There is no voice louder than that of the Egyptian pound’s flotation, the increase of the US dollar price, and its impact on the economy generally. The situation may be difficult for several companies in terms of identifying a strategy to deal with the fluctuations of the pound’s price, as it also impacts costs and profit margins.
This unstable situation leaves a question mark in the mind of financial managers and managers that develop plans to advance businesses regarding dealing with the fluctuations in 2017.
With the change of the exchange rate day after day, the expectations of analysts and financial managers are different and are reviewed on a monthly basis with several scenarios to deal with the dollar price.
Amr Elalfy, managing director and global head of research at Mubasher Financial Services, explained these scenarios by saying that companies will work on restructuring the budget based on more than one dollar price, as well as a scenario to make the dollar remain at its current price in the range of EGP 19-20. An additional scenario expects the dollar to increase, and a final scenario expects it to drop somewhere near EGP 16.
He added that based on the dollar price in each phase, companies will activate the appropriate scenario. This will require changing cost elements, as well as repricing products according to the flexibility of goods and their ability to pass part of or the entire dollar increase to consumers, then finally develop financing alternatives.
He stressed that as long as a company has leadership in the market, it can take initiative through moving the selling price of its products by a certain degree. However, if the company comes among small- and medium-sized enterprises (SMEs), steps taken by leading companies will be awaited, then these steps will be reviewed to take competitiveness into consideration.
Elalfy added that companies are now adopting the “various scenarios” strategy in order to deal with the pound’s fluctuations, including Raya which expects the dollar to experience two changes in terms of rate—one at EGP 17 on average during the first half of 2017, and then an expected drop to an average of EGP 14 during the second half of 2017.
He explained that there is another aspect related to financing in 2017, which is also subject to more than one scenario. The first is a stability of the current conditions which makes increasing capital through the Egyptian Exchange the least costly way, compared to banks who add 20% on the loans in Egyptian pounds.
He added that the second scenario is borrowing in pounds with high interest rates, which is better than borrowing in dollars to avoid increases, as well as interest rate increases.
The third scenario is obtaining loans in dollars as long as there are cash flows in foreign currencies which reduces the risks of increases in interest rates.
“It is a rather internal matter as restructuring will be carries out inside the company. Then there is dealing with the market. If the company is a market leader, it will be making decisions; if not, it will follow market leaders,” he said.
For his part, Sameh Hodaiby, finance director at Juhayna Food Industries, said that forecasts indicate an increase in the dollar price in 2017, which will cause passing the increase of costs to final consumers through increasing prices.
He explained that Juhayna has increased its prices twice during the past period, like many food industry companies, because each time the dollar increases, the production costs increase as well, until increases reached 55%. This caused the company to increase the prices of its products.
During the last quarter of 2016, Juhayna increased its products’ prices by 10%, then carried out another increase by 15%.
Hodaiby noted that Juhayna is adopting precautionary measures against the US dollar increase through reducing expansions that depend on importing equipment or that are done in dollars in order to avoid increasing costs.
Elalfy said that he believes the trend to do this will only be adopted by a small number of local companies, especially since the increase of the dollar price by 150% during less than a year has changed the investment feasibility of many projects and caused an increase of costs by the same percentage.
“This means that companies need to manage larger funding in ways that exceed its financial ability or creditworthiness.
Elalfy noted that companies will work hard to open foreign markets or expand the customer base abroad, especially if there was demand on their products abroad. Then they would rather direct a large quantity of their production to foreign markets rather than local markets to obtain dollars to finance production costs or future plans.
This scenario was confirmed by Maher El-Abd, head of investor relations in the Egyptian Chemical Industries Company (KIMA). He noted that the company directs more than 80% of its production to foreign markets in Europe and Asia and aims to increase the percentage to enhance its profitability.
He added that the success of this strategy will help Kima manage the financing necessary to expand its Aswan factory in US dollars.