Egypt’s capital markets show investor upsides

Financial support from Gulf allies, signs of economic recovery and a quieter atmosphere on the streets have helped Egypt’s capital markets make up some lost ground. The country’s key share index hit a three-year high in early November, with the market up 20% on just two months previously. The expectation of continued support from members of the Gulf Cooperation Council (GCC) is buoying investor confidence, to the benefit of Egyptian stocks and broader liquidity, although recent gains cannot disguise Egypt’s broader economic vulnerability.

The EGX30, the benchmark index of the Egyptian Exchange (EGX), reached its highest point since late 2011 in November, as investors responded to the boost to the economy’s stability from aid extended by Gulf countries, and more positive economic figures. The EGX30 topped 6410 points in mid-November – well above the low of less than 3590 in December 2011, but still down from the all-time high of 7210 points in January of that year, on the eve of the revolution.

Ratings upgrade gives market a boost

While a surge in October and early November was followed by a dip as some investors took profits, the market subsequently received a further boost due to a sovereign ratings upgrade by Standard & Poor’s (S&P). On November 15, S&P upgraded Egypt’s long-term foreign and local currency credit rating to B-/B from CCC+/C, with stable outlook, saying that Egypt now had enough foreign currency to meet its short-term fiscal and external financing requirements. This is largely thanks to the substantial help that the country has received since July.

Over the summer, Saudi Arabia, Kuwait and the UAE promised to extend $5bn, $4bn and $3bn, respectively, to Egypt in low-cost cash loans, oil and oil products – the $12bn total equivalent to 4.4% of Egypt’s GDP. According to S&P, three-quarters of the pledged resources have already been received and, since July, the UAE has offered further funding in the form of project development packages worth 1.1% of GDP. According to S&P, this is “an indication of the GCC’s willingness to financially support Egypt”.

Ratings from all three big agencies are lower than they were pre-revolution, but S&P’s move to upgrade the country should help strengthen shaky investor confidence. While the current interim government has grappled with street protests, its appointment of a selection of technocrats to economic briefs has won the support of investors. 

All this benefits the EGX, which has proved volatile since Mubarak’s departure. After a plunge in 2011, the EGX30 grew by 51% over that year and the broader EGX70 and EGX100 indices climbed by 15% and 24%, respectively. The fluctuations have affected the investor base, with a shift towards individual investors as opposed to institutions – a common characteristic of volatile markets. Futhermore, in keeping with Egypt’s ever-strengthening ties with the Middle East and North Africa region, Arab investment has broadly been growing, while investors from the non-Arab world have become more cautious.

Regulatory reforms

Over the past few years, the Egyptian Financial Supervisory Authority (EFSA), the stock market regulator, has imposed measures to control volatility, some of which have been eased more recently. The EFSA has also been implementing changes that should benefit the exchange long-term. In 2012 the EGX launched the FIX HUB, linking the exchange to 175 international markets via the Fidessa international network, boosting its visibility and accessibility to international markets. In September 2012 the regulator addressed the long-term problem of closing-price manipulation, introducing new regulations stipulating that the number of shares traded should not be less than 0.5% of the stock’s average daily turnover for the previous three months if its closing price is to be changed. EFSA has also been undertaking internal reform. If the market stabilises over the coming months, it should have further opportunities to focus on improving the regulatory framework, and increasing liquidity.

A recovery would benefit not only the EGX’s bigger stocks but also its small-cap subsidiary market, the Nile Stock Exchange (NILEX). Launched in 2010, the NILEX is a promising option for smaller Egyptian companies looking to raise capital without taking on debt. Egypt’s poor ratings make it harder for companies to borrow, particularly smaller players.

However, it is too early to forecast a recovery to pre-revolution levels for Egypt’s stock markets. The economy is still sluggish – the IMF forecasts 1.8% GDP growth for this year, and 2.8% next, low by the standards of the 2000s and most large emerging markets. Gulf largesse and additional external support help, but fiscal challenges, including expensive subsidies, will have to be addressed at some stage, and domestic sources of growth found and promoted.

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