The gains of August
August witnessed subdued but still eventful trading in the capital market,reports Sherine Abdel-Razek
Market activity usually slows down during the summer, especially in August, and this year was no exception. Alhough market indices gained ground during the month, the amount of daily average transactions was 40 per cent lower than July, hovering around LE26 million a day.
The Hermes Financial Index, a broad-based index composed of highly active stocks, gained 11.6 per cent to surpass the 9000-level and close at 9033.
While local investors enjoyed their summer vacation, foreign investors held back because of difficulties they face in repatriating their dollar- denominated profits due to the scarcity of hard currency in Egyptian banks. This led to a sharp drop in net foreign transactions by LE21 million during the first three and half weeks of August with foreign investors buying transactions valued at LE131.9 million compared to selling orders worth LE152.9 million. But towards the end of the month, as the Central Bank of Egypt (CBE) finally started to address a $70 million backlog in currency requests by overseas investors, sighs of relief could almost be heard throughout the market. The CBE also decided to set up a foreign investment fund through which investors will be able to obtain their hard currency denominated profits on the same day.
Internal change within the CBE gave more uplifting news for the market last month. The recomposed CBE board, including more representatives of the private sector and other institutions working in the market, has raised hopes for closer consultation between the banking sector and the stock market and its regulatory body, the Capital Market Authority (CMA), in the future.
The market was also encouraged by news that the San Francisco-based rating agency, Moody's, is setting up a Cairo office through which it will provide its ratings and research services to companies in Egypt and the Middle East. The office will be a joint venture with the local Finance and Banking Consultants International (FINBI). This will make Moody's the first international rating agency to have an office in Egypt.
Other rating agencies licensed by the Egyptian authorities to rate the sovereign and corporate bonds include Standard and Poor's (S&P), Thomson Bank Watch and Fitch IBCA. Egypt's bond market is still relatively small with an overall value of LE21billion, six billion of which is in corporate bonds.
Also in August, S&P downgraded its rating of the government's local currency sovereign bonds while giving a negative outlook for foreign currency debt. The importance of the negative outlook is that it signals investors that a further reduction in rating may be imminent. The move was immediately reflected both in the local market transactions as well as in Egypt's Eurobonds. The Eurobonds bore heavy losses as selling orders fed by the S&P news pushed bonds with maturities in July 2006 and 2011 further downwards, with this coming in the wake of earlier declines in July.
As for company news, the market had many stories to tell. The cement sector made the headlines when the state-owned National Investment Bank (NIB) bid to increase its holdings in Suez Cement from one per cent to 10 per cent, which would entitle it to claim a chair in the company's board of directors. The move, which appears to be in blatant contradiction to the government's ongoing privatisation plans, raised many eyebrows in the market. However, NIB was upstaged by Ciments Français (CF), which immediately announced it would offer a competitive bid. "We think that the value of Suez Cement share is higher than the price offered by the tenderer. Ciments Français could soon be in a position to make a better offer," said the statement by CF, which already owns 34 per cent in Suez .
In response to CF's announcement, the CMA initiated an investigation of the legality of the offer, criticising the statement for being "unclear and not in line with Egyptian regulations". Meanwhile, the NIB still managed to increase its holdings of Suez Cement to six per cent of the company.
During the month of August, Orascom Telecom Holdings stayed in the limelight, continuing to represent a plurality of daily stock transactions. The company announced it had increased its holdings in Chad Mobile from 49 to full ownership. This comes within the framework of a reorganisation of OTH's investments portfolio after divesting most of its holdings in Telecel, its unprofitable sub-Saharan franchise. OTH also announced it is considering tendering a bid for Nigeria's Econet. On a different note, the company submitted a bid to operate one of Iraq's three mobile networks. With new regulations prohibiting companies with more than 10 per cent government ownership from participation, OTH is now contending for the network with only two other regional competitors, Kuwaiti MTC and Bahraini Batelco, as well as several American and European firms.
The month also marks the season for announcements of second quarter and first half results. MobiNil performed impressively, witnessing a whopping 153 per cent increase in its net profits during the second quarter. The mobile network posted LE178 million in net profits during the three month period ending in July compared to LE70.1 million in the corresponding period of 2002. The revenues were driven mostly by growth in air-time revenues, due in large part to the change in the tariff plan that was implemented on 1 April 2003. The results were also backed by the postponement of the entry of a third network into the regulated Egyptian market, combined with a high growth rate in subscriptions.
However, not all companies were as fortunate as MobiNil. The banking sector was reeling during the month with two main private sector players, Misr International Bank and Watany Bank, shouldering hefty losses. Profits for the two banks during the first half of the year were 87 per cent and 92 percent lower than lat year respectively.
Hardest hit on the market, however, was El Ezz Steel Rebars, which witnessed a sharp increase of 211 per cent in its net losses to reach LE125 million for fiscal year 2002. This came only a few days after Fitch Ratings had released an optimistic report on Egypt's steel industry saying it would benefit from the new mortgage law, and predicting that Egypt's demographic pyramid, with 60 per cent of the population under 25 years of age, could eventually fuel a construction boom.
