Taking stock of flotation

The depreciation of the pound proves a blessing to the stock market. Sherine Abdel-Razek reports.

The stock market has been a primary beneficiary of the January flotation of the Egyptian pound and its subsequent depreciation, Capital Market Authority Chairman Abdel-Hamid Ibrahim said earlier this week.

He told the Press Syndicate's Economic Reporters Division that a revival in foreign transactions due to the decline in share prices is reviving the lagging economy following the flotation of the pound. "Foreign purchases of listed companies are equivalent to the exportation of Egyptian goods, which is the main aim of the currency liberalisation decision of 28 January," Ibrahim said. "The move put a lid on Egyptian share prices, thus making them more attractive to foreign investors, who found them cheaper compared to other markets in the region."

He explained that foreigners were net buyers; in the market their buying activities have exceeded their selling orders since the flotation. "The [foreigners'] buying transactions accounted for 23 per cent of the overall transactions from the beginning of the year to the end of last week," he said.

Foreigners' transactions did, however, retreat during July and August due to the problems some foreigners faced in repatriating their profits in dollars due to the scarcity of dollars in banks. The Central Bank of Egypt intervened by establishing a fund to cover short dollar positions for foreign investors. Now, the unrestricted freedom of foreign investors to move capital into and out of the market is an appealing factor, according to Ibrahim. "The easier we make it for them to transfer their money from Egypt, the more they will invest in the local market," he said.

While the pound's flotation made local stocks more price attractive, other positive developments reinforced the gains.

The flotation of the pound coincided with the lifting of the five per cent ceiling on the daily movement of the price of the market's most active stocks. "This move has energised the whole market, as seen by the sharp gain in the stock market's CASE index, including the 30 most active stocks in the market, which climbed from 440 points in January to 1046 points last Thursday. Moreover, the market capitalisation increased from LE120 billion at the start of the year to LE160 billion on September," Ibrahim said.

Ibrahim also attributed the recovery of the capital market to factors beyond the pound's flotation. He cited the implementation of listing rules whereby a number of listed companies increased their capital by offering new shares, thus enhancing the supply side of the market. He further praised the compliance of Egyptian companies with corporate governance measures, a set of regulations that guard investor interests and monitor corporate transparency.