Economic Update

Published 31 Jul 2015

Recovering headline stability and new listings should both help to invigorate Egypt’s capital markets in the medium term, with investor appetite for assets across the region providing an additional boost.

After recording growth of more than 30% last year, the Egyptian Stock Exchange (EGX) has faced a challenging few months, with a drop in the benchmark index. However, a flurry of initial public offerings (IPOs), a shake up in the EGX’s indices and more bond issues on the horizon suggest renewed confidence in the bourse, as Egyptian corporates and the government tap into investor interest in MENA assets.

Confidence on the up

The Egyptian stock market grew by 31.6% in 2014, according to EGX data, and consumer confidence remains on the rise, buoyed by anticipated economic growth of around 5-6% this year, Mohamed Younes, chairman of Concord International Investments Group, an investment management company, told OBG. “There’s more interest from international investors in the Egyptian market,” Younes remarked. “The market has been untapped for a long time and is undervalued, so there are good price-to-earnings ratios. We’ve seen premiums over offerings after recent IPOs.”

Indeed, a spate of IPOs have seen the EGX establish itself as one of the most active regional markets in the year to date in terms of new listings. On June 25, the EGX saw its largest floatation since 2007 when property firm Emaar Misr, part of the UAE-based Emaar Properties, placed 90m shares on the exchange. The offering, priced at LE3.8 per share ($0.50 at the time of the float), was oversubscribed by some 36 times, according to EGX officials. However, its share price eased in the following weeks, prompting the company to deploy a LE342m ($44m) stabilisation fund to buy back shares.

Another market event took place at the end of March, when Edita Food Industries listed 16.3m shares in a bid to raise capital to fund expansion plans, with the company’s public placement 4.5 times oversubscribed, according to the bourse.

The company also launched a private institutional offering on the EGX, with a parallel float of global depositary receipts (GDRs) on the London Stock Exchange; some 30% of Edita’s shares are now in free float. This follows on the back of another 30% stake that was previously acquired by Actis, an international emerging market private equity firm, at above-market prices in June 2013, which helped to drive investor interest in the latest issue.

Earlier in the year Orascom Construction became the first company to dual list on the EGX and NASDAQ Dubai, offering an 11% stake for $185m in March. This came hot on the heels of the Orascom Hotels and Development IPO in January, which raised a total of $70.7m, according to EY. Orascom had traded on the EGX before delisting in 2013 due to a tax dispute with the previous administration.

Building back up

All is not smooth sailing, of course. While Egypt dominated regional IPO activity in the first quarter, recording the only listings in MENA, the EGX has also faced challenges, with investor sentiment dampened by the devaluation of the Egyptian pound, recent clashes in the Sinai Peninsula and new limits on proceeds of GDR sales.

The exchange’s benchmark index, the EGX30, fell 4.2% on July 6, with the year-to-date decline rising to 15%, according to Bloomberg. Slowing economic growth has also taken its toll on performance. Official data showed GDP expansion easing to 3% in the first quarter, down from 6.8% and 4.3% in the third and fourth quarters of last year, respectively.

Rules of the game

An EGX ruling in early July that proceeds from the sale of GDRs could only be withdrawn in local currency also dampened investor demand, amidst currency controls and a crackdown on parallel market trading.

However, in the medium to long term, the EGX is still seen as showing considerable potential to catch up. “There is pent-up demand for IPOs… there needs to be privatisation of large government entities such as public utilities, housing companies and so on, which would bring more liquidity to the market,” Younes told OBG. “Right now market capitalisation as a percentage of GDP is very low compared to other countries, so there are lots of opportunities to list more companies.”

The announcement in late July that the EGX was debuting an equal weight index for the top-50 listed firms by value traded, the EGX50, on August 2 has sparked investor interest. This comes on the heels of regulatory changes lowering the free-float requirement for inclusion in the EGX30 from 15% to 5%, with minimum capital of LE100m ($12.8m), which could open the door for the likes of Orascom Construction. The shake up has already seen heavy-hitters Edita, GB Auto and Qalaa Holdings join the ranks of the EGX30, according to local press reports.

Thumbs up

Ratings agency Fitch gave Egypt’s broader economy a vote of confidence in mid-June despite slower growth, reaffirming its long-term foreign and local currency issuer default ratings at “B”, with a stable outlook. Fitch cited the country’s commitment to fiscal consolidation and economic reforms, alongside low external debt and a positive growth outlook as upsides.

The agency also lauded Egypt’s restored access to global capital markets, which has reduced its reliance on government-to-government loans and other international financial support, with local-currency issues mopped up by Egyptian banks and a $1.5bn eurobond successively floated in June.

According to regional press reports, Egypt’s second-largest state lender, Banque Misr, is eyeing a $500m float, while the National Bank of Egypt is also preparing an issue. This comes alongside an upgrade in Moody’s outlook for Egypt’s banking system in mid-July, from negative to stable, driven by growing demand for credit and a strong liquidity position.