Recovery of stock market depends on stabilising US dollar at EGP 12: Beltone Financial

Lack of integrated economic policy wasted the benefits of Egyptian pound's devaluation

Hany Genena, head of research at Beltone Financial, said that moving towards a flexible exchange rate of the Egyptian pound would be the main factor of economic growth and the government's economic reform programme.
Genena added that the inflow of foreign investments and increase of the acquisition rate in the Egyptian Exchange (EGX) depend on a fair exchange rate. He pointed out that his company has received inquiries from foreign investors willing to acquire several companies in different economic sectors during the coming period.
When do you expect the recovery of the EGX?
The recovery of the EGX depends on the devaluation of the Egyptian pound to range between EGP 11.5 and EGP 12 per US dollar, roughly comparable to the informal market. We should also change the exchange rate policy and make it more flexible through supporting trading operations in the EGX.
The Central Bank of Egypt (CBE) devaluated the Egyptian pound in March. Why did the sector not achieve any growth?
When the CBE devaluated the Egyptian pound in March, the investors responded temporarily and the EGX reached 8,000 points, up from 6,000 points.
The devaluation of the Egyptian pound did reflect positively on foreign investments inflows due to the disordered business environment and the lack of a clear vision supporting foreign investment. The devaluation of the pound shows that the state is committed to conduct all the economic reforms without losing control of the foreign exchange rate.
How does the application of the value-added tax (VAT) affect the sector?
The House of Representatives' approval of the VAT shows that we are on the right path towards implementing economic reforms. It was followed by a growth of the leading stocks in the market.
Could the market overcome the negative consequences of the lack of the US dollar?
The companies suffer major crises due to the lack of US dollars in various sectors, including food, telecommunications, and fertiliser, due to the difficulty of obtaining the foreign exchange needed to import raw materials. The crisis reached its peak during the third quarter of this year.
The CBE governor said in June that he intended to devaluate the pound, which confused the market since trading in the EGX responds to any devaluation of the local currency against the US dollar, and the purchase of stocks increases significantly.
Do local and foreign investors expect another devaluation of the Egyptian pound?
The devaluation of the pound will not solve the crisis and the liberalisation of the exchange rate is now necessary given the poor economic conditions and the recent negotiations regarding the loan from the International Monetary Fund (IMF).
The CBE suffered from 2001 to 2003, when it devalued the local currency while the informal market further decreased the Egyptian pound's price. Then it liberated the foreign exchange rate completely, despite the government's support for the pound.
Do you suggest any measures to control the market following the liberalisation of the exchange rate?
We should apply integrated economic policies to maintain the exchange rate following the pound's floatation, which will prevent any direct intervention to support the local currency and rely on the market only.
When the investors make sure that the economic and financial policies are stable, they will reconsider entering the market and injecting capital. Egypt's negotiations with the IMF over its economic reform programme would contribute to the disengagement between the Ministry of Finance and the CBE.
What do you expect from the Monetary Policy Committee regarding the yield pricing?
I expect that the CBE would raise the interest rates during the next meeting of the Monetary Policy Committee by more than 200 basis points. This procedure will be painful, but maintaining such high levels of return for about six months will integrate with the economic reform programme.
The current inflation rate is significantly high and reflects on various products and services. I expect that this procedure will enhance liquidity, estimated at billions of Egyptian pounds. I rule out that the banks will suffer from the high cost of funds after raising interest rates due to the high return on treasury bills, in parallel with lifting the "corridor".
The Ministry of Finance will offer government debt instruments during the current fiscal year estimated at EGP 250bn, so the banks' profitability will not be affected by raising the interest.
Did the high US dollar exchange rate affect borrowing in recent months?
The private sector's loans from banks have declined significantly, because the companies obtain US dollars from banks to buy production inputs, which stopped due to a decline in US dollar inflows to banks.
On the other hand, a significant growth has occurred in government loans during the last period due to the expansion of national projects and electricity, energy, and petroleum infrastructure.
In light of the current procedures to regulate the foreign exchange market, when do you expect the economy to achieve balance and attract more investors?
The US dollar exchange against the Egyptian pound will be stabilised in June 2017, due to the IMF loan, the proceeds of dollar bonds, and other funding sources hardly contribute to decreasing the current account deficit.
Stability will not be achieved through debt, but rather by increasing foreign direct investment and foreign investments in debt instruments, which is the fastest channel to increase foreign currency inflows. In addition, we need to increase foreign investments in the EGX, the outcome of acquisitions, and tourism income.
Have you received positive feedback from foreign investors after the announcement of the reform programme?
Many investors and international financial institutions await the floatation of the pound so as to inject new investments through acquisitions. Beltone has received numerous inquiries during the last two weeks about acquisition opportunities in the Egyptian banking sector.
Some international financial institutions, like the World Bank, have offered financing the acquisitions of banks. These international financial institutions sometimes inject investments in acquisitions ranging from 10-15% as long as there are safe investment measures.
Beltone received numerous inquiries via phone calls regarding the cement sector, and we have requests for interviews with investors. Some investors may target acquiring shares of some cement companies, especially as the relative production surplus of cement stimulates the merger.
The reform programme may lead to a popular failure and other economic risks. How would the market's situation change if the government's plan failed?
I consider the economic reforms carried out by the government a big risk, but the continuation of the current situation would be worse, especially since the official banking sector does not have US dollar liquidity, as opposed to the informal market which controls the market.
I believe that if we do not apply economic reforms, the value of the Egyptian pound will collapse against the US dollar, and may register at EGP 20 per US dollar. Egypt delayed the implementation of economic reforms during the past years, and it would have been better to gradually lift the subsidies over the past years.
How would you estimate the growth rate of foreign exchange reserves by the end of the current fiscal year, following the anticipated financial aid?
I expect that the foreign exchange reserves at the CBE will reach a maximum of $25bn in June 2017, because most of the foreign aid and resources are actually obligations.
I rule out that the CBE will link the floatation of the pound and the disengagement to the increase of foreign reserves up to $6bn. I expect that the CBE will float the pound by the end of September before issuing the international bonds, as this move will attract more investments.
The CBE governor's remarks about the floatation of the pound after the foreign exchange reserve reach $25bn aims to reassure the people and scare the speculators. The IMF mentioned a "flexible exchange rate" to request the floatation of the pound without obligating the government and the CBE to implement this step.
Do you expect the elimination of the informal market after the floatation the pound?
The informal market will continue despite the ongoing resolutions and sanctions on it, and I expect it will continue even after the floatation of the Egyptian pound. The elimination of the informal market is subject to providing the banks with US dollar liquidity in order to meet the market's needs.
Do you expect that the offering of Banque du Caire will revive the EGX?
The offering of Banque du Caire is a good addition to the EGX after the transfer of its delinquency portfolio to Banque Misr, especially given that there was an earlier plan to sell it during the fiscal year 2006/2007. The bank needs to increase its capital and we expect a large turnout to buy the bank's shares, where the banking sector is widely represented in the EGX.
How do you see the government agencies' competition with the private sector in the implementation of projects?
In principle, I refuse the acquisition of projects by the government or the Armed Forces, but the military and the government aim to form an executive arm of the strategic sectors to protect the economy and vital sectors.
At the same time, the government's interference in most investments frightens investors because it is considered a strong competitor, but the current conditions of the Egyptian economy justify these steps.
What do you expect after obtaining the first instalment of the IMF loan?
I expect significant inflows of aid and investment from abroad after receiving the first instalment of the IMF loan, and we may not need the other instalments of the loan. The same thing happened in the 1990s, and the economy recovered to the point of explosion, with growth reaching 7%, while investments increased significantly in the telecommunications, construction, and natural gas sectors.
A similar situation also happened in 2001 until 2003 amid a terrifying recession. Money was being smuggled abroad and restrictions on exports were applied. The banks made obligatory transfers of foreign currency, but after the economic reform in 2004, the volume of trade reached EGP 2bn.