matter.

ASEC's intention is to modernize the plant and improve its environmental conditions to meet international standards, thus reducing the emissions in the areas surrounding the plant, said managing director Omar Guemei in a written statement. In addition to improving environmental conditions, the plant's capacity will also be increased by upgrading the existing dry kilns to reach 4 million [tons of capacity]. All the wet kilns will shut down within a maximum period of two years and environmentally friendly natural gas will also replace heavy fuel in dry kilns, thus allowing Egypt to export more heavy fuel.

Guemei admits that there are obstacles facing the sector, and Helwan Cement in particular, but he is confident ASEC can help the industry become stronger and more efficient. The purchase of Helwan Portland Cement Co. is a very big challenge due to the poor technical conditions of the plant and its current environmental status," he noted. "But ASEC will use its capabilities and know-how to turn around this plant, setting an example of Egyptian efficiency, planning, research, engineering and production capabilities."

Indeed, both deals--Ciment Français/ Suez and ASEC/Helwan--are being heralded by market analysts as proof that the cement sector in Egypt has a promising future despite the coming supply glut and other economic concerns. And while stock traders sort out exactly which companies will emerge the strongest, the new partnerships are getting to work building the future that the traders are betting on. bt

Mark Goldrup

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