Despite the economic challenges facing the country, 2017 has been positive for the Egyptian Exchange (EGX), with the main index expanding by approximately 17% over the course of the year. This growth came on the back of a strong 2016, in which the EGX was one of the best-performing markets in the world in local currency terms. After the years of volatility which have accompanied Egypt’s difficult political and economic transition, the exchange entered 2018 in what investors hope is a return to sustained growth.
Main Market
The main market is a multi-location platform with floors in both Cairo and Alexandria, which operate on a standard primary (new issue) and secondary (trading) basis. Both locations share the same trading, clearing and settlement infrastructure, which have been operated by the private company Misr for Central Clearing Depository and Registry (MCDR) since the bourse moved from physical stocks in 1996.
As of January 31, 2018 there were 222 companies listed on the main market with a total market capitalisation of LE855.7bn ($56.4bn). The range of market sectors by which listed companies are divided reflects the broad base of the Egyptian economy. The top-performing sectors in the first month of 2018 included chemicals, which grew by 19.48%; followed by travel and leisure, up 9.42%; industrial good and services (7.76%); personal and household products (16%); food and beverage (4.93%); and the banking sector (2.36%).
The main board of the EGX is home to domestic giants as well as regional and international players. Among these are firms with multinational footprints that have assisted the EGX in attracting global capital. The most actively traded stocks in terms of volume in the first month of 2018 were Porto Group with 910.5m shares, Orascom Telecom Media and Technology Holding (703.9m), Amer Group Holding (519.8m), Citadel Capital (481.2m), Egyptian for Tourism Resorts (401.9m) and Palm Hills Development Company (222.2m).
The Nilex
While the EGX’s main board continues to account for the vast majority of market activity by trading value, since 2010 investors have had the option to direct their capital to a range of small and mid-cap firms that are listed on a separate board, the Nile Stock Exchange (Nilex). Like other secondary markets in the region, this sub-market shares the same basic trading rules and principles as the main market, but attempts to attract businesses to its board through less onerous listing requirements that are better suited to the profiles of small and medium-sized enterprises (SMEs).
The Nilex remains at an early stage of development, with 32 listed companies and a total market capitalisation of LE1.18bn ($77.7m) as of January 31, 2018. However, the exchange authorities are promoting the Nilex, organising joint activities with professional associations such as local Rotary Clubs and the Egyptian Businesswomen’s Association in an effort to encourage growing companies to consider it as a means to raise capital. Promotional campaigns have also targeted geographic areas, such as industrial zones in Upper Egypt.
Debt Issuance
As is the case with most markets in the MENA region, the EGX is primarily an equities platform, with trading in stocks accounting for 79.56% of market activity in January 2018 and bonds capturing the remaining 20.44%. However, recent years have seen growing interest in debt instruments. In 2015 bond trades hit their highest level in the history of the EGX, reaching LE89bn ($5.9bn), remaining at the relatively elevated level of LE79bn ($5.2bn) in 2016.
Debt issuance remains dominated by government activity, with the traded value of government bonds exceeding LE77bn ($5.1bn) in 2016, compared to just LE2bn ($131.8m) for corporate issuances.
Combining to make Egyptian debt more attractive to foreign investors in 2017 were the support of the IMF for the government’s economic policies, a currency devaluation in November 2016 and the accompanying 300 basis point (bps) rise in interest rates. The government started the year with a successful $4bn eurobond issuance, raising double its target at lower yields than initially anticipated (see analysis). The enthusiasm for sovereign bond issuances has meant that raising debt has become a cost-efficient means for the government to meet its spending obligations. By May 2017 the yield on Egyptian eurobonds due in 2025 fell by 133 bps to 6% – its lowest level in almost two years. Egypt could also be set for a credit rating upgrade in 2018, with international ratings agency Standard and Poor’s revising its outlook in November 2017 from stable to positive.
Foreign investor appetite for Egyptian Treasury bills (T-bills), meanwhile, reached record levels in 2017. The devaluation of the currency and some of the world’s highest yields brought around $18bn of T-bill purchases by October 2017, as portfolio investment flooded into the system. The average yield on Egyptian Treasuries climbed as high as 22% immediately after the flotation, but investors were also incentivised by the government’s investment-friendly approach in its ongoing process of economic reform, as well robust GDP growth forecasts of 3.5% for 2017 and 4.5% in 2018, according to the IMF. Foreign investors now own more than 30% of Egypt’s T-bill stock, a record high. However, with portfolio investors reaching their exposure limits and an elevated inflation rate making it difficult for the government to borrow, the rush for Egypt’s local-currency debt by foreign investors is likely to slow.
Performance
The EGX was the world’s best-performing market in 2016, according to the bourse’s year-end report. The market’s primary index is the EGX30, which ended the year at a record-high 12,300, an expansion of almost 102% in local-currency terms. Market capitalisation, meanwhile, increased by LE179bn ($11.8bn) to LE598.35bn ($39.4bn), reaching its highest level for eight years. The EGX displayed an encouraging upward trend across other indicators, with the value of equity transactions up by around 55% year-on-year (y-o-y) to reach LE190bn ($12.5bn), and the volume of traded securities rising from LE45bn ($3bn) in 2015 to LE69bn ($4.5bn) in 2016. The last quarter of the year saw a 140% gain in transaction values over the same period in 2015 to reach nearly LE80bn ($5.3bn) – the highest quarterly value registered since 2009.
As a capital-raising platform the exchange has become a more appealing prospect in recent years. A total of eight new companies were registered on the market in 2016, a 3% rise in market listings which is broadly in line with the annual growth targeted by the bourse. A further 46 companies opted to raise their capital through the market that year, increasing a total of LE5bn ($329.4m), bringing total capital increases over the previous three years to LE28bn ($1.8bn).
The year 2017 saw continued growth, with market capitalisation rising by about LE226bn ($14.9bn) to reach LE824.91bn ($54.3bn), representing another record high, according to the EGX’s 2017 annual report. Global players contributed a large part to the trend with nearly 1150 foreign investment funds and institutions entering the market in 2017, up from 900 the previous year. The momentum of the EGX’s principal index was also maintained. By the end of the year, the EGX30 had climbed 21.66% to reach more than 15,019 points.
The Nilex, meanwhile, saw a 40% increase in the value of transactions in 2016, which rose to nearly LE900m ($59.3m), and the listing of three new companies. However, in 2017 the Nilex index fell 24.7%, closing 2017 at 532.06 points, compared to 663.39 at the end of 2016.
Regulation
The EGX authorities and the regulator are both making efforts to capitalise on market expansion. Founded in 2009, the Egyptian Financial Supervisory Authority (EFSA) is the sole regulator of the non-banking financial services sector. Since its inception, the EFSA has overseen a process of market reform focused on key issues such as corporate governance, disclosure and transparency. In 2016 a number of changes were made aimed at keeping pace with global best practices, including the establishment of new rules governing the reciprocal ownership of shares of sister companies and the formation of corporate audit committees. In 2017 the EFSA was rebranded as the Financial Regulatory Authority (FRA), but its strategic priorities remained unchanged. The EGX authorities are also proactive participants in this reform process.
In March 2017 market integrity was further strengthened when the EGX board granted new powers to the chairman, enabling the him or her to suspend brokers suspected of market manipulation for a period of up to one month. Another EGX decision made the provision of subscription rights – by which shareholders in a company can retain an equal percentage ownership over time by subscribing to new stock issuances – mandatory for companies seeking to raise capital, while a new amendment which will allow for the trading of subscription rights is in the planning stage.
Other recent regulatory changes include new rules governing the issuance of depository receipts and amendments to the Online Disclosure System, which lets listed companies disseminate their required disclosures electronically, thereby allowing disclosure information to be easily integrated in real time into the various systems used by the market. Around 70% of listed companies are now using the Online Disclosure System, which EGX officials have been promoting through workshops and training sessions.
A new investment law easing bureaucratic restraints, coupled with the decision to devalue the pound, is also set to have an impact on foreign investment flows into the country. “There is increased interest from the global business community due to the recent enactment of the investment law and the currency flotation, paving the way for Egypt to raise its profile as a manufacturing hub within the region,” Khaled Mahmoud, chairman of MM Group for Industry and International Trade, told OBG.
STRATEGY: In August 2017 the EGX welcomed its new chairman, Mohamed Farid Saleh, who had previously served as vice-chairman of the exchange from 2010 to 2011. Speaking to the local press shortly after his appointment, Saleh outlined the strategic priorities aimed to improve the exchange’s overall performance and boost liquidity levels over the short- to medium-term. This process will involve a deepening of the exchange through a new options market and the introduction of short selling and new trading instruments, including sukuk (Islamic bonds). Some of these innovations, such as sukuk, will depend on approval from the Egyptian House of Representatives, which will also be asked to grant the EGX permission to set lower listing fees in a bid to attract smaller companies to the market. In November 2017 the EGX announced that it had completed the technical tests of its short selling platform. The structural reforms will be highlighted in a series of roadshows made in cooperation with the Ministry of Investment and International Cooperation (MIIC), involving select cities in the Gulf, Europe and the US.
Commodities Exchange
The Egyptian market may also see an important new component in the near term, as a result of the September 2017 decision by the Cabinet which gave approval to build the Middle East’s first commodities exchange. The project has been in development stages for some time. News of the Egyptian Commodities Exchange (EGYCOMEX) first emerged in late 2014, when the government announced that it intended to turn Egypt into a global trading centre by processing and re-exporting up to 65m tonnes of wheat, soybeans, sugar and other commodities via a soon-to-be-built Mediterranean port. In November 2015 a memorandum of understanding was signed between the Ministry of Supply and Internal Trade and Jordan-based Sigma Investment to develop the project. According to a feasibility study concluded in January 2016, EGYCOMEX will handle spot and futures transactions in a range of agricultural commodities before including precious metals and energy commodities.
Going Public
Deepening the market with new listings also remains a priority for the EGX. New initial public offerings (IPOs) worth LE3.2bn ($210.8m) came to the market in 2016, bringing the 30-month total (from mid-2014) close to LE9bn ($592.9m) – around 40% more than the total IPO value for the five years after 2008. The year 2017 witnessed a modest number of IPOs with three transactions taking place, namely Raya Contact Center at LE808m ($53.2m), MM Group for Industry and International Trade (LE708m, $46.6m), and Dice Sport & Casual Wear (LE747m, $49.2m).
In October 2017 the FRA announced that it was amending its listing regulations to require that companies be given a period of no more than one month to complete the offering and trading process on the EGX. For its part, the FRA has pledged to process listing requests within 15 days of receiving the application and necessary documents. The regulator will also play closer attention to the performance of shares post-IPO in comparison to the financial evaluation established during the application period and the future expectations stated by the company. It is expected that the combined effects of the new IPO process will establish a more streamlined and transparent system.
Privatisation
In the second half of 2017 the EGX reported that negotiations were ongoing with the MIIC regarding the flotation of a number of state companies, a development which is likely to result in large offerings over the coming years. As part of its drive to introduce new efficiencies to public sector institutions, various ministries have been tasked with preparing selected state assets for partial privatisation. The IPO strategy was outlined in a plan of action submitted to the government in 2016 by Dalia Khurshid, the former minister of investment and international cooperation, and calls for the listing of several state-owned companies and banks on the EGX. Through this process the government hopes to net between $5bn and $10bn over the next three years, while investors will have the opportunity to direct their capital into companies operating across a range of sectors, including petroleum, real estate, chemicals, shipping and services. The process involves the flotation of some of Egypt’s most prominent businesses – starting with the petroleum services engineering firm Enppi. The programme will be overseen by NI Capital, a wholly owned subsidiary of National Investment Bank, founded in 2015. The authorities have been keen to point out that steps have been taken to safeguard the national interest by ensuring, for example, that the state retains a controlling stake in the companies floated under the scheme (see analysis).
Outlook
The EGX is an important component of the Egyptian economy, and, thanks to an ongoing process of market development, is likely to continue to act as a useful platform for both corporates and SMEs wishing to raise capital. The ability of the EGX to attract new listings and investors is linked to the wider question of Egypt’s macroeconomic performance. Perhaps more important for long-term sustainability, however, is the ongoing process of reform being undertaken by the FRA. Short selling, in particular, is a key exchange capacity which, if introduced as planned, will keep the EGX in line with other emerging markets. A new commodities exchange also represents a key potential structural advance, although a number of important questions regarding its implementation remain to be answered.
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