Interview: Mohamed Farid Saleh
In what ways have the recent economic reforms isolated Egypt from global market trends and volatility?
MOHAMED FARID SALEH: Egypt has performed well in comparison to other markets included in the MSCI indices. This is largely due to the economic reforms that have been implemented over the past few years, which have enabled businesses to operate in a more robust environment, and has also been boosted by the strengthening of the Egyptian pound. One challenge for the market has been increasing the level of liquidity, which is an important focus for all stakeholders. Expanding the breadth of the market is best viewed from a value chain perspective. At one end, the supply side needs to help investors to understand the risks and opportunities associated with businesses by attracting new companies, educating them and acquainting them with the listing regulations and the benefits of being listed.
Part of this effort has involved approaching companies to educate them about the benefits of listing rather than taking a laissez-faire approach driven simply by demand for capital. In addition to improving communication with investors and taking a more active approach towards companies that have the potential to list, it is important to ensure that the EGX has the necessary tools for investors and is able to compete alongside other similar markets.
How is technology affecting capital markets globally, and what impact has this had on Egypt?
SALEH: The role of technology in capital markets is one that is frequently discussed, particularly in relation to new developments such as blockchain and distributed ledger technologies. However, the impact of these advancements will be very limited because their application is related to setting and clearing, and would be best suited to high-frequency trading as they replace a central mechanism. The centralised mechanism that is currently used is very effective and remains more efficient for the time being. One area where technology is having a major impact on the market is increasing the availability of information on businesses and its ability to reach investors. Technology is also helping to reduce transaction and operation costs for listed companies and for the exchange itself.
For now, the role of technology in capital markets is being driven by institutional investors seeking to offer competitive services to their clients, but demand for digital trading tools is likely to rise as similar services in the banking sector become more widespread. The market will also benefit from economic formalisation and the transition to cashless payments, which will increase the availability of data and create more potential listings, particularly on the Nile Stock Exchange (Nilex) for small and medium-sized enterprises (SMEs).
What are the priorities for developing Nilex and increasing its level of activity?
SALEH: SME exchanges are often seen as a stepping stone towards listing on the main exchange, and for some companies this is a way to build their business. However, it is important to note that for many SMEs the secondary exchange can be an effective means to raise capital and improve corporate governance, even though they may not aspire to issue an initial public offering (IPO) on the main exchange. Only 2% of SMEs will end up listed on the primary exchange and the majority fail after a few years. Therefore, if the secondary exchange is designed solely as a stepping stone to the EGX it would exclude many businesses that can benefit from being listed. Given the importance of these small businesses to the growth of the economy, it is important to make Nilex accessible and beneficial to a wide array of SMEs, from those looking for an alternative means of raising capital to those that are eventually looking to issue an IPO on the EGX. In order to achieve this, it is important for Nilex to focus on education, and ensuring the right regulations and tax incentives are in place to make the market attractive.
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