CAIRO: Just weeks ago, Egypt's growth rate for the current fiscal year was expected to clock in at 5.6 percent, but due to recent events, that number has dropped, with some forecasts putting it as low as 2 percent. CI Capital revised their original GDP growth estimate down to only 4 percent, which is not as dramatic as some previously thought. Recent protests that unseated Hosni Mubarak from almost 30 years in power have essentially brought the economy to a standstill with continued sector strikes and emergency curfew as well as the closures of banks and the Egyptian Stock Exchange (EGX). The Egyptian Exchange, which has been closed for the past three weeks, will remain closed until 48 hours after banks are re-opened in hopes that stability will return to the economy and financial sector. Banks closed after strikes broke out among public sector employees demanding better wages, and the Central Bank of Egypt has promised to meet with representative committees. “The stock market witnessed a dramatic sell-off by foreign investors since the turmoil began, with the EGX 30 falling almost 17 percent in just two trading sessions, to leave it down 21 percent year to date,” stated the report. According to Ayman Amer, associate director at CI Capital Research, there was approximately LE 346 million in sell-off from foreign investors versus the overwhelming LE 459 million from Arabs. However, institutions were net buyers with LE 574 million. The Egyptian Financial Services Authority has implemented new regulations for trading on the EGX, including reducing trading hours to three instead of four and suspending pre-open trading sessions as well as suspending same day trading. “Realistically speaking, foreigners are going to wait and see what happens before investing in the EGX in the near future because of the uncertainty,” said Amer when asked about investors coming back to the market. He went on to explain that there are currently roughly 150,000 active clients, whereas a few years ago, there was an estimated two million active clients. “The market can't afford to slide down even more, but it won't continue to lose for long,” said Amer, adding that while it's hard to predict and is being watched very closely, it could be a few months at least before gains are made. He also added that the performance of Global Depository Receipts (GDR) is being watched closely as they continue trading uninterrupted (in London). “The GDRs of CIB, EFG-Hermes, OCI, OT and TE have all been subject to significant downward pressure of the last month, reflecting investor unease with the region,” stated the report. Hinting towards a tentative re-entry has occurred in recent sessions in London, which has also seen the premium that London-based GDRs trade to local peers rise in recent sessions. A recovery in the local market, suggested by the GDR, is a possibility once re-opened. While there is a short-term panic occurring, a buying opportunity is being created by current prices and will be validated once there are any signs of stability on the political and economic side. The report suggests investing in more resilient stocks, such as certain USD-denominated stocks, companies with international presence, export-focused companies, defensive stocks and companies with high dividend yields. It also suggests avoiding the less resilient stocks such as banks, real estate, touristic real estate, consumer goods and transport and logistics. Egypt has also been downgraded by three international credit rating agencies — Fitch, Moody's and Standards & Poor's — which causes higher yields and consequently higher borrowing costs for the government in capital market thus weighing on the fiscal deficit. This also is of concern due to over a million tourists leaving the country and affecting the tourism sector, with losses estimated upwards of about LE 3 billion. “We originally estimated the tourism sector to generate about $12.8 billion, but have revised that to about $9.8 billion due to the current situation,” said Mona Mansour, CI Captial's director of research. Mansour added that she believes the tourism sector will bounce back within the next year once the country stabilizes. The report also describes the drop in investments affecting imports, exports, Suez Canal revenues, inflation, increased fiscal deficit and weakening currency, among other affects. “The Central Bank of Egypt intervened when the pound depreciated to about LE 5.9 in an effort to support it from falling further,” said Mansour. She explained that the pound is expected to depreciate further, possibly weakening to more than LE 6.1, and the CBE could possibly intervene once again. EFG-Hermes According to Reuters, EFG-Hermes, a leading investment bank in the Middle East, has reported adjusting Egypt from “overweight” to “neutral” following the unrest that has occurred in the past few weeks in the country. The company believes that while latest events will have a strong impact on the economy in 2011, a more open political system will prove beneficial in the long term. “The recent events will deteriorate both domestic and external outlooks, resulting in contraction in private consumption spending, investment levels, and lower tourism volumes and earnings,” the company stated. EFG also predicted a reduction in the real GDP of about 2-3 percent in 2011 and estimated tourism to recover in as soon as six months while forecasting spending to take longer to recover. “We believe that downward pressures can be managed given Egypt's ample foreign reserve position and a strengthened banking sector,” EFG said.
