Interview: Hussein Choucri
How is volatility in emerging markets impacting investment in Egypt’s capital markets?
HUSSEIN CHOUCRI: Tighter US monetary policy is at the heart of this volatility. Rising US interest rates after so many years of a loose monetary policy, reversal of quantitative easing and divestment of the US Federal Reserve balance sheet, combined with increasing interest rates affects emerging markets, their fixed-income securities and the attractiveness of their markets in general, because it puts pressure on their ability to service dollar-denominated debt. The pressure on their currencies means that countries that have large current account deficits and big foreign debt are especially vulnerable. Every time the US Federal Reserve makes a change in the rate we see an immediate reaction and sell-off in emerging markets. Egypt is no exception to this, as we are witnessing the impact through lower volumes after devaluation because of reduced flows from foreign investors. Nevertheless, foreign investors have the ability to make comparative analyses, which explains why they have reduced volumes, but continue to be net buyers. Egypt has fared better than other emerging markets despite this volatility because of the broad economic reforms the country has undertaken.
What steps need to be taken to increase the attractiveness of Egypt’s capital markets ?
CHOUCRI: Regulations and laws have not been the main limiting factor for the market in the past compared to the general market conditions and lack of liquidity. The government’s initial public offering (IPO) programme will have a positive impact here, as they will add depth to the market and increase diversity. More than increasing liquidity and diversity of the market, continuing along the current path of reforms will increase its attractiveness. Pursuing the implementation of institutional reforms beyond monetary reforms and monetary policy is how we take full advantage and increase the market’s attractiveness to foreign investors, while also spurring economic growth. The reforms that are taking place are going to support foreign direct investment and capital markets as well. It is always important for the government to be clear on policy, especially when it comes to tax policy and the repatriation of foreign dividends and principles, as there is a strong need for clarity and the ability to inform investors. With a new investment law and a floated currency, the crucial factor going forward will be how these policies are implemented.
To what extent are technological innovations impacting the development of capital markets?
CHOUCRI: Globally, we are seeing an impact from new technologies and these are changing the client relationship, particularly in developed markets. It used to be that the client-broker personal relationship was an important one. Now, this is not always the case; 90% of trading in Saudi Arabia, for instance, is done online. In Egypt there are of course some online clients and offerings, but it remains relatively limited.
To a certain extent mobile and online trading are opportunities for increased interaction with capital markets, as has been observed in the banking sector. However, the real issue is still the need for wider participation in the market as there hasn’t been a dramatic increase in the number of market participants in Egypt in the last 20 years. Only 30% of the country is banked, and the number of capital market customers has been stagnant for the last few years. The capital market in Egypt has been through a difficult time, starting with the financial crisis in mid-2008 and lasting until President Abdel Fattah El Sisi brought stability to the country. Since then, the capital market has been tightly linked to the economic developments in Egypt. The stock market overall benefitted from the depreciation of the pound, and volumes have been impacted both positively and negatively by the major decisions taken within the government’s economic reform programme.
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