Army companies in the stock market.. Tricky questions after Sisi’s announcement

In a flowing conversation during his annual Iftar with the “Egyptian Family”, on Tuesday, Egyptian President Abdel Fattah Al-Sisi announced his assignment to the government to list military-owned companies on the stock exchange before the end of this year, a step that, if it occurs, will include making information available about these companies that were not available from before.

This was not the first time that this idea was announced, “but there were no serious steps, but when the president announces that himself, the matter acquires more seriousness and attention,” according to Alia Al-Mahdi, a professor of economics at the American University, to Al-Hurra.

Al-Mahdi described the listing of army-affiliated companies on the stock exchange, as an “important and useful positive step,” noting that it “will open the door to more role played by the Egyptian private sector.”

While the researcher at the Carnegie Center, Amr Adly, explains that “pushing part of the capital for trading in the Egyptian stock exchange is a case of partial privatization, or for all the capital to be put up for trading in the stock market, this means a case of complete privatization through the financial capital market.”

According to previous statements by the Minister of Planning and Economic Development in Egypt, Hala Al-Saeed, it is intended to offer 10% to 100% of the National Petroleum Corporation and the National Company for the Production and Bottling of Natural Water and Vegetable Oils “Safi”, both of which are affiliated with the armed forces, in a move aimed at increasing the participation of the private sector. in the economy.

It is planned that the offering of the two companies, owned by the National Service Authority of the Egyptian Armed Forces, will be followed by a study to implement the offering of three other companies affiliated with the army, according to the minister.

For years, there has been a lot of controversy surrounding the army’s interference in the Egyptian economy. And at the beginning of this month, seven human rights organizations, including Human Rights Watch, demanded the International Monetary Fund that any loan to Egypt include conditions related to transparency with regard to army companies that are not subject to any independent or civilian supervision, “which deprives Egyptians of access to necessary information.” To assess costs and beneficiaries of publicly funded projects.

The organizations said: “A comprehensive report in 2019 found that Egyptian army companies operate almost in complete secrecy, and hide “hidden shortcomings and losses,” despite receiving a “disproportionate share of public revenues.”

On March 23, the Egyptian government formally requested support from the International Monetary Fund to help mitigate the economic repercussions related to Russia’s invasion of Ukraine.

Since 2016, the Fund has approved 3 loans to Egypt, totaling $20 billion.

According to the World Bank, there are about 60 military-affiliated companies operating in 19 industries in Egypt, out of a total of 24 listed on the industry classification table.

Al-Mahdi told Al-Hurra that any company listed on the stock exchange must disclose the size of its business, activities, budgets, profits and losses, and everything, because disclosure is what makes a person able to make his decision to invest in these companies, which is a prerequisite.

This new announcement by Sisi comes in light of a stifling economic crisis as a result of the Corona pandemic, then the Russian war on Ukraine, the depreciation of the Egyptian pound by about 17 percent, and another expected decline this year, and talk about the exit of some hot money from speculators in the stock exchange. .

Adly sees the matter in a broader context, in that “there is a desire by the Egyptian government to have financing uses for state-owned assets.”

Adly explained: “Since this idea was put forward some time ago, therefore, it has nothing to do with the current economic crisis resulting from the war in Ukraine, and the economic pressure on the government requires quick measures, and the step of putting army-affiliated companies on the stock exchange will not have a direct result. And fast, and this matter will require months of work to be prepared for the public offering on the stock exchange, and therefore it is difficult to consider it a short-term measure aimed at facing short-term problems.”

He continues: “I think that the state’s perception that from this offering will achieve more than one goal, including encouraging investment, through the idea that there are assets that are put into circulation, and thus attract investors from within to revitalize the Egyptian Stock Exchange, and on the other hand, for these investors to generate money on certain projects.

El-Mahdi said that putting army-affiliated companies on the stock exchange “gives greater confidence that the private sector will play an increasing role, and raise the state of competitiveness in the Egyptian market.”

She also believes that “the effect of this step will be rapid, and it will give very good positive signals for foreign investments.”

Al-Mahdi explains that “this matter may create a state of balance and competition on the same degree of terms, between the private sector companies and those affiliated with the army, and the larger parts of them are sold, the more this will encourage competition, and this in the end will help reduce prices when these companies compete to be more appropriate.

In a report to the Wall Street Journal this month, it stated that the army controls the economy in Egypt and limits competition opportunities for investors due to the tax and customs exemptions it obtains. She noted, for example, that when a new government company entered 2019 to sell meat, the Ministry of Agriculture banned private competitors.

Adly says, “Such measures actually expand the market on the one hand, but I am frankly not sure that it will lead to something positive, because there are many legal obstacles and questions that must be answered in something we have not tried before.”

During his speech on the occasion of the “Annual Egyptian Family Iftar”, Sisi instructed the Egyptian government to announce a program for the private sector’s participation in state-owned assets with a target of $10 billion annually for a period of four years.

But Adly said, “Introducing part of any company affiliated with the army requires legal amendments so that the government can implement this because the set of rules and laws through which these companies are managed must be changed to protect the capital of shareholders, who will be considered a minority.”

He said: “In the case of the public offering, the shares will become small. This experience will be new in Egypt, and it will have legal challenges regarding procedures, for example, how will public disclosure be, and how will the financial statements be published, many procedural questions, but they are necessary because without them the contribution will not occur. from investors.

He explained, “If we assume that 20 percent of the capital of a particular company will be put up, and an investment fund came that bought 5 percent of the capital, for example, and thus this buyer has minority ownership rights because he does not manage, the question here, how will the decision be taken in The company in a way that protects the right holder (minority).

He continues: “This circumstance is complicated, because we are talking about a buyer, and about another party from within the country that follows a set of special laws, and therefore there are many legal questions that must be resolved before listing on the stock exchange.”