How the Egyptian stock exchange is navigating reform in the face of global volatility

With reforms steadily changing the nature of Egypt’s economy, capital markets are finding new footing in an increasingly competitive region. The long-term growth prospects for the Egyptian Exchange (EGX) are closely linked to macroeconomic performance, as a host of development projects and regulatory upgrades have helped to keep GDP growth rates up. In the near team, however, inflationary pressure – worsened by Russia’s late February invasion of Ukraine and its effects on fuel and food prices – will likely be reflected in volatility throughout 2022.

Both the authorities and investors are looking to the opportunities brought about by economic diversification. Players from a growing number of industries are listing on the exchange, and a government plan to privatise state companies is set to ensure a flow of initial public offerings (IPOs) over the coming years. However, in order to remain competitive, Egypt’s capital markets sector will need to position itself as a favourable option among a range of dynamic markets in the MENA region.

Background

Established at a time of rapid economic expansion in the 19th century, Egypt’s stock exchange is one of the oldest in the Arab world. Initially, market operations were split between the Ottoman Bank in Cairo and the Alexandria Futures Market. By the early 1940s the two had been combined into the Cairo and Alexandria Stock Exchange (CASE), which was known as being among the topfive stock markets in the world.

Socialist reforms implemented by President Gamal Abdel Nasser in the era following the Second World War included the nationalisation of key industries and companies, which tempered capital market activity in Egypt. However, the liberal market reforms implemented by Anwar Sadat, Nasser’s successor, in the 1980s helped to revitalise foreign investor interest. The implementation of Sadat’s open-door policy underlined the role of CASE as a regional bourse.

The growth trajectory continued under President Hosni Mubarak, who enacted the Capital Market Law No. 95 of 1992 to encourage market expansion and attract new companies to Egypt’s exchange. By the early 2000s CASE hosted more than 1000 companies. However, the large number of listed firms made the exchange difficult to regulate, opening up the market to irregular disclosure practices. The authorities responded by ushering in a new period of reform, which led to more hands-on regulation, stricter standards and a reduction in the number of listed firms. CASE was renamed the Egyptian Exchange in 2009 by presidential decree, and moved from its historic downtown Cairo location to the Smart Village IT Park west of the capital in 2016.

Regulatory Environment

Capital markets, like the country’s other non-banking financial services, are overseen by the Financial Regulatory Authority (FRA). Created in 2009 and initially called the Egyptian Financial Services Authority, the FRA has worked to overhaul the sector’s regulatory environment, and is focused on financial disclosure rules, transparency and corporate governance. The capital market’s sector continues to be primarily regulated by the Capital Market Law No. 95 of 1992. The regulatory framework saw significant changes in 2018 when the authorities outlined rules for the issuance of corporate and government sukuk (Islamic bonds), measures for setting up a commodities exchange and directives on trading futures contracts.

Cooperation between the regulator and the EGX has allowed for the introduction of new products. In 2018 the market saw its first real estate investment trust; short selling of shares was introduced in 2019; and the authorities were working to establish rules for derivatives trading before the end of 2022. Much of the regulator’s attention has been on reducing transaction costs and making the bourse more attractive for retail investors. In late 2019 the FRA opted to reduce fees on exchange activity: trading service fees were cut from 0.00625% to 0.005%; clearing and settlement fees fell from 0.0125% to 0.01%; and stock market commissions were reduced form 0.012% to 0.01%. In addition to the rate cuts, the EGX supported exchange-traded funds by eliminating minimum order requirements.

Besides facilitating market growth, governance improvements to ensure the stability of the market is a focus. In mid-2020 new FRA rules included banning individuals from occupying the position of CEO and chairman simultaneously, and established a one-year period for firms to align with the new rules.

Navigating the Pandemic

As was the case globally, the EGX had to adapt to the negative economic effects of the Covid-19 pandemic. In response to the crisis, in March 2020 the authorities implemented a set of emergency measures to counter the downturn in exchange activity, such as reducing the stamp tax on buying and selling listed securities from 0.15% to 0.125% for foreign investors, and from 0.15% to 0.05% for residents. Furthermore, the Central Bank of Egypt directed LE20bn ($1.3bn) to the stock exchange for support, while state-owned National Bank of Egypt and Banque Misr channelled LE3bn ($190.6m) into the bourse.

These efforts and others were aimed at maintaining asset prices and buoying investor confidence. Still, market capitalisation fell from LE708.3bn ($45bn) in 2019 to LE650.9bn ($41.4bn) in 2020. Over the same period, the EGX30 Index, which tracks the market’s 30 most-liquid shares, fell by 22.3% to 10,845 points. Driven by the global post-pandemic rebound and a host of IPOs, the exchange’s performance improved significantly in 2021. The EGX30 rose by 10.2%, market capitalisation climbed to LE765bn ($48.6bn) – the second-highest year on record after 2017 – and the traded value of listed stocks rose by 33% to an all-time high of LE368bn ($23.4bn).

Historic Events

While the pandemic and economic rebound took centre stage in the two years since early 2020, a perhaps more impactful trend has been building in the background: the growth of stock exchanges in the Gulf. “Daily trading value on the EGX is in the range of $60m to $68m,” Ahmed Hesham, associate director for equity and quantitative strategy at Beltone Financial, told OBG. “Saudi Arabia is trading around $2.3bn per day and Abu Dhabi roughly $465m per day.” Due to their size and dynamism, certain stock exchanges in the GCC attract regional and international investors relatively easily, providing competition for the EGX.

One of the reasons for Egypt’s smaller trading value in US dollar terms stems from the devaluation of the Egyptian pound in 2016 as the country implemented a reform programme led by the IMF. This also affected market capitalisation. “The EGX had market capitalisation of $46m-47m before the devaluation, and now we are at approximately 75% of that,” Hesham told OBG.

Moreover, the government devalued the currency in March 2022, this time by 16% against the US dollar, after billions of dollars in foreign investment were taken out of the country’s Treasury markets. Portfolio outflows as a result of international investors’ conservatism following Russia’s invasion of Ukraine were partly offset by passive investment in Egypt after its re-inclusion in the JP Morgan Emerging Market Bond Index in January 2022 after a decade.

The net outflows from the fixed-income market, coupled with the added budgetary pressure of high prices for wheat imports that also stemmed from the war in Ukraine, encouraged governments in the Gulf to pledge support for Egypt’s external position. In April 2022 Saudi Arabia announced $5bn in deposits in the Central Bank of Egypt and an additional $10bn in investment. Qatar, too, outlined $5bn in investment. Meanwhile, the UAE pledged to channel $2bn through its ADQ sovereign wealth fund to buy stakes in Egyptian state-owned and private companies. By mid-April ADQ had already spent $1.9bn on several companies on the EGX, securing stakes in Egypt’s Commercial International Bank; e-payments firm Fawry; chemical manufacturers Abu Qir Fertilizers and Chemical Industries, and Misr Fertilizers Production; as well as logistics operator Alexandria Container and Cargo Handling. That month Egypt was also negotiating an additional financial support package with the IMF. These moves are expected to shore up investor confidence.

In addition, the EGX maintains many strengths on which to base long-term development. Egypt is a diversified economy with a consumer market of more than 100m people. This is reflected in the fact that a wide variety of industries are represented on the exchange – something the authorities aim to highlight as a differentiating factor in the region.

Market Structure

In April 2022 the EGX had 226 listed stocks and market capitalisation of LE686.4bn, or $37.1bn at the newly devalued rate. This is below the market capitalisation of 2019 and late 2021, but above the figure for 2020 in local currency terms. Although 2022 started out positively, with the EGX30 surging past 12,000 points in January, inflationary pressure and logistical bottlenecks created by high consumer demand impacted many listed companies. Yet, it was Russia’s invasion of Ukraine that really took a toll on the market. The EGX30 fell by 6% quarter-on-quarter in the first three months of the year to 11,238 points, while the EGX70 and EGX100 indices fell by 13.2% and 11.1%, respectively. All sectoral indices had negative performances except those for basic resources, which rose by 10.2%, and non-bank financial services, which increased by 6%.

The exchange has become a showcase for Egypt’s increasingly diversified economy, but the market is highly influenced by the performance of a handful of sectors. Indeed, the top-five sectors represent nearly 70% of total market capitalisation. During the first quarter of 2022 bank stocks accounted for 24.3% of market capitalisation, followed by the basic resources sector at 14%, and IT, media and communications at 11.6%. Non-banking financial services and real estate accounted for 10% and 9.8% of capitalisation, respectively. Despite this, trading potential is distributed across a host of sectors, including shipping and transportation services, travel and leisure, textiles, health care, and food, beverages and tobacco. In 2019 a separate designation for stocks in education services firms was created.

Domestic investors drive the market in terms of transactions. In 2021, 49% of trading volume was conducted by Egyptian institutions and 24% by Egyptian individuals. One-quarter was accounted for by foreign institutions and 2% by foreign individuals.

The EGX created a secondary board to service small and medium-sized enterprises (SMEs) in 2010, called the Nile Stock Exchange (Nilex). The alternative bourse operates with the same basic trading rules as its larger counterpart, but firms benefit from less cumbersome listing and disclosure obligations, as well as lower fees. As of April 2022 there were 13 companies listed on the Nilex.

Bonds

The bourse is primarily an equities market, as trade remains concentrated in stocks. However, the authorities have been working to boost fixed-income trading. Bond market capitalisation on the exchange rose from LE707.3bn ($44.9bn) in 2017 to LE1.6trn ($101.7bn) in 2020. Growth over the past few years has been driven in part by an increase in investor appetite for Egyptian debt after the flotation of the pound in 2016, as well as the IMF agreement that led to a period of rising interest rates and improved financial stability in the country.

The government has continued to approach the global debt market for financing. Egypt issued its – and the region’s – first green bond in September 2020. With a five-year maturity, the bond was initially announced at $500m with 5.75% interest. However, the government decided to raise the value to $750m and cut the interest rate to 5.25% after its initial offer was oversubscribed by more than seven times. In February 2021 it sold $3.8bn worth of dollar-denominated eurobonds at a 40-year maturity as part of efforts to move government debt towards long-term issuances and cut the country’s debt-servicing costs, and this was followed by another $3bn in eurobonds in September of that year. In March 2022 Egypt became the first country in the Middle East to issue Samurai bonds. The $500m yen-denominated, five-year debt titles were seen as a way for the country to diversify its sources of financing, and carried an annual coupon rate of 0.85%.

In August 2021 the EGX launched an index that specifically measures the performance of Treasury bonds. The market capitalisation of Treasury bonds roes by 47% in 2021 to LE2.4trn ($152.5bn) and traded value was up 44% to LE544bn ($34.6bn).

Public Offerings

In an increasingly competitive region for capital markets, sector authorities view IPOs as a way to attract fresh inflows to the EGX. Efforts to attract new companies have included directly approaching business associations to encourage entries to list and reaching out to firms trading on an over-the-counter basis to educate them on the benefits of listing. In the short term the EGX’s dynamism will be predicated on a combination of private operators listing and the continued implementation of the government’s plan to privatise public companies through the exchange.

In the year prior to the start of the Covid-19 pandemic, the stock exchange saw four entries list. In March 2019 the government offered a 4.5% stake in state-owned tobacco firm Eastern Company as part of the much-anticipated state privatisation programme. The listing was oversubscribed and raised LE1.7bn ($108m). Speed Medical Company, which operates medical laboratories, listed on the Nilex in April 2019 before moving to the main board in December 2020. The company was the first to make the transition from the SME exchange.

Another company, Tenth of Ramadan for Pharmaceutical Industries and Diagnostic Reagents ( Rameda), listed on the EGX in December 2019 by selling 49% of its shares and raising $108.7m. However, the main attention grabber in 2019 was the August IPO of Fawry, which was 30-times oversubscribed. The firm offered the market 36% of its shares and raised LE1.6bn ($101.7m), underlining the rising appetite for financial technology IPOs in Egypt and the broader MENA region.

The onset of the pandemic in 2020 derailed the prospects for many IPOs that year. Still, before the health crisis rippled around the world, the EGX saw the listing of Emerald Real Estate Investments, which raised LE250m ($15.9m) in February. Expectedly, 2021 saw a recovery in IPO activity. In April of that year Taaleem, a higher education management company, listed on the stock exchange, raising LE2.1bn ($133.4m) by selling 49% of its shares. In October the government’s privatisation program got a renewed boost with the listing of eFinance, the company in charge of building the government’s financial infrastructure. The listing of 26.1% of the firm was done by Egypt’s two main banks – National Bank of Egypt and Bank Misr – selling shares and raising LE5.8bn ($368.5m). This made the listing the largest IPO in the EGX’s recent history.

Listing Forecast

At the opening of 2022 several IPOs were expected to hit the market during the year. However, while a healthy mix of private and public firms including Ghazl El Mahalla Sporting Club, Macro Group for Pharmaceuticals and Banque du Caire had expressed interest in listing, the economic effects of Russia’s invasion of Ukraine has likely discouraged at least part of the projected listings.

Meanwhile, the government has expressed interest in listing several military-owned companies on the stock exchange. The move was initially suggested by President Abdel Fattah El Sisi in October 2019. With Egypt’s armed forces having increased their participation in the economy in the past several years, it is anticipated that opening up military-linked companies to private capital would attract investor interest and build on government efforts to privatise state-owned entities. In January 2022 Mohamed Omran, the chairman of the FRA, told international media that several military-owned firms could list some of their shares on the stock exchange. However, at the time he did not give details about which companies were being considered, nor the timeline for their move to the bourse.

Outlook

The volatility that has agitated global markets in the first trimester of 2022 is likely to remain for the rest of the year. Despite this unfavourable economic environment and no clear timeline for the end to the war in Ukraine, Egypt’s stock exchange has sufficient strengthens to attract participation over the long term. Indeed, the country’s diversified economy is increasingly represented by the companies that list on the stock market.

Although moving at a slow pace, the government’s ongoing privatisation drive is set to add dynamism to the market through new IPOs – especially if firms with large military participation open up. Moreover, regional financial support for the Egyptian economy, coupled with the possibility of an additional deal with the IMF in 2022, should bring reassurance to the financial markets and further drive the return of domestic and international investors to the EGX.