The Egyptian Exchange (EGX) has been through a roller coaster ride of late, buffeted by political crises, economic slowdowns and government involvement. But a new deal intended to open the market to greater foreign investment, and possible regulatory changes, may be important steps in the bourse’s recovery.
The EGX could be connected with the Borsa Istanbul (BIST), Turkey’s stock exchange, by September, facilitating access to Egyptian capital markets by a broader range of international investors, EGX chairman Mohammed Omran told a press conference on April 29.
If formally linked, the partnership between the two bourses would allow investors on the EGX to trade on the BIST and vice versa, following a memorandum of understanding signed in June last year. It is intended to catalyse the growth of both exchanges; the EGX in particular is expected to benefit from knowledge transfer and the opening up of its market to Turkish investors, who are becoming more active internationally. The deal is also expected to raise the EGX’s profile in Europe and the Middle East, providing a welcome boost during a difficult period for the Egyptian economy.
“This step will ease the stock exchange by attracting Turkish investors, as well as those who trade on the Turkish exchange, and increase the value and volume [of trades] we currently have,” Sobhi Al Majed, an official at the foreign relations department at the Egyptian Financial Supervisory Authority (EFSA), told the local press.
The link is likely to present a technical and administrative challenge for both bourses, but is to an extent a step in an ongoing process of cooperation of EGX with global exchanges. The exchange already operates the Fidessa trading system used by more than 150 bourses around the world, as well as Fix Hub, which facilitates access to the EGX by foreign customers. The EFSA has confirmed that the legal basis for the shared platform is already in place, including measures to protect Egyptian companies.
The agreement with the Borsa Istanbul is also seen as signalling a further strengthening of economic relations between Turkey and Egypt. The second and final tranche of a $2bn Turkish loan to Egypt is expected to be released in the next few months. Under the loan arrangement, Turkish investors will have greater access to the Egyptian market.
The Borsa deal comes at a crucial time for the EGX, which has suffered significant fall-out from Egypt’s political crisis and economic slowdown. Daily traded volumes fell from around LE1bn ($143.2m) after the 2011 revolution to LE250m ($35.8m) in mid-May this year, according to international press reports. The exchange’s benchmark index dropped from 12,000 on the eve of the global financial crisis in 2008 to a low of 3500, although it rallied to 5000 last month.
The market has also been affected by government actions that have led to concerns that it might be wavering on its pledges of a pro-investment stance and a hands-off approach to the bourse. In February, the authorities moved to halt a takeover of Orascom Construction Industries (OCI), the biggest stock on the EGX, by Orascom’s Amsterdam-listed affiliate OCI NV. The following month, the government imposed a tax on investment gains earned by National Societe Generale Bank (NSGB) shareholders as a result of a takeover by Qatar National Bank.
No official explanation for the changes has been given and market sources have offered various suggestions, including the government’s need for funds and political score-settling. But after a flurry of concern, the authorities have taken steps to reassure the markets, with parliament scrapping the tax on NSGB gains. The EFSA has also reinstated same-session buying and selling of individual stocks, which will likely boost trading volumes and bring greater liquidity to the market.
While the follow-up moves will be particularly welcomed in the current economic climate, they are also seen as a sign of growing recognition that capital markets are playing an increasingly important part in Egypt’s investment offerings. Authorities will be hoping that the Borsa Istanbul deal takes investor confidence to the next level.
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