Al-Ahram Weekly | Economy | New measure to revive the bourse

		25 - 31 July 2002 Issue No. 596 Economy	Current issue Previous issue Site map
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New measure to revive the bourse
The government has unveiled a series of initiatives aimed at resurrecting Egypt's flagging bourse. Sherine Abdel-Razek reports

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On Sunday 21 July, new regulations came into force that will allow the bourse's 12 most active stocks to move up or down according to market forces, abolishing the five per cent limit on share price fluctuations. The new regulations will allow these 12 shares to float freely within a 40 per cent bandwidth (plus or minus 20 per cent) during any given trading session.
The 12 companies include market heavyweights like MobiNil, Orascom Telecom and the Commercial International Bank. Minister of Foreign Trade Youssef Boutros-Ghali said the list of 12 would be regularly reviewed and would be expanded when stocks meet criteria laid down by the authorities. Although this gradual implementation of the new rules raised reservations among some market experts, Ghali said "It makes no sense to remove price boundaries for stocks that are not liquid and, because they are not liquid, could be manipulated with one or two transactions." While the market responded positively to the news last week with most of the blue chips gaining ground, the first day after implementation saw low trading volumes.
"Last week's revival faded and the market reaction to the first day of implementing the rules was muted," commented a Cairo-based broker, who asked to remain anonymous. "Investors held back their investments to see the effect of the new rules and then the market witnessed a profit taking session," he added.
Indeed, none of the 12 stocks which had their restrictions lifted moved more than five per cent by midsession on Sunday. Analysts believe that this is due to the fact that the new regulation is only a partial solution. "While the removal of price boundaries indicates that officials are keen to show progress and improvements in the market, stable, clear and flexible regulations are more likely to attract investors, especially foreigners," said Reem Mansour, economic analyst for Sigma Securities. Mansour explained that when the money laundering law was passed a lot of foreign investors praised the act. "Nevertheless, for a strong rebound to happen there need to be improvements in economic stability, the foreign exchange situation and privatisation," she added.
Another analyst, who works for a leading brokerage firm, pointed to other steps that could be taken in parallel with the new rules to have a stronger positive impact on the market. The analyst, who asked to remain anonymous, explained, that according to the CMA regulations, investors cannot sell their purchases before a three-day settlement period. This was acceptable when there were five per cent limits on stock movements. But now, inability to sell shares for three days, during which they can fluctuate freely, might lead to enormous losses in a depreciating market.
The authorities also have plans to introduce margin trading rules. These regulations would involve allowing investors to pay for 50 per cent of a trade up front, with a loan from a brokerage firm for the balance. The purchased securities would act as collateral for the loan. The investor has to pay back the amount when he sells his shares. Until he pays back the full amount, a set percentage of interest is paid to the brokerage firm.
In a gathering held on Sunday to celebrate the lifting of the ceiling, Ghali said that margin trading rules were currently being finalised by the Capital Markets Authority (CMA) and would be implemented in "a week or 10 days". "I will review them, and as soon as they are ready, I will issue them," he added. Margin trading rules will also only apply to the bourse's most active shares: the ultimate aim being to encourage more trading. The CMA is currently issuing licenses for financially capable brokerages to start this activity. Indeed, margin trading is risky amid the current decline in share prices. Investors might not be able to pay for their loans and financially struggling brokerages might find themselves in a crisis.
However, as long as the market is liquid, transferring shares shouldn't be a problem. Mansour points to the fact that until June 2000 margin trading was widespread, adding to daily market turnover. "However, it wasn't legalised and was eventually stopped by officials. This reduced the market's daily turnover to an average of LE30 million after trading at an average of LE300 million/day," she said.
Indeed, the steep decline in turnover has been the primary reason for the government's new measures. A report recently issued by the Federation of Arab Banks said that the performance of Egypt's stock market was the worst in the Arab world last year, dropping by 37 per cent. Market authorities blame last year's decline on the events of 11 September but most observers have a different interpretation. Namely, that 11 September should not be used as an excuse for Egypt's economic problems. Other countries have also been economically hit by the post-11 September crisis. Despite this, "many of the emerging market countries that managed their economies in a responsible manner pre-11 September have been able to avoid ratings downgrades," said Gerard Rizk an economic analyst for Nomura Securities, London.
However, the market did fare well during the week ending 18 July. An active buying spree sparked by news of the new regulations dominated events. The cement sector was also in the limelight. After rumours that Misr Qena Cement are in negotiations with the Mexican cement giant Cemex about the latter acquiring a stake in it, the local company disclosed that the talks were about market cooperation not a stake sale. Misr Qena Cement closed at LE12.54, after rallying from around LE9 in early June on speculation of possible foreign investor interest. These announcements were made in a letter from Misr Qena Cement to the Cairo and Alexandria Stock Exchanges (CASE) to address market rumours concerning a potential offer from an anchor investor. It said there had not been any talk concerning potential offers to buy or sell the firm's shares, although the vice- chairman of Cemex was invited to visit the company's factory in Qena two weeks ago. The sector has attracted considerable attention recently with rumours of stake sales in late June when Irish building materials group CRH announced an offer for Misr Beni Suef Cement.
As for the over-the-counter (OTC) market, where unlisted shares are traded, the week witnessed active transactions on shares of Lakah group. The chairman of the group, which was delisted from the bourse a month ago due to its failure to provide the CMA with a schedule of repaying its debts, is rumored to have reached a settlement with his debtors and is returning to Egypt soon.

1. Egyptian Company for Mobile Services-MobiNil (LE 1 billion)
2. Orascom Telecom Holding- OT (LE 1.1 billion)
3. Orascom Construction Industries-OCI (LE 0.825 billion)
4. Egyptian Media Production City ( LE 1.72 billion)
5. Commercial International Bank-CIB (LE0.65 billion)
6. Suez Cement (LE0.64billion)
7. Misr International Bank- MIB (LE0.14billion)
8. Egyptian American Bank- EAB (LE0.144)
9. Medinet Nasr Housing (LE0.08)
10. Paint and Chemicals Industries-Pachin (LE0.2 billion)
11. Al Watany Bank of Egypt (LE0.175 billion)
12. Export Development Bank of Egypt (LE0. 25 billion)

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