By Mohamed Ahmed
The Egyptian Stock Exchange (EGX) is surrounded by several risks that threaten its ability to receive successful initial public offerings (IPOs) during this sensitive economic stage. This is on the local incidents level, and includes several difficult files, such as: the incompatibility between growth rates and unemployment indicators; the budget deficit; and worsening of debt. They are also related to international unrest, of which the most recent was the ignition of an international currency war, led by China.
In a survey on the market’s ability to receive IPOs in light of the risks they face, stock market experts tended to determine a risk package. Foremost of these is the inability of economic leaders in the government of Prime Minister Ibrahim Mehleb to settle effective economic policies to face the aggravation of the macroeconomic crises. Also on the list is the domestic debt, which exceeded the EGP 2tn barrier, in parallel with not controlling the budget deficit that is expected to exceed EGP 262.5bn through the fiscal year (FY)
Other risks include inadequate transparency on government policies while handling the crises, like the ambiguity of the Central Bank of Egypt’s (CBE) actions regarding the Euro price reduction. The CBE did not clearly announce the mechanisms for handling this issue, alongside an insufficiency in applying and implementing stock market regulations. The latest incident of this included not punishing brokerage firms that funded customers through credit in Emaar’s IPO, violating the law.
Further risks relate to how the government will, in the future, deal with the issue of capital gains taxation, and seizure of businessmen’s money. This explains the severe stock market fluctuation on the one hand, and on the other, the reduction in the trading value to less than EGP 500m and the exit of foreign institutions. That situation threatens any IPO with failure as a result of the lack of liquidity, and the investors’ lack of trust that they will make profits from the IPO. This is what happened with Emaar’s stock, which lost 13% of its value over the three sessions following its listing.
Poor effective policies addressing macroeconomic crises
“There is a package of factors posing a real risk to listing new companies on the EGX, most notably the absence of economic leadership that is able to settle clear policies to address the economic structural crises that face the country, like the budget deficit, worsening the debt, increasing the growth pace, lack of dollar, and the difficulty of importing goods. Perhaps that explains the exit of a large segment of the foreign institutions from the local market,” said Hisham Tawfik, Chairman at Arabia Online Brokerage.
Tawfik believes the vagueness surrounding government policies addressing the macroeconomic crises have the most effect on investors’ decisions. This is particularly regarding participation in company IPOs on the one hand, and on the other, the preference of companies to fund their projects through the EGX. The economic circumstances, in particular, will put pressure on the fair value of the stock that is in comparison to the local crises of the EGX.
In the first half (H1) of 2015, the CBE issued a regulatory decision for dollar deposits. It put the maximum limit for daily deposits of not more than $10,000 for individuals, and $50,000 monthly, which was an attempt to eliminate the black market.
These exceptional decisions contributed to limiting the dollar trading in the parallel market, temporarily. However, with the lack of dollars in banks, the merchants faced a severe crisis in funding the imports. This ran in parallel with restoring the black market, where the dollar recently touched the EGP 8 level.
“The mistrust of local companies and foreign investors in government policies stands as an obstacle in front of attracting new big companies to list their stocks on the EXG, in parallel with removing a number of big companies, like Mobinil, Orascom Construction Industries, BiscoMisr, and QNB Al-Ahly. Moreover, there is a crisis in the liquidity, increasing the challenges that face the local stock market,” Tawfik said.
Tawfik feels the first step towards controlling the stock market risks is choosing ministerial leaders with economic vision. They would then handle the macroeconomic crises, and settle an integrated vision regarding ways of using the stock market in funding the developing operations of government companies and establish projects. These steps are the main entrance for local obstacles the EGX is witnessing, such as low liquidity, or the severe fluctuation, especially in times of crisis.
In an attempt to increase reliance on the stock market to fund government projects, the EGX amended the implementing regulations. This would allow the funding of projects established through the IPO system. Minister of Investment Ashraf Salman announced the government’s intention to offer a number of oil companies. Topmost on the list are the Middle East Oil Refinery (MIDOR), the Egyptian Company for Refrigeration by Natural Gas (GAS COOL), and El-Neel Petroleum Company for marketing oil.
On the other hand, the Ministry of Transportation has, on several occasions since last year, announced its intention to rely on the EGX to fund the railway network’s development plans, and buying super speed trains. At the same time, the Ministry of Religious Endowments announced that it is ready to list some of its companies on the EGX. These include El-Mahmoudia General Contracting and Real Estate Investments, and Tanta for Textiles. However, the two files have yet to witness any serious steps.
Absence of transparency increases market fluctuations
There is another very important dimension in the risks the stock market is witnessing, and which reflect on the future of IPO attractiveness. This is the insufficient transparency, or deficiencies, in applying the stock market’s implementing regulations while dealing with the crises, according to Ayman Abo Hend, Investment Director in Cartel Capital for Direct Investment.
Abo Hend outlined that crisis, mentioning the case of Emaar Egypt’s listing on the EGX. He said that after the stocks made a record in IPO coverage rate, it registered a severe reduction amounting to 13% in the first three sessions, without a clear reason for that reduction. This made investors lose confidence in the attractiveness of any IPOs in the future.
According to Abo Hend, all parties, including the managements of the EGX and the Egyptian Financial Supervisory Authority (EFSA), have admitted that a number of the brokerage firms granted funds to the customers to participate in Emaar’s IPO, violated the law and the implementing regulations of the stock market. Nevertheless, the supervisory and regulatory bodies did not take any action to punish these companies, and only warned them against repeating the offence.
EGX Chairman Mohamed Omran said the EGX did not take any deterrent measures, saying that they do not want to add more problems to what the stock market is already facing in this period.
When Emaar’s fund for supporting stock price stability announced the commencement of buying 15% of the offered stocks, or 90,000 stocks, it received purchasing demands for more than 400,000 stocks. The allotment rate of repurchasing the stocks was approximately 18%, an indication of the extent to which the investors want to leave the stocks after their severe reduction.
DBK Pharmaceuticals recently delayed its IPO in the local stock market for three months, as a result of the unrest the market is experiencing and the threat to the IPO to fail.
“The absence of transparency was repeated also in the way the government dealt with the issue of seizing the money of businessman Safwan Thabet, Juhayna’s CEO, on accusations of funding terrorism, in addition to accusing Oriental Weavers of monopoly. The government did not reveal the details of the funding operations in the first case, or the complete data about the monopoly, supported by numbers and the merchants network that was used as a sample to prove the charge in the second case,” Abo Hend said.
He added that all these factors make covering the coming IPOs questionable. This has been compounded by the fears of foreign institutions in investing in companies that may face penalties or seizure of major shareholders’ money, despite major shareholders settling the company’s future plans.
The vague status has not been confined to these incidents only, but appeared in the issue of imposing taxes on the stock market. Although the government announced last May its decision to postpone imposing capital gains taxes for two years, it continued to deduct taxes from foreigner parties’ profits for three months, until the decision was activated last August, Abo Hend added.
According to Abo Hend, the foreign investors put their minds to re-imposing 10% taxes on the capital gains after two years. The regional markets, however, have taken to the trend of decreasing the taxes, like Kuwait and Saudi Arabia. The taxation issue is an important factor in shaping the features of competitiveness between the region’s markets.
In Abo Hend’s opinion, the most revealing evidence of a deficiency in transparency, is illustrated by the CBE not announcing solutions for the crisis of the Chinese currency price reduction that strongly shook the EGX. In the meantime, central banks worldwide announced their plans of taking measures to support the investors, in order to face the unrest status and the pattern of speculation that controlled the stock markets.
According to market data, the EGX has registered losses of approximately 18.7% in the first three weeks of August. The losses meant that the Egyptian market faced some of the most adverse conditions of the region’s markets, before the losses were controlled to register 13.5% by the end of the month.
In spite of the buying trend foreign investors followed in the first two weeks of August, registering net purchases of EGP 41.8m in the first week and EGP 47.5m in the second week, the international unrest the stock markets witnessed pushed them to intensify sales, registering net sales of EGP 227m in the third week.
Absence of parliament ignites fears
The political aspect is an important part of the risks that face investors, especially foreign institutions on the stock market, under delaying the parliament elections for more than a year. That means that there is no legislative authority supported by the power of constitution in issuing laws, in addition to activating its supervisory role on the performance of the executive authority, says Karim Khadr, Head of Research and Equities at CI Capital investment bank.
Khadr believes the reduction in oil prices, to $40 for Brent, negatively reflected on the amount of foreign liquidity flowing to the EGX, given that the investment strategies of the foreign funds deal with the region as a one market.
“T hese factors coincided with the lack of dollars and the emergence of the crisis of China’s slowing economic growth, followed by reduction in the Yuan’ price, in addition to Greece’s debt crisis, which decreased the liquidity in the local market, and consequently, will negatively affect the evaluations of the future IPOs, which threatens conducting them in the current period,” he said.