Interview: Hussein Choucri
To what extent is there room to encourage greater investment from domestic institutions?
HUSSEIN CHOUCRI: This issue has been discussed for years and market participants would like to see a greater investment and more capital being devoted to the equity market, which is now relatively small. While most pension funds are invested in domestic fixed-income markets, we have not yet seen a major policy change on this front. Another issue is the extent to which the Egyptian Financial Supervisory Authority (EFSA) can affect capital flows and funds distribution; over the years the EFSA has introduced a number of changes to capital market law which have impacted mutual funds. We also hope that there will be an effort to make changes to real estate funds, which are currently subject to high taxes which limit their attractiveness. This idea was introduced in 2016 as an addition to the mutual funds structural changes, yet when it became clear that those funds did not enjoy tax advantages, no one came forward to set up real estate funds. We would like to see a tax exemption status that could potentially unlock a huge amount of capital coming to the Egyptian market. This way real estate will be seen as an asset class as it is in more developed countries.
What do you expect will be the main drivers of growth in terms of equity trading?
CHOUCRI: Overall, the outlook for the equity market is positive and we expect positive economic developments from the reform package. The floating of the Egyptian pound will make domestic products more attractive as the government and the market are both eager to attract foreign investment. The new investment law is likely to be passed in the first months of 2017, so in addition to the benefits of the reform package, we expect this to create a more investor-friendly environment by eliminating bureaucracy and red tape. Additionally, the stock markets are anticipating economic activity ahead of time; therefore, we expect the performance in equity markets to reflect positive sentiments, and we should continue to see big volumes on the market due to capital flows from abroad. This will lead to higher equity prices, which will be further stimulated by the improving importance of Egyptian companies. We also expect to see continued growth in the number of parties entering the equity market, following additional investments that are already coming in and strengthened by the government’s announcement to offer a number of public companies to the capital market. The regulations and laws necessary to attract investors and make initial public offerings easier have already been put in place by the EFSA.
Regarding the flotation, it remains too early to judge the extent to which it caused an upturn in foreign investments as these investments take time to materialise. Nevertheless, early reviews show that the devaluation is helping. Moving forward we would like to see the recent reforms become a main driver for economic growth internationally.
How will a possible capital gains tax impact the country’s capital markets?
CHOUCRI: We are not currently paying any capital gains taxes and proposals to change this have been postponed till the end of 2017. The government attempted to introduce a capital gains tax to the market, but collectively market participants made it clear that in the current environment it was not the time to introduce taxes of this kind. Furthermore, there are more lucrative sources of capital that the government should approach before taxing the market. These include increasing the percentage of tax payers in Egypt – which is low in comparison to other emerging markets – and bringing the grey economy into the tax structure. Some improvements have been made with the value-added tax and the additional attention on real estate taxes. Despite this, however, over 50% of the economy remains in the so-called parallel market.
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