North African capital markets were hit hard in the wake of the Arab Spring uprisings that cut through the region in 2011. Economic activity was left disjointed and north African bourses experienced sharp declines in trading. The Banker looks at whether the increased liberalisation of these countries' economies can encourage foreign investment and benefit their respective exchanges.

Last year will be remembered for the surge of uprisings that rippled across the Arab world, particularly in Egypt, Tunisia, Morocco and Libya. The seismic change these countries have since undergone in confronting the Arab Spring combined with the challenges of a stagnating global economy, the protracted debt crisis in the eurozone and a politically volatile environment have caused severe disruption to economic activity – evident in the sharp decline in trading on their respective stock exchanges.

The Egyptian Exchange (EGX) ranked globally as the worst-performing exchange in 2011, falling by about 35% as a result of the violent political protests that led to the bourse being suspended for more than seven weeks and a sharp slump in equity valuations.

Meanwhile, Tunisia's stock exchange dropped by 22% in the first quarter of 2011, before climbing by 15% during the next nine months to close the year down by 7%. Having climbed 21.2% in 2010, the composite Morocco All Share Index (MASI), a value-weighted index comprising all 75 listed companies in the Casablanca Stock Exchange (CSE), fell by 12.86% over the course of 2011.

With dramatic images flashing across global TV screens of throngs of protesters storming through the streets and violent explosions rocking cities, it was only a question of when, not if, investors would start pulling their money from the various markets. But as the dust settles these countries will have to think about how to rebuild themselves and they are busy modernising their stock exchanges so that funding needs will be more easily met.

While often viewed as a homogenous block by investors, each of the north African countries has grappled with the political fallout in different ways and at different speeds.

The people's choice

Morocco introduced a new constitution in July and held parliamentary elections in November 2011. Elections for a constituent assembly were held in Tunisia in October 2011 – the first free election held in the country since its independence in 1956. Meanwhile, Egypt’s road to political recovery has been significantly bumpier. However, all three exchanges are now struggling with a lack of liquidity as their benchmark indices have retreated, trading volumes have sagged and initial public offerings (IPOs) have been shelved. 

The respective authorities have viewed the changing landscape as an opportunity to restructure the capital markets to ensure they serve as a key engine in rebuilding their economies. As a result, plans are already under way to introduce new financial instruments such as short-selling, derivatives and exchange-traded funds (ETFs) and they are all looking at what reforms need to be introduced to open up the markets. In particular, the north African markets hope to boost liquidity by encouraging listings from small and medium-sized enterprises (SMEs).

Remarkably the EGX saw a huge resurgence during the first six months of 2012. It ranked as the second fastest emerging market worldwide with Egypt’s main index, the EGX30, rising by 28% to close at 4709 points at the end of June. But knee-jerk reactions to various political events has seen the market spike and fall, as witnessed when the market plummeted in the fortnight after the first round of Egypt’s presidential election in May. Shares then rebounded by nearly 8% in a single trading session on June 24 after Mohammed Morsi was confirmed as the new president.

“The movement of our exchange today is 100% correlated with political developments and the morale of the people,” says Mohamed Omran, chairman of the EGX. “The market reacts either positively or negatively depending on what is happening in the political sphere and its stability is therefore contingent on ending these tensions.”

Since Mr Morsi was elected, Egypt has seen Hesham Qandil brought in as the new prime minister on July 24, who in turn unveiled a new cabinet on August 2. However, the country is now awaiting a new constitution. “I’m not sure whether the political turmoil is really over,” says Mr Omran. “But the country is now working towards a new constitution and that will be the starting point to grow again. So we are trying to prepare the ground for take-off.”

Fee incentives

In a bid to boost trading in the interim, on May 12 the EGX board approved an exemption of companies from listing fees for the first time in the exchange’s history. The exemption is granted to all companies that complete the listing procedure within the three-month period from July 1 to September 30 this year.  

There have been three listings so far in 2012. In June, financial services company Grand Investment for Trading issued capital of E£1.5m ($247,000). Then in July, two industrial goods and services companies, Jannat for Animal Production and Egyptian Italian Mixers Company, issued respectively capital of E£2.5m and E£23.1m.

In further efforts to stimulate the market, on July 16 the EGX signed an agreement with Fidessa that will enable investors from more than 175 global markets – with overall investments of approximately $800m – to directly trade on the exchange. Fidessa is a global company specialising in linking buy and sell orders in global stock markets. “Investors of the bourses included in the agreement will be able to trade in EGX through the local brokerage firms that are supported by relevant technologies,” says Mr Omran.

Three local brokerage companies have been already included in the agreement, and others are being encouraged to join subject to meeting necessary requirements. EGX also signed a similar agreement with the London Stock Exchange in 2011, which allowed the latter’s investors to trade in local equities.

“We are now working with the Egyptian Financial Supervisory Authority on new regulation relating to sukuk financing, which should be introduced by the end of the year,” adds Mr Omran. “But we are deliberately being cautious about implementing new products until the market becomes more stable. As we all know, foreign investors in particular can lose trust in one second and it takes a long time to rebuild it.”

Emerging status

However, some investors are banking on the long-term potential of Egypt, such as Arqaam Capital, a Dubai-based regional investment bank, which acquired Egyptian brokerage firm El Rashed Securities in January 2012. “This is our only active Middle Eastern market that has emerging market status,” says Tarek Lotfy, managing director of capital markets at Arqaam. “We have a positive view on Egypt in the medium and long term as the Egyptian economy remains supported by strong fundamentals – robust domestic demand, a growing middle class and high consumption power.

“We were responding to client demands in making this acquisition and we are committed to building a regional brokerage platform to ensure our clients can take advantage of the country’s growth and development.

“Egypt is one of the more diverse markets in the region so there is an opportunity to play different sectors. The financial sector has always been interesting and there are some exciting new names in real estate such as Palm Hill, as well as tourism and telecoms firms such as Orascom, so you can get a decent allocation and diversification.

“However, I’m not denying that there are clear headwinds in Egypt today – it has been and will continue to be volatile in the future. There are concerns about its fiscal deficit and of course the elephant in the room is the currency situation.” 

According to the International Monetary Fund, the budget deficit stood at 9.8% of gross domestic product (GDP) in 2011, but the potential devaluation of the Egyptian pound has proved to be an even bigger concern for foreign investors who have steadily withdrawn billions of dollars from Egyptian equities since May 2011, reversing the trend of steady inflows in 2009 and 2010, according to EPFR Global, a fund flow data provider.  

The euro effect

The fall in investor appetite for north African exchanges has been further exacerbated by the deepening eurozone crisis.

“Our key challenge today is liquidity,” says Karim Hajji, chief executive of the CSE. “European investors are now less present on our market and we have also seen a notable impact on the earnings of listed Moroccan companies which have strong trading links with Europe. “We only have about 20% free-float on our market, which also adds to our liquidity issues. This is a problem in nearly all African markets apart from South Africa, which has very good liquidity, and to a lesser extent Egypt.” 

With a market capitalisation of $53.5bn, the CSE currently ranks as the third largest exchange in Africa after the Johannesburg Stock Exchange ($182bn) and the EGX ($56.1bn). The team that took over the management of the CSE in 2009 had ambitious plans to roughly double the 77 listed companies to 150 by 2015. However, the events of the past few years have somewhat lowered these goals; the CSE had three IPOs in 2011 and has had one to date this year in January.

“Since those targets were set, we’ve been confronted with the ongoing financial crisis, the Arab Spring and the Moroccan elections. So we are revising our projections based on what is feasible in today’s climate,” says Mr Hajji. “There are a couple of IPOs that have been submitted to the market authority but these have since been delayed.”

Indeed, the CSE has suffered from a pronounced climate of doubt in 2012, as reflected by the fact that only the agri-food sector of the different sectors listed on the exchange has recorded a positive performance of 1.32% during the first half of the year. 

Frontier market

In light of growing concerns over the market’s liquidity, in June 2012 index provider MSCI announced that its Morocco Index had been added to the list for potential reclassification to frontier market status as part of the 2013 annual market classification review. The CSE has been classified as an emerging market since 1995, but is now considered to be more in line with the size and liquidity requirements of a frontier market following a significant drop in liquidity since 2008.

The MSCI Morocco Index currently has only three constituents, of which Maroc Telecom had its weight reduced by 50% due to low liquidity, according to MSCI’s methodology. This caused large sell movements from the main foreign investors, consequently creating a heavy selling pressure on the market. 

“We held a conference with the minister of finance three weeks ago who pledged to bring reforms to the market, such as the creation of a derivatives market and securities lending and borrowing. I hope to see a derivatives law approved by October or November time this year,” says Mr Hajji. “Short-selling can improve trading volumes quite significantly and means you can have bulls and bears on the market at the same time. The second thing is to launch ETFs as the global ETF industry is now valued at more than $1000bn.”

In January 2011, the CSE teamed up with the FTSE to launch a new family of indices for the Moroccan market. The FTSE CSE Morocco 15 Index, comprised of the top 15 stocks on the exchange, and the FTSE CSE Morocco All-Liquid Index, was seen as an important step towards the internationalisation of the CSE. It provided more visibility to the exchange worldwide and enabled both domestic and international fund managers to create ETFs that can be used as an index benchmark.

“We launched the CSE Morocco 15 FTSE Index to prepare for the launch of ETFs,” says Mr Hajji. “This index is more easily replicated than the MASI or Madex [Moroccan Most Active Shares Index]. The MASI is all listed stocks while the Madex is about 64 stocks which are not all liquid.”

The exchange is also hoping to boost liquidity by encouraging listings from SMEs. In Morocco, about 95% of companies are SMEs, contributing to about 50% of employment. The CSE has introduced several mechanisms to attract SMEs, such as an exemption of up to 50% on corporate tax on the first three years of listing. It also provides a grant in order to reduce the costs of introduction on the stock market.

“SMEs are and will be the big focus for us in 2012 and 2013. They account for 35% of listed companies in terms of number of companies but in terms of market cap, they’re only just over 1% because they’re quite small,” says Mr Hajji.

Turning to Tunisia

The CSE is also looking to attract listings from other countries in the west African region as well as Tunisia. In June 2010 Ennakl, one of Tunisia’s major automobile companies and a sales and maintenance representative of Volkswagen, carried out a dual listing on the CSE at the same time as it entered Tunisia's stock exchange. "This was a great success and the first operation of its kind in north Africa,” says Mr Hajji. “On the back of this, we have seen interest from other Tunisian companies about listing on the CSE. We’re now hoping to sign a dual listing agreement with Tunisia as well as some African countries such as Côte d'Ivoire and Cameroon.” 

In fact, Ennakl is one of roughly 300 companies confiscated from the regime of former president Ben Ali in early 2011. On July 26, the Tunisian government announced that it planned to sell shares by the end of 2012 in six companies, one of which is Ennakl.

A 25% stake in mobile phone operator Tunisiana, the country’s largest and only private telecoms operator, will be the first asset offered to the public with submissions due by November 2. The second offering will be a 60% stake in Ennakl, with the deadline for submissions at the end of November.

The remaining four share sales include a 13% stake in the Bank of Tunisia, a 37% stake in Carthage Cement, 99% of the local branch of Kia Motors, and 100% of Carthage International School. Tunisia's government has been facing growing pressure to expedite the sales of these companies in order to kick-start trading on the exchange and breathe new life into its economy’s fragile recovery.

“I am expecting 10 more companies with a total value of at least €100m-worth of shares to list on the exchange during 2013,” says Fadhel Abdelkefi, chairman of Tunisia's stock exchange. “Half of these will be private companies and the other half will be state-owned confiscated companies.

“I believe there is a huge opportunity to increase the size of our exchange – my target is to increase the number of IPOs from 60 to 150 over the next three years. The market capitalisation of the exchange is currently $15bn and this equates to 25% of GDP but I’m aiming to raise this to 50% to 60% by 2015. We are talking about billions of dollars coming to market.

“What is changing with this new government is that it is really focusing on the exchange because it knows that the demand is there,” continues Mr Abdelkefi. “The last IPOs we listed were both oversubscribed – an encouraging sign to other companies thinking about raising money from the exchange. Even more so in light of the fact that the banking sector is struggling with non-performing loans and liquidity problems.”  

The IPO of Ateliers Mecanique du Sahel in May 2011, a leading Tunisian utensils company, was 21 times oversubscribed, while the IPO of IT company Hexabyte in January 2012 was 40 times oversubscribed.

The Islamic route

On June 29, the Tunisian government launched the country’s first Islamic mutual fund – Theemar. Capitalised at about $30m, the fund’s mission is to finance SMEs and it aims to create up to 30 enterprises during the first phase alone. Theemar’s shareholders comprise the Saudi Arabian-headquartered Islamic Development Bank, Kuwait Projects Company, Bahrain’s Al Baraka Bank and the Caisse de Depot et Consignation – a large public fund set up by Tunisia's interim government to finance big infrastructure projects.

This aside, however, Mr Abdelkefi says he has no plans to introduce any new products to the exchange. “Today, I just want to focus on increasing the free-float of companies so as to increase the turnover, and then in three to four years' time, I will look at introducing other products.” 

Mr Abdelkefi says that the small size of the exchange – the bourse has a market capitalisation of $9.6bn – serves as a deterrent to attracting both foreign and institutional investors. “You can’t attract big companies when you have a small market cap,” he says. “If you include strategic investors within foreign investors then they account for a 28% share on our exchange, but this drops to less than 4% if you’re just counting portfolio investors. Prior to the financial crisis, this figure would have been closer to 10%. So one piece of regulation that needs to be amended today is the 50% cap.”

Currently, foreign portfolio investors are prohibited from holding more than 50% of any equity listing and international investors are further deterred by the bourse’s MSCI classification as a frontier market, but Mr Abdelkefi is confident about its future growth. “I think the potential of the exchange is very high and that is because it is the political will that makes a difference today. Everyone, including the prime minister and the minister of finance, agrees that the exchange needs to play a central role in the economy,” he says.

Investor hesistations

The north African exchanges look set to benefit in the coming years from the planned increased liberalisation of their economies in the wake of the Arab Spring and the slate of new reforms this promises to usher in. But in the near term, the eurozone debt crisis is going to continue to present challenges and the increased political risk premium generated by the ongoing uncertainties of the Arab Spring continues to deter investors.

On August 8, Tunisia’s government announced that its new constitution would not be adopted until April 2013, six months later than planned. The new timetable looks likely to delay general elections planned for March 2013 and aggravate the political uncertainties already facing Tunisia, which has been rocked by social unrest in recent months.

On August 12, activists protested in Morocco's main cities at the perceived failure of the Islamist-led government to make good on its electoral promises. In Casablanca, Morocco's largest city, nearly 1000 people rallied in the streets. The same day, Egyptian president Mohammed Morsi tore up an army decree that had curbed his powers and dismissed the country’s two top generals. Yet, while his dramatic move to reshape the military leadership has been viewed as an early victory, future political skirmishes with the army are expected to hinder his efforts to revive the crippled economy. 

However, if the Arab Spring proves successful in aiding economies in transitioning to genuine democracy in the long term, there is no doubt that north Africa’s capital markets landscape will benefit from a rise in foreign investment and cross-market trade in the years to come.

Additional research for this article was carried out by Riken Shah.


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