FX shortage threatens region’s oldest bourse
After a second revolution in two-and-a-half years, Egypt’s new interim government has other things to worry about than falling out of an MSCI index. But the possibility of Egypt’s bourse falling from emerging markets to frontier status in the MSCI index might exacerbate the challenges. And the foreign-currency liquidity problems that have led to this possibility are symptomatic of broader challenges facing the country.
In June, in its annual market classification review, MSCI said it was "closely monitoring the situation in Egypt, in particular the negative developments in the foreign exchange market." It said it "may be forced to" launch a public consultation on excluding Egypt from the MSCI Emerging Market index, because this shortage of foreign currency makes it difficult for foreign investors to repatriate funds.
"Repatriation can range from a few days even to months, and that’s deterring a lot of foreigners from buying into the market," says Wael Ziada, head of research at EFG Hermes in Cairo. He adds that the foreign exchange dynamics themselves, with the Egyptian currency in continuing decline through 2013, and the fear of the stock market shutting down as it did after the January 25 revolution in 2011, have impeded foreign participation in the market.
One thing Egypt has going for it is that it has the oldest and sometimes deepest bourse in the region. A further loss of liquidity in that exchange, and more flight of foreign capital, would add to the lack of foreign currency in Egypt to cover imports, and the increasing pressure on that import bill caused by the declining currency.
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A MSCI downgrade would not happen quickly. "It’s not easy to get into an MSCI index, and it’s extremely difficult to get out," says a treasury and securities services banker at a multinational in Dubai. "It takes a long time: even in Morocco it took three years for them to be removed when there was no market activity at all. But the Egypt situation is pretty tough, and it leaves fund managers in a very difficult situation." Some fund managers say that an exit from the index might lead to a one-off shock, but would have no big lasting implications, as they believe only a few hundred million dollars of the money in Egypt is passively tracking the index anyway. But the possibility of it happening doesn’t look good, nor does it encourage greater foreign participation.
A further problem is that the biggest company, Orascom Construction Industries, which accounted for 24.3% of the EGX 30 index at the start of this year, is moving its primary listing from Cairo to Amsterdam. Well before the MSCI remarks, brokers including Deutsche Bank were warning that the flight of listed companies might pull Egypt out of the emerging market index and worsen existing problems.
Still, since the MSCI announcement, Egypt has undergone a second revolution, and this one appears to have been positively received by stock markets. At the time of writing, Egyptian stocks were up 15% since late June, largely because the new interim government cabinet, sworn in on July 16, is considered to be economically liberal.
On top of that, some Gulf states have rushed to Egypt’s assistance, with $12 billion of pledges in a week, giving the market valuable breathing space. The money, $5 billion of it from Saudi Arabia, $4 billion from Kuwait and $3 billion from the UAE, will be made up of a mixture of grants, loans, central bank deposits and oil.
"We’ve been adding more to Egypt in the past month rather than taking money out," says David Mcilroy, chief investment officer and portfolio manager at Alquity Investment Management, which runs a pan-African equity fund. "The direction the Muslim Brotherhood was taking the country wasn’t entirely positive, and although strictly this is a step back in terms of democracy, from a pro-market point of view, it’s a short-term positive. The medium term remains to be seen, but there’s no rush to the exits from us."
Not everyone agrees: Renaissance Capital’s global chief economist, Charlie Robertson, says he expects Africa funds to stay out of Egypt for now, favouring South Africa and Morocco – ironically, given that Morocco has itself just been turfed out of the MSCI EM index.
But, as before, the direction of market sentiment – be it equities, foreign exchange or FDI – is likely to rest on a resumption of negotiations with the IMF over a $4.8 billion loan, which would likely trigger several billion dollars of other loans from elsewhere. There has been some concern that Egypt’s new government has not appeared to make the IMF facility a priority, perhaps because of the Gulf aid. The IMF loan is dependent on reform, in particular around subsidies.
As for Egypt’s stock exchange, it has a new chairman, Atef Yassin, who stepped into his role on July 1, and whose timing appears to have been rather good, as the jump in the market also coincided with a dramatic increase in trading volumes. The cynical view, though, is that the resilience of the market is partly a result of exactly the sort of problem that threatens the bourse in the first place: the difficulty of getting money out of Egypt even if you want to.
