Al-Ahram Weekly On-line 28 Sep. - 4 Oct. 2000 Issue No. 501
Published in Cairo by AL-AHRAM established in 1875

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Better light down the road

By Sherine Abdel Razek

In spite of hopes for a vigorous stock market this fall, following a sluggish summer, numerous factors exerted downward pressure on the market during the last two weeks. The failure of the Euromoney conference, the announcement that a 20 per cent stake of Egypt Telecom would not be offered until the end of October and a murky macroeconomic outlook were the most prominent of these.

Although the Euromoney conference brought together more than 1,000 officials and businessmen, attendees expressed disappointment with the event which drew very few foreign investors and at which the government delivered little good news.

Perhaps it was the general air of disappointment prevailing in the market that encouraged the government to announce the long-awaited sale of a portion of Egypt Telecom. However, this announcement appears to have caused a new set of problems.

As investors prepare for the offering of Egypt Telecom, under which LE5 billion worth of shares and GDRs (Global Depository Receipts) are expected to hit the market, many have begun to divest their portfolios of less attractive stocks to free up resources for the offering.

A press release by the government said that the stake offered in Egypt Telecom will be equally divided between the local market, in the form of shares, and international markets, in the form of GDRs. Lead managers and underwriters for the offering, a group comprising 12 financial institutions, both local and foreign, will convene early next month to determine the fair value for the shares to be offered. The nominal value of the shares is LE100 each.

In addition to being Egypt's largest ever initial public offering (IPO), the stake in Egypt Telecom is also generating enthusiasm because it will inject badly needed liquidity into the market. The offering is expected to be a litmus test of the interest of foreign investors in Egypt's telecommunications sector, especially since during the last eight weeks foreign investors were heavy sellers for listed shares.

Similar telecommunications offerings in other emerging markets, such as Turkey, have attracted less foreign interest than anticipated. Foreign investors seem to have found shares in information technology companies in the developed markets more attractive, in spite of their recently meager gains.

Nevertheless, a number of factors are likely to enhance the appeal of Egypt Telecom. The company is well-positioned to operate Egypt's third mobile phone network when the exclusivity period enjoyed by the other two operators, MobiNil and Click, ends in November 2002. Likewise, Egypt Telecom is viewed as a potential candidate to establish Egypt's first third-generation mobile phone network. Earlier this month the telecommunications company, which has a monopoly on fixed-lines, announced that it will provide one million new lines each year. Also, its profits of LE1.6 billion for the year ending in June, are double those of the previous year.

The return of businessman Rami Lakah to Egypt has slowed the rapid decline in value of the shares and GDRs for the Lakah Group. Nonetheless, these continue to drop in value following the negative assessment on the outlook for the group made by the rating agency Fitch IBCA.

Orascom Telecom (OT) and its sister company Orascom Construction Industries (OCI) were among the few stocks that gave their investors reason for joy. OT announced that several European telecommunications operators have expressed an interest in pursuing partnerships with the company, either through alliances or acquisition of part of the enterprise. This has pushed up the value of the company's stock and that of its subsidiary MobiNil for several days.

OCI, which has performed strongly compared to other companies, released its first-half figures showing that the growth in its earnings this year is only 78 per cent of earnings made in the same period last year.

Although the market appears to have thrown off the worst of the summer doldrums, with trading volumes holding steady compared to August, investors still appear to lack the conviction to push the market on a sustained upward course.

Conflicting outlooks for the market have caused some confusion for investors. Earlier this month, the market responded favourably to positive economic indicators issued by the Central Bank of Egypt (CBE). The CBE released figures for balance of payments and liquidity for the fourth quarter of fiscal year 1999/2000, ending 30 June 2000. These showed a sharp decline in the trade and current account deficits as well as an increase in foreign reserves

However, market analysts have reasons to be pessimistic. The results of a survey conducted by Reuters about the outlook for the Egyptian economy indicated little optimism. All those surveyed, whether at local or foreign financial institutions, predicted that the GDP growth for next year will be less than 5.5 per cent.

Regarding the GDP figures announced by the government for the year 1999/2000, analysts suggested that the 5.5 per cent figure is exaggerated. They suggest that growth in the past year did not exceed 4.5 per cent. This estimate, they say, is based on the fact that in 1999/2000 Egypt suffered from the decline in oil prices and escalating interest rates. Even though tourism revenues increased, these revenues would have been insufficient to cause a growth rate of 5.5 per cent.

Moreover, a market commentary by EFG Hermes, Egypt's largest investment bank noted that the outlook for the rest of this month offers little prospect for significant changes to investors' perceptions or in the direction of the market. Looking ahead further, improved third quarter results would help locally, while internationally, a stronger Euro would boost local exports and tourism.

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