Aided by expertise learnt in the US, those in charge of the Cairo and Alexandria Stock Exchange have constructed a highly efficient operation, says Silvia Pavoni .

Cairo’s streets can be quite an experience. Dusty and noisy, the roads are ruled by a stampede of cars, each with its own highway code. In the midst of disorderly overtaking it is a miracle that the lives of adventurous locals crossing at random points in the road are spared. To the foreign eye this a vision of chaos.

The road to Cairo’s stock exchange, in the centre of town, is no exception. In this case, however, the chaos surrounding the building hides a clear vision and logical strategy.

The Cairo and Alexandria Stock Exchange (CASE) has shown great progress in recent years. It currently has 500 listed companies with a total market capitalisation of E£650bn ($116bn), about 90% of gross domestic product (GDP), and daily trades volume of more than E£1bn. Only five years ago, the market was valued at E£270bn with daily trade volume of just E£50m.

Economic underpinnings

The CASE’s development and growth momentum in the past few years have been supported by Egypt’s economic growth and changes in the financial sector since the late 1990s. “We have experienced a big change,” says Maged Shawky Sourial, chairman of the CASE. “I recall what we were trying to do in 1997: the reforms, the regulation, [the work on] the markets, [the new] technology. We thought we were doing very well when we had E£60m trading in one day; we even told the press.”

Before joining the CASE in 2004 and becoming chairman in 2005, Mr Shawky Sourial had been senior assistant to the minister of economy for financial markets issues since 1997. Mr Shawky Sourial is part of a group of senior professionals who gained international experience in big international banks or organisations who now hold key roles in Egypt’s economic and financial infrastructure. It is in this spirit of internationalisation that part of the central bank’s staff spends a three-month secondment period at the US Federal Reserve.

An important development in the CASE’s growth was the introduction of new listing rules in 2002. These required increased disclosure and higher corporate governance standards, and had an immediate effect on the quality and number of listed companies. Mr Shawky Sourial says that of the 1200 companies listed on the CASE in 2002, more than 50% de-listed following the introduction of the new rules. Only 100 new initial public offerings (IPOs) came to market, but the drop in volume was more than compensated for by the combined market value of the CASE’s new composition. New listings and capital raisings totalled E£7bn, compared with the 600 or so de-listed companies that had had a market value of E£4bn.

Before the introduction of the new rules, being a quoted company used to offer a tax shield and many companies only listed to benefit from this provision.

The market’s new strength came in handy last year, when the Egyptian stock market proved resilient despite troubles in most Middle Eastern markets: while the CASE’s neighbours saw the value of their stocks plummet, the CASE 30 index ended last year 10% up.

“We performed well in 2006 despite three severe price corrections,” says Mr Shawky Sourial. “We had the resilience to perform well. Other markets in the region are very shallow, with mostly individual investors and a non-institutional base. On the CASE we have 30% institutional trades [while] I think that the other markets’ institutional trades never exceed 10%.”

Although higher than its regional neighbours, 30% institutional trades is far from ideal and Egypt will need to encourage the strong development of institutional investors before the level of institutional trades reaches developed markets’ standards.

Immature elders

Egyptian retail investors, especially from the older generations, seem to jump into the market without studying companies’ fundamentals, instead basing judgement on rumour and speculations. At an institutional level, however, the country is more conservative about allowing pension funds to invest heavily in the stock market. “We have about 600 local pension funds,” says Mr Shawky Sourial, “[but] very few of them invest in the market. They mostly invest in time deposits or government bonds. They are very conservative.”

The pension funds of banks tend to be more aggressive than those of other sectors, explains Mr Shawky Sourial. However, their participation is still tiny compared with the activity of international institutional players.

The exuberance of retail investors has been cited as a major factor in the troubles of the region’s stock markets over the past two years, as demonstrated by the reaction to rumours of a recent takeover bid. In anticipation of a bid for National Bank for Development, as part of the government’s privatisation plan, retail investors kept on buying the bank’s shares at very high premiums. However, when a consortium did approach NBD earlier this year, the offer price was one-third below the bank’s trading price of that day.

Education programmes for retail investors are organised by the CASE but the highest hopes of rationalising investor behaviour come from the development of the institutional investor base as this will increase the demand for and availability of quality research on stocks.

Mr Shawky Sourial believes that such a development is on its way: “The management of most pension funds and insurance companies are changing and younger generations are coming in. Many of them bring international experience to the job. The improvement [in research] will happen by default.”

Banking sector

The growth of Egypt’s stock market has been fuelled by a number of sectors. Since 2004, companies that were going though a privatisation process – mainly petrochemicals – were investor favourites. Then came the wave of telecom companies, and more recently property and banking stocks have attracted local and foreign attention.

The banking sector has embarked on many reforms since September 2004 when the Central Bank of Egypt launched a plan to reduce the number of banks from 57 to 37 by the end of 2007. This ambitious target may not be met – as at the end of August there were 41 banks left – but much has nonetheless been achieved. For example, state-owned bank privatisation and restructuring has helped reshape the sector and attract foreign interest.

The most recent privatisation deal saw the sale of Bank of Alexandria to Italy’s Intesa Sanpaolo. Local player Commercial International Bank (CIB – Egypt’s top privately owned bank by Tier 1 capital) was also involved in the early stages of the bid but ultimately was unprepared to offer as high a price as the Italian lender. Sahar El-Sallab, CIB’s energetic vice-chairman, says that Intesa was prepared to pay more because the acquisition would give it the local banking licence and branch network that CIB already possesses.

Ms El-Sallab believes there will be a similar outcome for the privatisation of Banque du Caire. “It’s going to be bought by a foreign institution,” she says. “One of the institutions that didn’t get Bank of Alexandria will bid for Banque du Caire.”

Other local bankers recognise how much the banking sector has changed. “The market used to be over-banked,” says Mounir El Zahid, managing director of HSBC Egypt. “Banking has turned from [being] a broken industry to one that foreign banks want to buy into.”

Business friendly

The policies of the Central Bank of Egypt have done more than result in a more competitive banking sector; its efforts have also contributed to a more conducive business environment. “The Central Bank of Egypt used to be very backwards a few years ago,” says CIB’s Ms El-Sallab. “Slowly, it has created a great organisation, [one that is] open and with an international feel. I used to work at Citi and suddenly I see all of my former colleagues there.”

Given the big improvements made in Egypt, some might worry about too much interest from abroad, with a flood of foreign investors, especially ‘hot money’, coming to the country. The CASE’s chairman is not one of the worriers and looks at the country’s past to justify his openness to the rest of the world.

“I am one of the very few people not to be worried,” says Mr Shawky Sourial. “Some people are concerned about [foreign] influence, losing control and ‘hot money’. I say, look at Egypt between 1880 and 1940. There were more foreigners in Egypt then than anywhere else in the world, and the country’s economy was going strong.”

The vision of an international and modern Egypt is also mirrored in the stock exchange’s ongoing investment in technology, which has contributed to increased trade volumes. CASE’s trading and settlements are both automated, and intra-day and internet trading are also allowed. Moreover, there is continued investment planned to improve the trading platform. To develop its technology, a CASE subsidiary has also entered a joint venture with OMX, an exchange serving the Europe’s Nordic region (and which both Nasdaq and Dubai’s stock exchange are currently bidding for).

Investment has also been put towards the development of a second Egyptian stock exchange aimed at smaller companies, to open soon, and in the launch of a derivatives stock exchange in the last quarter of 2008.

Local rivals

Big investments usually back big ambitions and it would be natural to assume that Cairo and its stock exchange consider the regional neighbours as the competition to beat as leading financial centre and stock exchange of the Gulf.

Mr Shawky Sourial, however, seems to be more interested in competing with other developing countries. “In the next five years, I want to be able to compete with emerging markets like Brazil and India. I don’t necessarily feel in competition with Dubai.”

With regards to the number of future listings on the stock exchange, Mr Shawky Sourial has hopes that go beyond privatisation-fuelled IPOs. In recent years, private equity has become more active in the country, targeting companies that need restructuring; it is hoped that private equity’s exit strategies will lead to increased IPOs down the line. “We talk to private sector companies to convince them to come to the market,” says Mr Shawky Sourial. “We don’t want to rely on privatisation for the stream of future IPOs. We have seen a large amount of private equity coming to Egypt since 2004 and we now see those companies coming to the market.”

Cairo’s streets might remain chaotic for years to come, but its stock exchange and financial markets are on an orderly path towards future development.CHART: THE EGYPTIAN STOCK EXCHANGE


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