August 26, 2019

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  • Hint of stability boosts stocks

    Investors bought heavily into Egyptian stocks this week.


    Cairo: Egypt’s stock market has recouped last week’s losses and made some major gains over the past three days, rising around 12.6 percent since Sunday with many stocks reaching the allowed 10 percent increase.

    Tuesday saw a significant increase of 2.9 percent, with the benchmark EGX 30 index closing at 4,612 points. On Monday alone, the index soared 7.6 percent higher, its strongest single-day gain in nine years and, according to Reuters, the fourth sharpest rise in the index’s history.

    However, as Magda Kandil, executive director of the Egyptian Center for Economic Studies, said, this should not outshine the fact that Egypt is in “fire-fighting mode” when it comes to the economy.

    The “economy is at a low point. Foreign reserves have reached a critical level. The first order of business is to reach out to the international community, to secure concessional loans from international institutions,” she added.

    For it’s part, the International Monetary Fund issued a statement Monday which said, “Egypt faces significant immediate economic challenges, especially the need to restart growth and address the fiscal and external imbalances. …The IMF stands ready to support Egypt in dealing with these challenges and looks forward to working closely with the authorities.” Egypt and the IMF have been in talks over a $3.2 billion loan for the past year.

    On a positive note, a day after Mohamed Morsi was dubbed Egypt’s president-elect, investors bought heavily into Egyptian stocks with restored confidence, mainly reacting to the absence of expected violence after the election results.

    Days of tumultuous news had resulted in losses of more than LE 18 billion from the stock market’s overall market capitalization during last week’s four trading sessions.

    Reversing that trend, overall market capitalization reached LE 335.1 billion Tuesday, up from LE 303.0 billion on Thursday’s close.

    Prior to this, the index’s last peak was on May 24, at 4,982 points, right before the first round of presidential election results and the maddening runoff got underway. Since then, the downward slide has been consistent, and last week was especially bad.

    Since a court ruling effectively dissolved parliament on June 14, consequently putting the constituent assembly in flux, and after the army council issued a constitutional declaration giving itself sweeping powers, the delayed presidential election results hit investor confidence right where it hurts: uncertainty, with a negative outlook of possible all out chaos, fed by the ensuing rumor mill.

    Kandil credited the market’s sharp rise to “a big premium of political stability, which is understandable given the abysmal outlook [post-results] and the implication [and expectations] for division in the country and so forth.”

    As Osama Mourad, CEO of Arab Finance Brokerage, told Reuters, “The market is celebrating the lack of violence around this result … The market was afraid of clashes on the streets.”

    While celebrating the positive performance of the market, however, analysts and economists are quick to point out that this is by no means an indication of a broader recovery.

    The new president has a lot on his plate, the economy being a major chunk of the pressing concerns. For example, the Egyptian pound reached a fresh seven-year low of 6.0507 to the dollar on June 20. But unlike the stock market, it went even lower on Monday, dipping to 6.055.

    “We have a few hurdles to iron out, unless we do that quickly and efficiently, we could go back to a reverse situation where we see outflows dominant. We are already struggling with the implications of the [recent] downgrades of credit ratings,” said Kandil.

    As for the first sparks of political stability of the past days, the situation is still risky and volatile with an expected power struggle between the presidency and the army council, due to hand over power at the end of June.

    “Political stability, in this current environment, with a president who hardly got 52 percent of the vote — the country is divided and the downside risk is towards political instability,” Kandil added.

    Reiterating what investors and analysts have said in the 500 days since Hosni Mubarak’s ouster, Kandil said the key is putting together a proper government. Morsi is currently drawing up a new Cabinet after Kamal El-Ganzoury and his ministers resigned.

    “We need a stable government. The new leader and the parliamentary majority [the Muslim Brotherhood’s Freedom and Justice Party] when it was in place, reflected the right ideology as far as reforming the political landscape and preserving the pillars of a free market economy, encouraging private [sector] led growth, and reaching out to the people who were left behind,” Kandil said.

    However, she added, “I would be concerned about the implementation strategy … they need to unite the country to bring political stability.”

    Foreign reserves have dwindled to a critical level of $15.5 billion, barely three months of import cover, when they should be up to eight months.

    “If we do not rescue the economy and pull up international reserves, I think any plan on ideology and fantasy project will go out the window. The cost of securing recovery would be extremely difficult,” she said.

    Complicating matters further, “the risk of currency devaluation could make the road to recovery very difficult,” she added.

    Her suggestion is to quickly reach out to the international community and secure the loans and funding to shore up investor confidence.

    There’s also a pressing need for an “adjustment program because we have a situation with the fiscal budget where the deficit has soared. We need to trim the waste and provide a social umbrella to those who need support. Then we need to focus on infrastructure, education and health,” she said.

    On the longer term, Egypt’s leaders need a “proactive agenda to stimulate the private sector, namely small and medium enterprises.” –The Egypt Monocle

    Egypt's benchmark index has made major gains since the presidential election results.

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