{"id":615876,"date":"2024-02-25T00:00:00","date_gmt":"2024-02-25T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/as-interest-rates-remain-elevated-industry-players-are-struggling-to-unlock-capex-investments\/"},"modified":"2024-02-25T00:00:00","modified_gmt":"2024-02-25T00:00:00","slug":"as-interest-rates-remain-elevated-industry-players-are-struggling-to-unlock-capex-investments","status":"publish","type":"inside_industry","link":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/as-interest-rates-remain-elevated-industry-players-are-struggling-to-unlock-capex-investments\/","title":{"rendered":"As interest rates remain elevated, industry players are struggling to unlock capex investments"},"content":{"rendered":"

How are industry players managing their financing needs amid a persistently high <\/strong>interest rate environment?<\/strong> Over the past two years, the Central Bank of Egypt (CBE) has consistently been raising interest rates in a bid to tamp down inflation that shot up following the EGP devaluation of March 2022<\/a>. Since then, many businesses \u2014 particularly manufacturers and other industry players \u2014 have been holding off on investments as high interest rates on financing made debt prohibitively expensive. Industry sources Enterprise spoke with also pointed to a dearth of financing initiatives to help the private sector to secure financing for fresh investments, which is standing in the way of growth. <\/p>\n

Don\u2019t take it from us: The interest rate environment is a significant concern for all of you:<\/strong>In our 2022 Fall Reader Survey, nearly half of readers said that high interest rates were holding back decisions to deploy capex spending. At the time \u2014 when the overnight deposit rate stood at 11.25% \u2014 one-third of you (36%) said you need to see interest rates go down to somewhere between 8.25-10.25%, while 12% of you wanted to see rates go down even lower to allow for new investments. <\/p>\n

A look at current demand for bank financing:<\/strong> Total bank loans for private sector players (in both local and foreign currency) came in at EGP 1.757 tn at the end of October 2023, compared to EGP 1.482 tn at the end of December 2022, according to recent figures from the CBE. EGP-denominated loans accounted for the lion\u2019s share of the figure (EGP 1.376 tn at the end of October 2023, compared to EGP 1.182 tn at the end of December 2022). Foreign currency-denominated loans saw a smaller increase over the nine-month period, rising to EGP 381 bn from EGP 300 bn. <\/p>\n

How do banks calculate the price of business lending?<\/strong> Lending rates to the private sector and companies vary between banks depending on the sector and nature of the project, but are set higher than the CBE\u2019s corridor rate, a banking source explained to Enterprise. <\/p>\n

Industry has been struggling with a lack of subsidized lending:<\/strong> In 2022, the CBE moved to<\/a>scrap a program<\/a> that granted industry, agriculture, and construction players subsidized loans at a preferential rate of 8%. A few months later, the government decided to roll out<\/a> a fresh subsidized loan program set at an 11% interest rate. Manufacturers were concerned at the time that the jump in interest rates would be untenable for them and force some factories to slash production or hike consumer prices. <\/p>\n

Manufacturers really need financing support from the government as interest rates <\/strong>remain too high to afford to take on debt<\/strong>, Egyptian Businessmen\u2019s Association member Ahmed El Zayat told Enterprise. For businesses with more than EGP 50 mn in revenue, interest rates on loans range anywhere between 22-25%, which is a major obstacle for these companies to take on debt to develop their businesses, El Zayat said. For manufacturers to be able to afford debt at these rates, they would be forced to raise the prices of their products so steeply that they would no longer be competitive, he said. El Zayat suggested that policymakers should create a fresh subsidized loan initiative for manufacturers and real estate players, considering these two sectors contribute some 35% of the country\u2019s GDP.<\/p>\n

The 11% loan program exists \u2014 it\u2019s just not the best fit:<\/strong> Several sources Enterprise spoke with pointed to the difficulty of the program\u2019s eligibility requirements. While some businesses are able to benefit from the program, the vast majority struggle to meet all of the program\u2019s multiple conditions and requirements, reinforcing the business community\u2019s desire for a fresh initiative with more flexible conditions, El Zayat said. <\/p>\n

As costs run high, the whirring of machinery continues to grow quieter:<\/strong> Manufacturers who are forced to take on debt at high interest rates will inevitably be force to either hike prices or cut down on productivity, which has knock-on effects on other players and corners of the industry, said Federation of Egyptian Industries member Mohamed El Bahey told Enterprise. This is particularly problematic as manufacturers already face a wealth of challenges, including raw material shortages and difficulties securing FX to import production inputs, components, and machinery. <\/p>\n

Meanwhile, banks are reluctant:<\/strong> Some banks are hedging against dishing out industrial financing, as they\u2019re concerned about the perceived high risk of default due to a slowdown in imports amid ongoing FX pressures and high inflation rates, SMEs Union head Alaa El Saqty told us. Difficulties securing financing from banks, coupled with the ongoing foreign currency crunch, are causing serious continuity issues for several businesses, including export-oriented manufacturers, El Saqty and El Bahey both agreed. <\/p>\n

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