Resisting the Russian bug

By Sherine Abdel-Razek

The signs are ominous. The Emerging Markets Index, published by the World Bank's private sector arm, the International Finance Corporation (IFC), was down by 19 per cent through the past month. This reflects sharp declines in share prices in emerging markets worldwide. But what about Egypt?

Experts believe that the impact of such crashes on any economy, especially emerging ones, depends on the volume of direct foreign investment and the volume of trade with the outside world.

Sherif Raafat, head of the Egyptian stock exchange, last week denied that the Egyptian exchange would be affected by the crisis. Raafat was quoted as saying that the economy was not threatened since Egypt's stake of direct foreign investment did not exceed one per cent of overall direct investment in the emerging markets.

Less optimistic was Hani Tawfik, head of Global Investors, a private equity management company. He said the crisis will cause investors to flee emerging markets and make them wary about returning for some time to come. "This will certainly cause a decline in market transactions," he said.

Furthermore, the decline of Egyptian shares traded as global depository receipts (GDRs) in the stricken international capital markets will have the knock-on effect of lowering their value on the Egyptian market. There are currently five Egyptian companies with shares traded as GDRs on the London Stock Exchange. Tawfik pointed out that the problem may be exacerbated by the fact that all of these companies are heavyweights and considered prime market movers.

He offers an example: The Commercial International Bank (CIB), one of two Egyptian banks with GDRs traded overseas. "CIB GDRs were traded at $7 in London last week compared to LE26 for CIB shares in Egypt." It was trading at $9.80 two weeks earlier. Investors, according to Tawfik, will buy shares at lower prices from London and sell them at a profit in Egypt. Eventually, this process, known as arbitrage, will leach the value from CIB shares traded in Egypt and weaken the market as a consequence.

While the market fared well at the nadir of the crash due to a broad-based wave of buying, it was stagnant last week with an obvious absence of foreign interest during the first two days of the trading week.

On the other hand, economic experts agree that sound economic indicators suggest that the Egyptian economy may well prove immune to the economic crises affecting other economies. Egypt's inflation rate has reached four per cent, its budget deficit does not exceed one per cent of Gross Domestic Product (GDP) and its foreign debt is under control.

Another positive factor is that the Egyptian economy is not heavily reliant on exports, as it has other significant sources of income such as Suez Canal revenues. Export-dependent economies trading with Russia will be hurt by the devaluation of the ruble. The price of their goods will increase, making them less competitive. From this perspective, it is noteworthy that Egyptian-Russian bilateral trade does not exceed $150 million (around LE510) annually, a marginal figure compared to Egypt's total exports of LE4 billion.

Moreover, only a small number of Egyptian companies trade in Russia, which fact definitely dilutes the impact on the economy.

Topping the list of companies with monthly exports of $3 to $4 million to Russia is Ceramica Cleopatra Group. Its chairman, Mohamed Abul-Enein, pointed out that the ruble's collapse will result in a sharp increase in the price of his company's exports denominated in dollars. "But this loss will be shouldered by Russian importers if export deals were finalised before the crisis."