The view from London

On a recent visit to Britain, Gamal Essam El-Din heard mixed evaluations of the Egyptian economy from a number of people in the financial sector including Mohamed Metwalli, director of investment banking for Merrill Lynch's London operations
The view from London
By Gamal Essam El-Din
On London's Square Mile, where most British and multinational economic institutions and investment banks are located, the interest in Egypt's economy runs deep.
According to Kathryn Woodfine, an assistant portfolio strategist in emerging markets securities with HSBC (Hong Kong and Shanghai Banking Corporation), Egypt and Israel are now considered the two most important emerging markets in the MENA (Middle East and North Africa) region. "In spite of all the economic hardships which hit the Egyptian market in the last three years, we think that Egypt is still a lot less risky as a market for foreign investors than are the other emerging markets such as Russia and Turkey, or those of Eastern Europe. For example, inflation and interest rates are lower in Egypt than either Poland or Hungary. The dividend yield on Egyptian shares stands at 5.7 per cent, compared with 1.1 per cent in Poland and Hungary. Even from a long-term standpoint, Egyptian valuations look compelling," Woodfine said.
As part of its growing interest in the Egyptian market, HSBC last October became the largest owner of shares in the Egyptian-British Bank. This move, which gave HSBC a controlling 90 per cent, led to changing the name of the bank to HSBC-Egypt.
Compared with other emerging markets in the MENA and Africa region, Egypt has the largest number of companies listed on London's Stock Exchange. This exchange, which has the largest pool of international investment capital in the world, witnessed during the last three years the listing of eight Egyptian companies in the form of Global Depository Receipts (GDRs).
According to Deborah Medley Foye, an executive with the Global Business Development division at the London Stock Exchange (LSE), last year was a "very good year" for Egyptian shares. "This is in spite of the fact that Egypt, two years ago, fell into the grip of a market recession, but recession is now a worldwide problem. We hope the good performance of Egyptian companies will encourage more Egyptian investors back home to list their shares on the LSE. In particular, we are looking forward to listing the shares of Telecom Egypt," said Foye.
Referring to Egypt's inclusion in the Morgan Stanley Capital Index (MSCI) for Emerging Markets Free and MSCI World Indices, effective 31 May 2001, Foye characterised this as a major step forward for the country's economy. Its inclusion, she said, "will give the Egyptian stock market an international appeal and helped a lot in integrating it into the global market."
The Egyptian companies listed on the LSE are a mix of private (5) and privatised (3) companies. This, according to Mohamed Metwalli, director of Investment Banking at Merrill Lynch International, is an indication that Egypt is moving with complete confidence toward full liberalisation. The emergence of internationally acclaimed private sector companies in Egypt, said Metwalli, is a major achievement of its economic reform programme. He added that it is this factor that makes analysts optimistic about the Egyptian economy in spite of the setbacks it faced in the last three years. To prove his point, he highlighted the fact that 65 per cent of the country's GDP is now generated by the private sector. "In one sector, such as telecommunications, the two mobile phone companies have the largest number of subscribers [two and a half million], while half of the turnover in this sector is generated by the private sector," he added.
While most of the above arguments are generally optimistic, there are also more cautious evaluations of the Egyptian economy coming out of London's Square Mile. In its annual report entitled "The World in 2001," the Economist Group, the umbrella organisation which produces The Economist weekly magazine as well as monthly country reports through its Economist Intelligence Unit (EIU), asserts that Egypt's economy "has lost its shine." Even so, this annual assessment does not give up on all hope, conceding that "the remedies currently being applied -- repayment by the government of its domestic debts combined with a loosening of monetary policy -- should contribute to a modest recovery in 2001." Furthermore, it suggests that "The long-awaited sale of 20 per cent of the national telephone company, Telecom Egypt, should also help the economy regain in 2001 some of its former sparkle."
Niall Kishtainy, an editor for the Egypt desk with EIU, conceded that the assessment that "Egypt has lost its shine" is harsh. He explained, however, that "the Economist Group, which is involved in releasing different publications, gives fully independent economic reports about countries throughout the world."
In its most recent report about Egypt, issued in February of this year, the EIU affirms that the critical task before the current government is to maintain a delicate balance between promoting economic efficiency on the one hand, and scaling down rising social inequalities on the other. "Economic policy has taken a back seat to social concerns. As a result, progress on liberalisation has proved slow over the past year, frustrating both local and international investors who expected more from the current reformist economic team," the report said.
EIU's report lauded the new "managed peg" introduced by the Central Bank of Egypt (CBE) in an attempt to stabilise the pound against the dollar. The report, however, cautions that if the CBE becomes inflexible and is slow to reduce the value of the peg when necessary, a combination of two problems could emerge again: dollar shortages and a squeeze in pound liquidity, both of which could have negative implications for growth.
The demand for devaluing the Egyptian pound against the dollar is espoused by most of those in British finance with whom Al-Ahram Weekly spoke. All, in one way or another, believe that devaluation is the key challenge for the current government in the coming period as a condition for rectifying monetary imbalances and boosting exports.
Goldman Sachs (GS), a major investment bank, agrees it is good that the new managed peg led to a slight devaluation (13 per cent) for the Egyptian pound against the dollar. "However, we still believe that the Egyptian pound is overvalued. Overall, it needs to be reduced by at least 22 per cent against the dollar," suggested Gens Noidvig, a GS research analyst for the Egyptian and Middle East markets.
Other prescriptions advocated by Noidvig are that the government adopt a more stable policy for the banking sector and that a move towards increased dependence on the United States as an export market would be ill-advised.
Both GS and EIU agree that what is currently needed is greater dedication to privatisation. Thus they advocate the sale of Telecom Egypt, and introducing structural and legislative monetary reforms, particularly with regard to reinforcing CBE's powers.
In spite of EIU's cautious outlook it did note encouraging signals in the first quarter of 2001. In microeconomic terms, EIU lauds stripping EgyptAir of its long-held monopoly on domestic flights, the expansion of the local Orascom Telecom into overseas markets and the acquisition of the private Pharaonic Insurance by the US giant American Insurance Group (AIG).
In macroeconomic terms, EIU emphasised that Egypt is still leading the MENA region in Foreign Direct Investment (FDI) flows -- FDI in Egypt has increased by 40 per cent compared to its level in 1998.
In terms of its ranking as a business-friendly environment in Africa, the EIU puts Egypt third behind South Africa and Morocco. The report also registers a narrowing of the trade deficit by 21 per cent due to a 27 per cent increase in exports and a 6 per cent decline in imports. The EIU also considers the initialling of the partnership agreement between Egypt and the EU on 26 January 2001 a welcome step and a necessary precursor to Egypt's entry into the proposed Euro-Med free trade zone by 2010.
Recommend this page
© Copyright Al-Ahram Weekly. All rights reserved
Send a letter to the Editor