After closing its doors for more than 35 working days, the Egyptian Exchange (EGX) was given the go ahead to resume trading on March 23. It had been widely speculated that the EGX would only start trading a day before being delisted from the MSCI for Emerging Markets.
During the first day of trading, the session was suspended less than a minute after it began. In fact, it only took 16 seconds for the index to plunge 10.2%. Trading resumed 30 minutes later with 46 stocks suspended due to “insufficient disclosure” by some of their shareholders and key figures. Following that, trading went somewhat smoother. Most of the market’s blue chips were either suspended or among those with no buyer demand following the initial 10% drop — the maximum drop allowed by the EGX per session. Surprisingly, Orascom Telecom, along with four other stocks, finished in the black — closing anywhere between 0.5% and 5% above their initial pricing. Overall, the EGX 30 sunk 8.9%, recovering slightly from its initial 16-second plunge.

When is the question?
The EGX had announced that it was closing its doors January 30 due to security issues following the protests that started January 25. Since former President Hosni Mubarak stepped down, three opening dates were set by the EGX during which the parties involved were told to prepare for trading. These included brokers, asset and portfolio management companies, banks’ custody departments, that act as the safeguard of the stocks, and Misr for Clearance, Settlement and Disclosure (MCSD).
However, all three dates were false alarms with the openings canceled less than 48 hours after being announced. While the prudence of delaying the opening is subject to debate, the decision is likely to have a negative impact on serious investors, especially foreign ones, in the short term. One of the attractions of the EGX for foreign investors, who make up an estimated 10% of trading, was the easy entry and exit from the market.
One of the reasons behind these delays was the continuing problem pertaining to credit services offered by brokerages. These are based on a mutual understanding between brokerages and clients that control specific trades in terms of volume and frequency, within a specified period of time — the credit is offered in exchange for extra commission for the brokerage. (These agreements are not written but are simply based on understanding.) The problem is that such agreements misrepresent the credit status of both the trading company and the client. This particular issue had been pending since before the January 25 Revolution, governing bodies had taken no action to resolve it.
Another challenge facing the bourse is the current conflict over who has the right to benefit from the Investment Anti-Risk Fund, which is a fund paid for by investors and trading companies in the form of a percentage taken from each trade. The idea is that this fund can be used by either investors or traders to compensate for losses incurred on the stock market due to force majeure (superior force), such as natural disasters or wars.
The ongoing debate is whether the revolution falls under the criteria to utilize the fund’s money, as the revolution was not specifically listed as one of the conditions. The second debate pertains to which party has more right to the money in the funds — investors or brokerages. The irony is that regardless of who ends up receiving the money, theoretically it should be used to pay off debt to brokerages and banks. The value of the Anti-Risk Fund is LE 850 million. However, according to the MCSD, the body in charge of managing the fund, only 20% of the money is available at the moment.
Many questioned whether the exchange should open for trading while these problems were still on the table. However, a glimmer of hope appeared following the formation of a committee to resolve the aforementioned issues and facilitate the market’s reopening.

It’s a coin toss
As expected, the EGX plunged as soon as it reopened. But these losses are likely to be temporary as many investors tend to adhere to the principle that “cash is king.” This is also due to selloffs by many foreign investors (both individuals and institutions) as a result of being ‘trapped’ in the market since January 30 and the inability to pull out their investments as easily as before.
On a macro level, projections are unclear as it has yet to be seen how business tycoons, who are generally movers and shakers on the market, will be impacted by the political changes taking place in the country. Moreover, the economic situation has become more fragile due to protests and labor strikes demanding rights. Essam El Naggar, advisor to Sweden’s economic and investment minister, told Egyptian newspapers on March 15 that if the current situation continues, Egypt is likely to announce its bankruptcy in three months.
International reports didn’t stray too far from this projection. However, they were more optimistic when analyzing the upcoming period, highlighting that investor confidence in the economic recovery and stability is expected to be restored gradually once the political environment stabilizes. This was reflected in reports issued by Blominvest Bank and HSBC. However, it’s worth mentioning that Standard & Poor’s sustained Egypt’s long-term credit rating at BB/B and short-term rating at BB+/B. It noted that Egypt’s “outlook on the long term is still negative due to the uncertainty.” Moody’s also reviewed Egypt’s rating, downgrading its sovereign bonds to ‘junk status,’ placing Egypt at Ba3 instead of Ba2.

Currency and inflation impacts
The Egyptian pound witnessed a dip during March as some people believed it was safer to exchange money into US dollars. This made the Central Bank of Egypt (CBE) intervene, pumping more US dollars into the market to stabilize the foreign exchange rate. (As of press time, $1 equaled LE 5.95.) The CBE is expecting another hike in the exchange rate until the economy and production start returning to normal.
The CBE had about $36 billion (LE 214.2 billion) in foreign reserves. After the recent intervention, this reserve depreciated to $33 billion. However, this should not cause panic. As economic life gets back to business as usual, it is expected to once again improve the investment climate gradually, encouraging foreign direct investment to flow back into Egypt.

Banking and financial services
It is expected that investment-banking services and the insurance sector will be among the hardest hit. This is likely because the former was nearly deprived from its main revenue stream when trading was suspended on the EGX. The latter is expected to pay reparations to clients affected by the absence of security in the country since January 28.
Banks are likely to witness a severe blow in lending portfolios as many of their larger clients are likely to be unable to meet their scheduled loan payments due to the paralysis of the economy over the past few weeks. Adding to their woes are people who lost their jobs and have outstanding payments on their credit cards and mortgage, personal or car loans. This will likely increase the percentage of non-performing loans and negatively impact the position of banking stocks in the short term.
These issues are considered cornerstones when it comes to determining the prices of the shares of listed banks and insurance companies. However, it is expected that the financial statements for the fiscal year of 2010 released throughout the month will offer some support for the performance of the sector on the trading floor. But it is unlikely that this effect will last beyond mid-April, when the earnings statements for the period ending March 31 are released.

Telecoms and technology
Telecoms and technology companies were negatively impacted, largely due to the suspension of services on January 28. However, when telecommunication and internet services were reinstated, usage surged as people unable to visit friends and families during the chaos placed more calls and depended more heavily on the internet to access information. There was also a marked increase in the use of land lines, which resulted in increased revenues.
It is worth noting that all three mobile operators and internet service providers are currently seeking compensation for lost revenue from the government since they were obligated to comply with the communications blackout, resulting in several cases filed against them by users also demanding compensation. Some suppliers are suing both telephone operators and internet providers for losses they incurred due to the communications blackout.

Real estate and construction materials
Real estate was also one of the sectors that was hit hard following the revolution due to the implication of several key sector players in criminal investigations stemming from ties to the previous regime. Corruption allegations are likely to impact the performance of several companies including Ezz Steel, Palm Hills Developments and SODIC, to name a few, resulting in a loss in sales and an increase in cancellations. Many buyers who were shopping around for units — commercial or residential — are likely to stop looking due to concerns about job security and political and economic stability. There are also concerns over whether banks will continue to offer credit services similar to those offered prior to the revolution or instead adopt a more cautious approach. These factors are likely to produce a wait-and-see attitude when it comes to the real estate market.
On the other hand, the construction materials industry was not as badly hurt by the revolution — many people took advantage of the absence of the de facto government to complete illegal construction activities mostly over agricultural land, which is prohibited by law. However, in light of the absence of authorities, such activities went unchecked. It is worth noting that the biggest corruption investigation currently taking place is against Ahmed Ezz, owner of Ezz Steel. He is also under investigation as the former Secretary for the National Democratic Party. bt