Photo: People cover themselves from sun, as they wait to buy subsidised food contributed by the Ministry of Defence and Military Production of the Egyptian Armed Forces in Cairo, Egypt May 10, 2017. REUTERS/Amr Abdallah Dalsh
Ramadan is a time of restraint and spiritual contemplation, the daily iftar a joyous moment as Muslims the world over break their fast together. But for Egyptians the holy month this year comes as the country roils from rampant food inflation and a debased currency that could make Ramadan all the tougher.
Today, food costs 40 percent more than it did a year ago after local manufacturers, which source most of their ingredients abroad, raised prices following a collapse in the value of the Egyptian pound.
“Restaurants, gas, transport, everything just doubled in a matter of a couple of months and everyone is struggling – whether people are very rich or people are very poor. 100 [Egyptian] pounds used to get me two chickens; now 100 pounds can get me just one,” said May, 30, a pharmacist from Alexandria who declined to reveal her full name.
Surging prices have hurt food sector earnings as Egyptians opt to downgrade to cheaper alternatives or go without, but analysts expect the demand shock to be relatively short-lived and seem confident policy measures will prove beneficial, both to industry and ordinary people.
“In general, if the government does this right it will be good in the long term. Consumers in Egypt used to buy much more than they’d need and the rest was thrown in the garbage,” said a food industry source speaking on condition of anonymity. “In the long-run it should help reduce waste.”
Inflation in import-dependent Egypt, whose population has more than doubled since 1980, has long been a problem and ranged from 5-13 percent from 2008 to early 2016 before spiraling upwards following the flotation of the pound last November.
The central bank had forlornly tried to maintain the pound at an artificially high rate through strict capital controls and dollar rationing, but a severe recession in the tourism sector – a vital source of hard currency – made this strategy unsustainable as companies struggled to pay for imports.
The pound closed at 18.05 to the dollar on May 23 versus its previous fixed rate of 8.80. Free-floating the currency was the latest in a series of austerity measures such as the introduction of value-added tax (VAT) and cuts to fuel subsidies, and which aim to bolster state finances and help attract foreign direct investment (FDI).
“Prices have been going up for a year, creeping up slowly; with the devaluation it became obvious,” said May. “People are slowly letting go of what they like. Everyone's angry and everyone's complaining, but they know that there's nothing to be done so are just hopeless. They will not go through another revolution. There’s nothing to be done so either you accept it or complain every day until you get depressed and die.”
‘THE WORST MAY BE OVER’
Annual Inflation hit a three-decade high in April of 31.5 percent and food prices hiked to 43.6 percent versus 12 months earlier. Yet the worst is likely over, with investment bank EFG Hermes citing April’s 1.7 percent increase in month-on-month inflation - the third straight month of decelerating monthly inflation - as a sign the inflationary shock of structural reforms are now almost fully absorbed.
That may be of little immediate solace to Egypt’s local food manufacturers, which as bulk importers of commodities such as wheat, milk powder and corn faced cost inflation of 60-80 percent, analysts estimate.
“For late movers who had not anticipated the devaluation correctly or prepared, very significant price increases had to be pushed through to preserve margins,” said Mohammad Kamal, an analyst at Dubai’s Aram Capital.
Food manufacturers raised prices by 80-90 percent, prompting a year-on-year decline in volume sales, analysts say.
“Food producers have been battling declining volumes and profitability, but most companies mentioned to us that volumes are recovering month-to-month,” said Mohamed Zein, an analyst at Renaissance Capital in Dubai. “The biggest drop was in January and then the rate of decline slowed in February and then further in March and so on. It looks like consumers are slowly adapting to price increases. There was one massive demand shock, causing people to reduce their consumption of certain products and down-trade to others.”
Juhayna is Egypt's No.1 listed manufacturer of packaged juice and dairy products. Its first-quarter profit fell 28 percent to 58.257 million Egyptian pounds ($3.22 million) from the same period a year earlier, which it blamed on the soaring cost of raw materials, Reuters reported. Sales revenue was near-flat, however, at 1.287 billion Egyptian pounds.
Smaller rival EDITA Food Industries fared better. It reported a 23.5 percent rise in first-quarter net profit to 40.4 million Egyptian pounds ($2.23 million) compared to the same period a year earlier, on the back of price increases and cost-control initiatives, according to a company statement. Sales revenue jumped 24 percent year-on-year to 642.4 million Egyptian pounds.
An EDITA spokeswoman said the company imports a quarter of its ingredients from abroad, revealing it had “mostly” passed on rising ingredients costs to consumers and predicting the food manufacturing sector would return to relative normality in 2018.
Manufacturers’ margins will still decline despite rising prices, because of lower utilisation rates – their wage bill remains the same, but lower sales volumes mean labour costs are relatively higher per unit sold.
“We’re cutting operating costs, reducing capital expenditure, trying to increase exports, improve the utilisation of the sales team, delivery trucks, becoming more efficient,” said the same food industry source.
Ramadan is a critical period for food manufacturers, according to Hatem Alaa, EFG Hermes Director of Consumer and Retail Research in Cairo,
“For most food producers it’s a peak demand season. You see dairy companies usually run at over 100 percent utilisation,” said Alaa.
An Egyptian tradition is to give charity bags to the less fortunate during Ramadan. These typically contained a bag of sugar, a bag of rice, boxes of oil, some nuts and raisins. Last year these cost about 80 Egyptian pounds, said May. This year the bags cost 120 pounds, but the quantities of goods have been slashed so a kilo of rice is down to half a kilo, for example, and nuts and raisins are absent.
Major food manufacturers in Egypt are trying to source more raw materials domestically. Zein cited the example of EDITA, which had sourced flour from Greece but now tries to buy more domestic supplies.
“Locally-sourced flour is still linked with international prices but instead of paying in dollars EDITA now pays in pounds - the magnitude of currency appreciation or depreciation, might not filter through to the cost immediately, but over time it may,” said Zein. “Egypt is a net importer of many input materials but over time, with FDI returning to take advantage of the cheaper currency and low cost of labour the local supply chain should expand.”
Among consumers, many switched to lower quality, cheaper alternative products to what they used to buy previously.
“If I used to buy, say, a jar of Nutella every week, now I buy just once a month. The Egyptian alternative brand for Nutella tastes like feet. It's disgusting and yet it's only 10 pounds cheaper,” said May, the pharmacist. “There are two things that you can do. Either buy less and manage with less or buy the Egyptian alternative, but the local made products aren’t as good quality as the imported ones.”
Egyptians are cutting back on discretionary consumption, for example moving away from processed meats and imported packaged food.
“Therefore, many producers of non-staple foods saw sales volumes decline,” said Kamal. “This is only beginning to play out and should be a major theme for the consumer sector in 2017.”
Juhayna should be relatively protected from down-trading because its milk and dairy products are staples and not easily substitutable, analysts predict.
About 70 million of the country’s 92 million people receive food subsidies worth 21 pounds per month, plus five loaves a day, and the government may raise the quota to 27 pounds, Reuters reported. Pita bread subsidies have remained unchanged since 1977 and with food costs soaring more Egyptians are relying on fixed-price loaves. Pitas are sold at 0.05 pounds, which is about a tenth of the market price.
Currency depreciation is usually a boon for exporters, but such benefits may be slim for Egypt’s food producers whose exports will be insufficient to offset weak domestic margins.
“Many Egyptian companies are seeking to increase their dollar revenues through exports,” added EFG’s Alaa. “This is a common strategic focus, but they’re starting from a very low base and some usual export destinations like Libya have been weak so it hasn’t been an area of great focus for the past 7-8 years. Part of the reason companies are now talking about exports is because of the weakness in local volumes.”
Food manufacturers’ high valuations mean there’s little chance of consolidation, with the sector’s stocks tracking a broader equity market rally sparked by the currency devaluation.
“That's almost counter intuitive if you believe inflation is here to stay for a long time, and that wage growth will take some time to catch up. This implies that earnings growth for consumer businesses will lag,” said Kamal. “The market has been a bit nonsensical in bidding up a lot of these names quite aggressively, up to peak cycle multiples of 40 times earnings in some cases.”
More broadly, Egypt’s recent gas discoveries, which should come into production in 2018 and enable the country to again become a net gas exporter, may bolster the pound.
“Egypt still has strong growth prospects in consumption owing to favourable demographics and the fact that many sectors are underdeveloped,” added Zein. “The market dynamics are there, what we are seeing now is just a temporary demand shock that is a short-term by-product of exchange rate regime reform.”
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