Issue No.588
Economy
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30 May - 5 June 2002 Issue No.588 Economy |
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| Published in Cairo by AL-AHRAM established in 1875 | Recommend this page | ||
An unkind cut
The capital market is already black and blue from months of pummelling at the hands of the economy. Last week it sagged after yet another blow: this time from an international rating agency. Sherine Abdel-Razek reports
The market has suffered one more slap in the face. As if it didn't have enough troubles, international rating agency Standard and Poor's (S&P) last week decided to downgrade the Egyptian economy a notch to BB++. This is the lowest rating in the investment-grade category; in other words investing in Egypt is as risky as it gets for a country still worth investing in.
Adding insult to injury, S&P downgraded its ratings for two of Egypt's leading banks: the National Bank of Egypt (NBE) and Commercial International Bank (CIB). The rating agency said the downgrades came because "the government's financial and structural reform measures will at best slow down, rather than reverse, the recent deterioration in Egypt's creditworthiness."
According to Gerard Rizk, analyst with Nomura Securities in London, the Egyptian economy suffers from some well-documented problems: a high budget deficit and debt burden, inadequate spending controls, a lack of progress on economic liberalisation, a cumbersome
bureaucracy and little political stomach for more reform.
As for the NBE and CIB, Egypt's biggest state-owned and private banks respectively, analysts interpreted their downgrade as pointing to persistent structural weaknesses in the banking sector.
Emmanuel Volland, a director in Standard & Poor's Paris office, was quoted by Reuters as saying, "While the government is currently adopting new measures for the banking industry, it has done this only after long delays and with limited vigour and the long-awaited
privatisation of the public-sector banks has been postponed." Volland also pointed to deterioration in asset quality in the sector throughout 2001. By the end of the year the proportion of non-performing loans to total loans stood at 16 per cent.
S&P highlighted other problems, too: weak capitalisation, squeezed liquidity, low automation and overstaffing. Egypt is still in the investment grade in Fitch's ratings, but is a grade lower at Moody's.
Together with the poor economic outlook, these problems, according to Rizk, are handicapping economic development and undermining the credibility of the entire financial system in Egypt.
Analysts also believe that S&P's moves were triggered by Egypt's refusal this month to use a financing facility offered by the International Monetary Fund. Egypt's intransigence stems from its reluctance to liberalise the economy and reform the foreign exchange regime. Analysts believed the IMF would ask Egypt to do both as a condition of granting the facility. The facility was agreed upon at Egypt's donors meeting in February.
The refusal may lead to a domino effect. The World Bank said earlier this week that its $500 million loan to Egypt, due in September, depended on the IMF authorising its finance facility.
OT share price movement
What is certain is that the cut in ratings will increase the cost of borrowing for Egypt, further burdening the economy. "Any future debt issue is likely to be more expensively priced for both sovereign and corporate borrowers. A higher credit risk profile, exacerbated by regional tension, could narrow Egypt's options should it need to borrow. The downgrade clearly does not promote confidence in Egypt as a market or economy to invest in," Rizk said.
S&P's move will also make it harder for NBE and CIB to raise money from the international markets.
The news from S&P was released late Wednesday and early Thursday, the fourth and last days of the trading week. As a result, the market had not fully absorbed the news by week's end. But Thursday's transactions were thin, and negative sentiment seemed to be seeping through the market. Shares that appeal to foreign investors suffered most.
Unsurprisingly, CIB has been budged from its position as the market's most active banking stock. It ended at LE27.99.
Al-Watany Bank's stock fell after news last week that negotiations with an Arab-based financial institution to buy a 40 percent stake in the bank ended without a deal.
Moving on from banks, it was clear that Orascom Telecom (OT) is still suffering the aftermath of results that fell short of forecasts. However this was partly offset by news that the telecom giant would soon sell part of its sub- Saharan Telecel unit. Moreover, OT's chairman had announced that the company was negotiating a broad refinancing package, including a syndicated loan worth approximately $250 million for its Tunisian GSM licence, which would not be consolidated on the company balance sheet. The stock
ended the week at LE10.73.
Local GSM provider, MobiNil, failed to attract buyers, closing at LE28.01.
In other news, the Capital Markets Authority approved a revised offer put forward by Egyptian Kuwaiti Holding to buy 100 per cent of El-Masreyah Glass. Under the terms of the deal, Egyptian Kuwaiti Holding must buy at least 80.05 per cent of the glass company's shares at a set price of LE176.
El-Masreyah Glass announced a reviewed net profit of LE12 million for the first quarter of 2002. This figure compares to a net profit of LE6.40 million for the same period the previous year.
The results of four investment funds were the most brutal indication of the slowing of the market. The four funds, owned by Banque Misr, American Express Bank, Egyptian American Bank and Bank of Alexandria, all posted losses for the fiscal year 2001.
Overall market transactions came to LE345 million, which was mainly the result of a number of one-off big share ownership transactions. Most of the rest was in bonds, which accounted for LE131 million of turnover. Losers outnumbered gainers by far, with the stock price of 73 companies falling, while only 337 stocks gained ground.
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