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Al-Ahram Weekly 26 Aug. - 1 Sep. 1999 Issue No. 444 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 26 Aug. - 1 Sep. 1999 Issue No. 444
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Focus Culture Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Bonds in the shadow of equities
By Enaya GadThe bond market is inevitable for the development of an economy. It is a main source of new capital for governments and industries, with funds being exchanged from savers to borrowers. Where the bond market has evolved, the returns from the various forms of bonds can be as high as a ratio of eight-to-ten.
In many of the world's economies, the bond market is not as fully matured as the stock market, but compared to even those economies, the Egyptian bond market has a lot of catching up to do. In 1998 the volume of business in the stock market hit LE82 billion, while bond-trading reached only LE22.5 billion, less than one-quarter of the volume of stock-trading.
A fully operative market can only come about if investors are provided with alternatives so that fixed income securities may reach 40 to 50 per cent of total transactions, with equities accounting for another 50-60 per cent. In emerging markets such as Holland, Mexico, and Brazil, fixed income securities are 40-50 per cent of the market. But this positive market size does not mean that transparency and settlement concerns in these emerging markets have been resolved.
There is, nevertheless, a rationale for the unhurried pace at which the Egyptian government has allowed the bond market to grow. In order to implement its policy of privatisation, the government has concentrated its efforts primarily on developing the stock market, while delaying the growth of the bond market. One of the key reforms implemented by the government has been the creation of a viable capital market brought about by the revitalisation of the Egyptian Stock Exchange. The merging of the Cairo and Alexandria bourses has reinforced the ongoing dramatic structural transformation from public to private ownership.
But the financing of future economic growth by the government, through the restructuring of the bond market, has been postponed. Even traders are more interested in stocks, which entrepreneurs are more willing to buy. Higher commissions for traders on stocks as opposed to bonds have made them favour the equities market.
As for the entrepreneurs, Ashraf Ghazali, deputy managing director at Flemings CIIC, said "The issuing of shares (as part of the privatisation process), is more attractive to local and foreign investors because of the quick returns they bring of 15-20 per cent in as short a time as a week up to a number of months. So why should they be interested in the 11 per cent to 12 per cent (yield on bonds which is) on an annual basis?"
The directing of funds mainly towards stocks has also resulted in the disregard of bonds as a portfolio option. The average annual return on stocks in 1996 and part of 1997 was as high as 80 per cent, but, of course, this level did not last. So stocks are now perceived as riskier than their bond cousins.
As investors' awareness of the possibilities in Egypt's emerging market increases, the debt market, as the bond market is known, will no longer be regarded as unfamiliar. Medium-term bonds of five to seven years, most common in Egypt, are getting more consideration, especially with the 200 per cent growth in bond volume over the past fiscal year, according to Mustafa El-Assal, a broker and head of Fixed Income at EFG-Hermes.
Asked about how the debt market could be further expanded, Ghazali said, "The Egyptian Capital Market Authority [CMA] should release obligatory certification which all traders must acquire [in order to trade in bonds]. Also, a bond market association needs to be established under CMA direction with individual investors welcome to attend."
Amazingly, there is not a single bond specialist within the country, said the head of fixed income at a major private bank in Cairo who prefers to remain anonymous. Most brokers in this domain previously worked in banks but not in trading, with none exposed to an active investment market. "Traders and analysts need to become more exposed to international markets," and those in the local financial sector, such as bankers and brokers, need to creatively provide what the market needs, the banking source said.
But there is concern over the lack of communication between local financial operators and Egyptians who have left the country for extended periods, in order to gain expertise in the world of finance, and have returned with a different vision. Such financial advisers and bankers must not be isolated from the culture of the Egyptian market for too long.
An example of practices in the Egyptian market which differ from those of more advanced economies is that settlements are not delivered through a proper clearing house, and it takes a total of four days to purchase a bond, compared to two days in developed economies. Also, there is a limited variety of bond instruments in the Egyptian market, with only straight and floating rate bonds offered. The international market, by comparison, has serial bonds, coupon bonds, real estate bonds and more specialised bonds, to name a few.
However, change is in the air. The government has been taking steps to activate the bond market. Small investors need to be lured to the debt market by minimising the obvious risks of cashing in a bond before maturity.
The government will not encourage the issuing of euro-dollar bonds at present, according to the private banking source. Not only is the new currency still functioning on a trial basis, but why add to uncertainty by increasing the country's external debt, the source asked. "A foreign exchange bond is always risky for both the borrower and the lender. The rate can rise or fall, affecting either participant. It would be premature to deal in the euro-dollar when there is so much more to do within the Egyptian capital market."
Foreigners have also found the yield on bonds to be low and not as inviting as stocks. There is no continuing control on maturity and the credit quality of the investments in bonds in Egypt.
Treasury bonds, however, are being issued more frequently. Since the beginning of 1999, LE4.5 billion worth of these bonds has been issued. As the stock market declined by 22 per cent last year, this encouraged both the government and fund managers to move approximately 30 per cent of their investments from equities to fixed income securities.
The government had hoped that bonds would contribute to a more cohesive market. But following the release of LE6 billion in government and corporate bonds, some experts said this caused a shortage of cash in the economy. However, bonds themselves are not guilty of any misdeed -- market distortions are.
Liquidity uncertainty, high interest rates, and the shortage of foreign currency have all contributed to irregular trade in the bond market. Investors in the capital market are confronting selling pressures and unpredictable buying surges. "A good day of transactions is LE30 million for treasury bonds, and a good week is LE80 million. A bad week is LE500,000 and it can stay that way for two consecutive weeks," said broker El-Assal. These trading fluctuations reflect market imperfections, not just client interest within the debt market.
The bond market is dominated by institutions, including insurance companies, pension funds and mutual funds. These financial entities are obligated to work with individual investors under the supervision of the Central Bank of Egypt (CBE). It is only through this three-sided effort that the market may absorb the pressures of buying and selling without materially affecting the price.
At present, however, the Egyptian bond market lacks a sufficient flow of funds and a properly functioning framework. "There is a lack of transparency in market developments, not enough of a spread in prices offered, and players that do not have access, or are not aware of, what is out there in the trade arena," El-Assal asserted.
For example, even in the stock market, the government's decision to sell 34 public sector companies at the same time tends to distract investors and negatively affect prices. This overall lack of cohesiveness within the market has particularly harmful consequences for the trading of bonds because the bond market is still young and fragile. Stocks are supported by many clients and market analysts, but bonds continue to be almost defenceless.
