How big a bear?

By Gamal Essam El-Din

Can stock market brace itself for a better performance? (photo: Ayman Ibrahim)

Now there are signs that the boom is running out of steam. These first appeared seven months ago, with the share prices of as many as 15 newly-privatised public sector companies suffering a series of sharp falls. According to Abdallah Tayel, chairman of the People's Assembly's Economic Affairs Committee, the stock market is now rife with "neurotic speculation, abrupt swings and a decline in stock investor interest in new public sector offerings." Tayel, who was addressing a recent meeting of the committee, said "I do not understand all of this happening at a time when the economy's macroeconomic indicators are excellent."

Tayel was not alone in this view. Other MPs painted an even more pessimistic picture. They agreed that the drop in share prices was caused by a series of problems, ranging from declining demand, low purchasing-power, the long-term effects of the 17 November Luxor attack and even President Bill Clinton's legal embarrassments.

Former Economy Minister Mustafa El-Said argued that Egypt was currently in the grip of an economic recession. "The national savings rate is declining and reflects a state of stagnation. As a result, demand has fallen and most of the small investors have lost confidence in the stock market," he said.

According to El-Said, share prices have fallen since last March by between 30 and 40 per cent, while the general index of stocks has dropped from 428 to 360. "Improving the stock market's performance requires revitalising the economy as a whole. The market is neither suffering from inefficiency nor from lax control on speculation. This is a problem of economic recession, and until the economy picks up again we will continue to have a bear market," said El-Said.

Ahmed Abu Heggi, an MP for the Upper Egypt governorate of Sohag, remarked that Egypt's business sector has been hit recently by a wave of bankruptcies. "Contrary to what international lending institutions describe as a sturdy Egyptian economy, ordinary citizens live a different reality. Egyptian families have been hit so hard by privatisation that they feel they will be dumped sooner or later by an impending financial disaster. They also see the stock market as a place for organised plunder of Egypt's public riches. I am sorry if this is a pessimistic view, but it is the true one, as expressed by ordinary citizens when they speak of the economy of their country," said Heggi. He added that as many as 243 small investors went bankrupt in one month in Sohag.

Supporting the same view, Salah Shaladim lashed out at Economy Minister Youssef Ghali. "After every crisis, whether it's the Luxor attack or the Asian financial turmoil, Ghali has claimed that Egypt would be immune to any negative effects. It is now clear that Ghali was never correct in his predictions," said Shaladim.

Two other MPs, Amin Hamad and Ahmed Shiha, accused the government of causing the stock market crisis. Hamad alleged that the stock market had turned out to be a place for money-laundering. He said that officials were accruing illegal fortunes through their trading in "insider information". Shiha deplored the government's encouragement of "hit-and-run" investors and brokerage companies, which cause harm, not only to the stock market, but to the national economy itself.

MPs were supported by Samir Radawn, representative of the Central Bank, who described the situation on the stock market as "stark swindling" that defied any sound financial analysis.

Countering the parliamentarians' criticism, officials offered an optimistic outlook on the stock market. Abdel-Hamid Ibrahim, chairman of the Capital Market Authority, delivered a panoramic review of the stock market's recent activity. He said that as many as 12 measures had been taken to improve stock market performance. Foremost among them is the application of international accounting criteria in the preparation of the financial statements of companies and banks, as well as the amendment of the Capital Market Law so as to allow public sector companies to buy back their shares and distribute periodical profits.

A further legislative amendment had been adopted, added Ibrahim, allowing companies in their first fiscal year to sell their shares on the market at prices higher than their nominal value. "This amendment was applied in the sale of shares in the new mobile phone company (Mobinil). As a result, trading in shares of this company skyrocketed to LE67 million in six days alone," said Ibrahim. He also pointed to the Finance Ministry's decision to float new treasury bills aimed at creating a balance with share offerings.

Ibrahim also explained that the shares of as many as 22 large companies, each with capital ranging from LE1 billion to LE3.4 billion, are currently being traded on the market. "This kind of company has created a lot of activity and we hope that the next stage will see the floating of shares in the giant public infrastructure companies in the electricity and telecommunication sectors," he said.

Ibrahim also indicated that the stock market has been in upswing since 20 July. Throughout this period, he added, trading has been conducted on 234 shares. Out of this figure, the prices of 116 shares have risen, 59 suffered losses and 59 remained steady.

Ibrahim refused to describe foreign investors as "hit-and-run" speculators. "These investors took a beating in Asia's financial crisis and had to sell their shares in a number of emerging markets such as Egypt. Besides, most of the big stock markets in London, New York and Hong Kong have suffered recently because of the problems in Southeast Asia, coupled with the scandals facing Bill Clinton."

Finance Minister Mohieddin El-Gharib strongly denied that the stock market is currently in crisis and that a crash is around the corner. "There will never be a crash on this market. What is happening now is part of a standard correction," said El-Gharib. He announced that LE500 million worth of treasury bills had been oversubscribed in less than 48 hours, and that there was a plan to float an additional LE500 million in order to stimulate more activity on the market.

El-Gharib also refuted any charges that Law 5 of 1998, which eliminated the key double tax exemption regarding investments in tax-free instruments like treasuries, was behind the recent sharp falls on the stock market. El-Gharib also criticised the reaction of two banks which resorted to radically increasing their tax provisions, resulting in a 30 per cent drop in their first-quarter earnings.

"We make laws for the entire national economy, not just for two banks," he said. He also emphasised that official investigations have proven that there is not one single shred of evidence of money-laundering in the stock market.