Egypt - The Central Bank of Egypt (CBE) shocked the business community and economists by raising the interest rates on the pound by 600 basis points in one move last Wednesday, as part of its plan to reform the foreign exchange market.

The overnight lending rate at the CBE reached 28.25%, imposing significant burdens on borrowing companies with high debt levels.

The impact of the interest rate hike on the companies listed on the Egyptian Exchange (EGX) varies according to their leverage and the size of their loans. The higher the interest rates, the greater the impact, especially for those with debts in foreign currency.

Some of the largest borrowing companies listed on the main index of the EGX are Ezz Steel, El Sewedy Cables, Egyptian Kuwaiti Holding, Qalaa Holdings, Emaar Misr, GB Corp, and Eipico, as well as Telecom Egypt, Oriental Weavers, and Raya Holdings.

These companies adopt different policies to mitigate the impact of the rising debt costs by seeking liquidity from other sources, rather than relying on standard interest rates.

Hossam Hussein, the head of the financial sector at Raya Holdings, said that the interest rate hike of 600 basis points will have a significant effect on the company, but the company has different strategies to avoid this impact.

He said that there is a tendency to increase the capital of the companies to speed up the loan repayment and reduce the burden of the interest rate hike, adding that the total loans of the holding company amounted to about EGP 12bn, divided between the reserves of the subsidiary companies and the working capital.

He said that the company is also considering increasing its capital or attracting new investors to join the company, noting that the impact will affect all the companies operating in the Egyptian market.

He expects that the monetary tightening policy will ease in the second half of the current year, which will give the companies a chance to breathe at that time.

He also pointed out that there is an impact on the non-bank financial activity companies, especially on the cost of debt on their existing loans, as well as on their current portfolios, predicting that the borrowers’ demand for loans from the financing companies will decrease due to the rise in interest rates.

A source at CIRA Education said that the company is still evaluating the impact of the sudden interest rate hike of 600 basis points on its debt cost, and will devise strategies to overcome the current economic challenges.

Marwa Mounir, the head of investor relations at the New Urban Communities Authority, said that the company will hold a board meeting to assess the impact on it, adding that there is no impact so far despite having loans, thanks to its liquidity from the sale of Heliopolis land.

Marina William, a consumer sector analyst at Al Ahly Pharos, said that the borrowing companies will be negatively affected significantly, especially Cairo for Investment and Real Estate Development – CIRA, which is one of the most indebted companies in this sector.

She said that the profits of the borrowing companies will be affected, but to different extents, noting that those with dollar revenues such as Oriental Weavers and Juhayna will not be affected much.

She advised the borrowing companies to work on providing liquidity, which may take some time, to try to overcome the negative impact of the interest rate hike.

Qalaa Holdings, one of the largest borrowers on the Egyptian Exchange, faces a significant impact from the rise in interest rates. The company plans to sell its shares or stakes in its subsidiaries to pay off its debts.

Hisham Al Khazenidar, Co-Founder and CEO of Qalaa, said that reducing debt and increasing cash flows are the main goals to lower the risk levels. He added that the Egyptian Refining Company has been consistent in repaying instalments and interest and that debt restructuring at the Qalaa level is a priority.

Hisham Hamdi, a consumer analyst at NAEEM Brokerage, said that the pound’s liberalization against the dollar has balanced out the negative impact of higher interest rates on companies with loans.

He said that exchange rate stability will help companies access foreign currency and that releasing goods from customs will boost the profit margins of companies. He explained that food companies such as Edita, Juhayna, Domty, and Obour Land will benefit from the opening of documentary credits, while companies in the services, industrial products, and car sectors such as GB Corp will be slightly affected. He expected that interest rates would drop gradually in the medium term.

Central Bank Governor Hassan Abdullah said at a press conference on Wednesday that financing costs are a minor part of companies’ overall costs.

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