Paying the war price
While a short and successful war on Iraq is actually thought to be good for the global economy, the same is not true for Egypt's market. Wael Gamal reports
The upsurge in the Egyptian stock market in reaction to the recent Security Council splits over waging a war on Iraq shows how the local market responds to factors quite unlike those that affect markets worldwide.
The weekly Economist has said that the likely effects of a short war on global markets is that oil prices will rise to $40 a barrel, then fall as the war ends. In turn, share prices and the dollar will rally and confidence will be revived, creating a powerful economic recovery. "War will eliminate today's mood of uncertainty, boost government spending and push oil prices lower in the medium term, as new Iraqi production comes on stream," the Economist said.
The Egyptian market will function differently within this scenario. A recent study by the Ministry of Foreign Trade concludes that the war will have negative effects on the Egyptian stock market because capital market investment is greatly sensitive to political and economic variables. The study stresses the need to stick to a package of policies, with an active state role, to counter the expected negative effects of war on Iraq. Referring to what happened after 11 September, the study said that "a year after the events, their consequences were still evident on the operation of international markets." Despite the measures taken at the time by the Egyptian government to encourage stock investments, all indices dropped and the CASE index slumped by 38 per cent, the study said.
This time, the state needs to take stronger measures to offset the negative effects of a possible war. By issuing the new capital market law, speeding up privatisation, developing the market trading system and improving transparency, the study said there is a good chance the economy could withstand the shake. "Encouraging issuing convertibles including convertible bonds will also be important to create confidence," the study said.
During the last attack on Iraq, the CASE index jumped from 642.76 points a day before the attack to 660.47 five days afterwards and continued to rise. The effects of this war on the Egyptian economy, however, are expected to be enormous. Tourism and oil will be hit hard and the anticipated fall in oil prices will have disastrous consequences for Egypt's foreign exchange revenues.
Some analysts, however, have a different view. They believe that whether a war takes place or not is irrelevant to the stock market. Amr Maghrabi, head of EFG-Hermes' technical analysis unit, said the latest market upsurge is a reaction to the previous week's losses and had nothing to do with the war issue.
Maged Shawki, a Capital Market Authority board member, agrees, saying there has always been a time lag before the Egyptian market has reacted to these kinds of variables. "Rises and falls of interest rates, for example, never had any serious effects on stock prices," he said.
Shawki said the new exchange rate policy has attracted foreign money to Egyptian stocks and forced the reevaluation of Egyptian assets, a process that has made the market more efficient.
