Interview: Mohamed Farid Saleh
How have currency flotation and other economic reforms impacted the EGX?
MOHAMED FARID SALEH: The currency flotation and other reforms that were implemented in November 2016 represent a paradigm shift in economic policymaking and a turning point for the development of capital markets in Egypt. The moves have gradually restored confidence among the investment community, as the Egyptian currency reflects supply and demand forces. On the real economy it has served as a catalyst of growth for Egyptian companies that are export-oriented or have dollar-based revenues, as they benefit from the difference between the magnitude of the currency depreciation and the increase in inflation. For other businesses the currency flotation has induced price adjustments and prompted local companies to operate more efficiently.
The shift in the foreign exchange policy, measures to reduce the chronic fiscal deficit such as the introduction of a value-added tax, and the new investment law and its regulations to improve the business environment, have all had transformational changes on the real economy and the EGX. The immediate impact has been on the value of trading, which has almost tripled over the same period, with the average daily trading value amounting to LE1.2bn ($79.1m). This shows the dynamism of Egypt’s capital markets and the positive appetite from investors. The increased foreign activity in the Egyptian stock market is particularly interesting: during the 10 months prior to the flotation, net foreign purchases were at LE800m ($52.7m), but rose significantly after November 2016, reaching LE13bn ($856.4m) in October 2017. This shows that the capital markets have been a prime beneficiary of the economic reforms rolled out by authorities in recent months.
In the long run the Egyptian economy should keep benefitting from a properly priced currency and continue to gain competitiveness via investment reforms. This is particularly true for the manufacturing and services sectors, where we expect the depreciation of the Egyptian pound vis-à-vis the US dollar will stimulate development in import-substitution activities and the expansion of local export capabilities. We expect most large businesses will gradually factor in the price of the currency, move away from their fixed business model and increase their activity. This should translate into a higher number of listings on the EGX.
There are three main advantages of listing on the EGX: companies gain visibility among the general public and the investor community; they can diversify their sources of capital; and they can raise funds to pursue further progress and tap into growth opportunities. The EGX’s reforms include reducing the circuits breaker time from 30 minutes to 15 minutes, improving communication between listed companies and research firms, and establishing a special unit for reviewing financial disclosures by listed companies. Going forward, the EGX aims to improve the intra-day trading mechanism, and introduce short selling and derivatives. These factors will all contribute to the attractiveness of Egypt’s capital market to foreign and domestic investors.
What stands to be gained from the initial public offering (IPO) programme of public companies?
SALEH: The primary objective of the government’s IPO programme for state-owned enterprises is to expand their ownership base, enabling them to fund their expansions via the stock market and boost their growth over the medium to long term. By doing so, the government is looking to improve the efficiency of public companies, as well as allowing new investors to take part in development strategies. The second objective of the programme is to consolidate and reinvigorate the overall capital markets by floating stakes of sizeable companies to the exchange’s portfolio, thus attracting new investments. It is a way for the state to generate wealth and balance its budget, as part of the proceeds will be directed towards achieving the government’s broader national plans and reducing the fiscal deficit.
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