How Egypt’s Stock Exchange Stepped Back From the Brink

CFA Magazine, September 2015

There was a time, for about 20 years until 1930, when Egypt boasted the third-largest stock market in the world. Founded in Alexandria in 1883 and Cairo in 1903, Egypt’s stock markets were for many years the only ones that mattered in the region: historic, liquid and professional, an enviable place to list and invest.

Those days are long gone. Today, more headlines are made by companies delisting than joining, and the two-month suspension of trading after the 2011 revolution seemed symptomatic of an exchange that was losing its biggest names and had less and less to offer the investor. The last four years of political upheaval have not created an environment in which many wish to participate.

But there are reasons for optimism, too. A new and younger generation are trying to put the country’s capital markets back on their feet and make them an engine for growth, and listings are finally starting to come back again. Their efforts to keep their market open and credible in difficult and volatile circumstances give hope for the future. “In Egypt, we always have good history,” says Ahmed Abou El-Saad, chairman of Rasmala Egypt Asset Management, and president of the CFA Egypt Society. “We try to build on it, but unfortunately we are not successful every time.”

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The Egyptian Exchange’s modern history starts from 1992, when a new capital market law was issued after thirty years of dormancy under central planning and socialist policies. In the following years many IPOs took place every year. By 2000, the exchange was liquid and vibrant, with a lively and diversified mutual fund industry developing around it, and with very few major competitors in the region bar Kuwait: Dubai’s market wasn’t launched until 2000, and Qatar’s until 1997.

“Of all the Arab stock markets, it was the one that was best known, most open and most transparent,” says Angus Blair, founder of the Signet Institute in Cairo, who earlier in his career led the team which brought Egypt’s first Global Depositary Receipt to the London Stock Exchange. “It had a number of good investable stocks, and that made it attractive. It led the way for a long time.”

After the flotation of the Egyptian pound in 2003, the market rose relentlessly for five years before being hit by a domestic crisis in 2008, followed by the global financial crisis. Afterwards, it rebounded again. And then came the revolution, and one of the most testing experiences in the exchange’s history.

“The revolution took us all by surprise,” recalls El-Saad. “It wasn’t planned. It just happened.” Egyptians revolted after seeing Tunisians do so, and the situation escalated very quickly, coming to a head on January 25 and lasting until President Hosni Mubarak’s decision to resign on February 11.

“The market was already waiting for a correction, and this trigger turned profit-taking into a bomb that exploded,” El-Saad remembers. “After January 25, there were two black days of trading, seeing eight, nine per cent sell-offs.” By Friday 28^th, the situation had worsened. “By then security had completely lost control of the country. On the early morning of the 28^th we found that all of a sudden everything had stopped working. There were no mobile networks, no communication: nobody knew what was going on. And after having seen policeman everywhere, by 5pm you could no longer find a single soldier on the street.”

The situation was so lawless that the stock exchange was the last thing on anybody’s mind. “People were not looking for how to resume their business. It turned to something more important: how to protect your family and your house,” El_Saad says. “I remember that day I was riding my bike and went close to Tahrir Square,” the centre of the protests, “but I had to go back. All of a sudden the country had collapsed.”

Most people stayed at home for the next few days, and naturally the exchange stayed closed too, with nobody around to operate it. By the following Tuesday, after an apparently conciliatory speech from Mubarak, there was a sense of stability returning, “so we went to our offices on the Wednesday morning. But the exchange was still closed. There was no trading. Everything was on hold.”

Gradually banks began to resume work, opening for an hour or two a day to serve basic individual needs, but not the exchange. “The next week, the exchange was not able to operate again. We were getting extremely nervous. We didn’t know what to do.”

By the following Saturday, El Saad – who in addition to his other roles is secretary general of the Egyptian Investment Management Association – held a meeting with Ministry of Investment, attended by exchange executives and the regulator. But nothing was resolved. “It was clear nobody knew how to do deal with it.”

More time passed. “It extended for another week, and another week. We realised that nobody would be able to operate. Nobody has the courage or the guts. Everything comes back to zero.”

All told, the exchange was closed for two months, until the last week of March. By now, El Saad and other relatively young members of the financial services industry such as Hussein El Sawalhy, the managing director of Jazira Securities Brokerage, realised that they were going to need to act. “We saw that this [older] generation were not capable of doing anything. We thought we could have a good role to play here. Nobody would do anything unless we pushed for it.”

So he and El Sawalhy sent an open invitation to all marketplace participants, from brokers to fund managers to listed companies to regulators. “Let’s meet somewhere, everyone pay for their coffee and tea, and let’s just talk.” A Facebook page was set up, attracting a thousand active members in less than a week – yet another example of social media proving instrumental in an Arab Spring event. About 80 of them met, talking, opening communication channels, and then clearing out in time for the curfew that still applied at night. They talked through the challenges ahead in clearing, in repatriation, in margin, in listed company disclosure. And they set about putting the pieces together for the market to re-open.

Their strategy was to come back with a bang. “We wanted the opening of the exchange to be as big as the closure of the exchange,” El Saad says. “We don’t care if it goes down by 5% or 10% or 50%, we just want the system to operate. We will celebrate the opening whatever happens.”

They organized a big investor conference one day before the resumption of trading, bringing together 10 of the largest listed companies on the exchange along with institutional investors. At the end of it, they announced that trading would resume the next day. They sought publicity: El Saad went on the most popular TV show on state television. They got key figures, from politicians to economists to celebrities, to ring the market bell.

Naturally, at first the market plunged, but that wasn’t the point: at least it was open, and trading. It took until about the fourth quarter of 2011 before things really stabilised and a clear bottom was found. At the same time, investors were pulling out of treasuries as well. “The central bank said: if people want to go out, let them go out.” This consumed much of the country’s foreign exchange reserves – in fact, to a large extent the country was saved by the dollar remittances coming in from overseas Egyptians – but the country survived.

The time since has not been much smoother. 2013 brought another revolution and another change of President. In May 2013 the MSCI put out a statement saying it would start a process of consultation on removing Egypt from its Emerging Markets index, which would have hit liquidity still further. So El Saad and El Sawalhy again took on the challenge head on, launching an initiative called “Save the Egyptian Capital Market”, and bringing together the CFA Society Egypt with eight other associations to speak together. “We tried to institutionalize it, to give it power.” They tried to explain how dangerous and damaging a removal from the index would be. One outcome of the initiative was the formation of an advisory committee to represent different market players and professionals, upon which El Saad serves. Mercifully, a further trading suspension was avoided – “if trading had been suspended you would never have been able to trade again” – and the market began to expand and perform again.

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So where does the Egyptian market stand today? Open, yes, but there is much work to do to revive it to its former standards.

“The problem now is the delistings we’ve had,” says Blair. The Egyptian arm of Vodafone has delisted, as has Mobinil, an arm of France Telecom; worst of all, Egypt’s biggest publicly traded company, Orascom Construction, delisted in 2013 following a buyout from Orascom’s Amsterdam-based parent OCI. The company had represented 25% of the index.

“That means the large investible stock availability has diminished markedly, and therefore it’s become a much less liquid market than before and a lot less attractive,” says Blair. “Investors can’t access companies that are going to grow on a global standard, only domestic companies.”

It’s true that there have been IPOs again, with mixed success. The most significant was the listing of Arabian Cement, which was the first major listing on Cairo’s stock exchange after the revolutions when it listed in May 2014. It raised $110 million and was 18.5 times oversubscribed.

This appeared to represent the return of investor appetite, and the pipeline to follow it was full. Orascom Hotels & Development, the spin-off of an 11% stake in Orascom Construction in a modest return to the market by that company, Edita Food Industries and Emaar Misr – a unit of Dubai’s Emaar Holdings real estate group – have all followed to market.

But a closer look at some of those deals reveals that they are not all great successes for the Egyptian market. The most recent, Emaar Misr, was trading below its launch price at the time of writing, and a large part of the Edita capital raising was a GDR issue in London, which doesn’t really demonstrate appetite or liquidity in Egypt itself. Meanwhile, departures continue: in May, Bisco Misr said it would delist, at the request of its controlling shareholder, Kellogg.

“The question is,” says Blair, “is the Egyptian market going to become increasingly attractive? If there was economic and political stability and there were things in the market that offered hope that things would change markedly, there would be greater interest. But I don’t think that will happen. Right now, if you’re a fund in the region and you don’t mind second tier companies in terms of liquidity than it’s all right, but global funds, who need a minimum trade in each stock a day, are largely out of the market in Egypt for almost all of the stocks.”

One problem is that those companies that have listed mainly have a very small free float, hampering liquidity. An exception is the bank CIB, with a free float around 90%, which is enormously important to the market and the benchmark. But its CEO, Hisham Ezz Al-Arab, wants to see more do the same. “That’s the problem for us. I don’t like to be the single stock,” he says. “I would love to see the government listing companies rather than privatizing.

“At least take banks and list them so there is not just one bank listed on the stock exchange with a big free float,” he says. “Make it like the old days, when there used to be Egyptian American Bank, CIB, Suez Canal Bank. Those that are listed need to increase their free float. Their core investors have to let go. Don’t throw the entire burden on CIB.”

A stronger economy would help the stock market, and many think one is on its way. In April Moody’s upgraded Egypt from Caa1 to B3, its first upward movement after six notches of downward movement in the previous three years. “Key divers for the rating decision were the improved macroeconomic performance, reduced external vulnerabilities, and ongoing commitment to fiscal and economic reform,” says Steffen Dyck, lead analyst for Egypt’s sovereign ratings. Dyck says fiscal sustainability “remains a key concern”, but he notes Egypt has relatively low levels of external debt and has benefited from support from Gulf Cooperation Council member countries who pledged a total of $12.5 billion in official aid and investments. “Together with approximately $38 billion in reported signed investment deals, the large amount of financial support will help to mitigate external vulnerabilities and reduce balance of payments risks,” Dyck says.

Behind the numbers, there are more subtle reasons for optimism too. Bankers in particular speak of Egypt’s demographics as a plus, with a population approaching 90 million of whom 60% are below the age of 30 (though the rising population, increasing by about two million people a year at the moment, also presents challenges). A considerable increase in salaries came out of the protest movement, which has elevated many of these people to becoming consumers for the first time. “When you give people cash, they will go and spend,” says El Saad. Throughout the turmoil, his funds have done well through focusing on consumer, construction and building material stocks, a play on this theme.

On top of that, Egypt has a considerable grey market – Al Arab at CIB estimates it may be bigger than the recognised real one, though those numbers don’t appear in GDP or any other economic indicators. “The grey economy is the reason the country didn’t stop,” says El Saad. “It’s why we are not in the same situation as Greece. This is a cash economy, an informal economy, and that didn’t stop during the revolution.” A useful illustration of the strength of this money came last year with the issue of Suez Canal investment certificates, in order to fund the expansion of the canal. EGP61 billion was raised in eight days, and half of it came from outside the banking sector, El Saad says. “This gives you a proxy for the size of the cash economy.”

Still, capturing that money in the stock exchange will not be easy; it wants to remain undetected, unregistered and untaxed.

One way or another, though, Egypt needs its stock market back. It will be a vital engine for growth in a country that needs it. “We need to create more depth in the market,” says Al Arab at CIB. “The exchange has a role to play in encouraging the already-listed companies to increase their free float, and encouraging the government to list some of their holdings.”

And El Saad, who has worked so hard to keep the market running, believes more IPOs will come. “It’s very tricky. Timing is not in our favour. But at least people still have strong belief in their country.”