Worries about the result of the upcoming presidential elections run-off are taking their toll on the market. Sherine Abdel-Razek
takes a look at the market's performance
Jitters preceding the announcement of the first results of presidential elections stripped the market of almost eight per cent of its strength Sunday through Tuesday amid selling pressures by foreigners and Arabs.
"The preliminary figures released since voting ended Thursday night took investors by surprise and their reaction materialised starting the early minutes of Sunday's transactions," said Tamer Ismail, head of the dealing room at Cairo Capital Brokerage.
According to Ismail, for all the stock market investors he deals with the result of the first round is worrisome as the two candidates reaching the second round are the most divisive; thus the countdown to the second round will be unstable politically, a factor that investors like to hedge against by quitting the market.
Former prime minister Ahmed Shafik, one of the two presidential candidates who made it to the second round, claims that his adversary, the Muslim Brotherhood's Freedom and Justice Party candidate Mohamed Mursi, will turn the country into a theocracy. For his part, Mursi claims Shafik means a return to the Hosni Mubarak regime.
The best-case scenario for investors, especially foreigners, according to Ismail, was if Amr Moussa, former foreign minister, won. "In my company, we had many discussions with experts from foreign financial houses like Merril Lynch and Morgan Stanley and they were always sure that Moussa would make it to the run-offs," he said.
"Moussa has good relations with the United States, Israel and Gulf countries and this would have given him the privilege of being able to attract the much needed investment and aid," added Ismail.
Egypt is trying to cover its fiscal gap by borrowing from the International Monetary Fund (IMF) and other donors. The Muslim Brotherhood-controlled parliament has been hampering IMF loan negotiations by rejecting reforms that the fund is requesting.
The latest losses put the Egyptian stock market's gain since the beginning of the year at less than 30 per cent compared to around 40 per cent in April. Back then the market ranked second among best performing emerging markets, with Brazil first. With the countdown on to the second round of elections, May saw performance zigzag and the shedding of earlier gains.
"It is all politics that is driving the market now. The early recovery in the first months of the year came after the parliamentary elections and a partial return back to normal status was felt," said one broker in a leading investment bank.
"Neither the problems in the Eurozone related to Greece nor the news from traded companies like the billion dollar deal that Orascom Construction Industries finalised in Iraq were able to change the market's mood," the broker added.
Both Ismail and the broker agree that the coming period won't be much better for the market.
Fitch IBCA, the rating agency, said in a report it issued at the beginning of the week that political differences between the two candidates in the second round run-off "could exacerbate social unrest and prolong political stalemate".
The agency noted that political tension could further delay a restart to critical talks with the IMF, and the resumption of foreign direct investment.
However, Fitch said it believes the government will endeavour to meet the requirement to finalise a budget by 30 June. The rating agency decided to keep Egypt's "BB-" rating until a new government is able to implement a comprehensive economic programme that attracts external support and foreign investment.
However, even though tensions are likely to rise before the election run-off, in the longer term both candidates favour policies that could stabilise Egypt's credit profile.
Egypt's economy shrank by four per cent between the second and third quarters of the current financial year. Gross domestic product (GDP) at current prices dropped from LE377.3 billion in the period between October-December 2011 to LE362.5 billion between January-March 2012. Moreover, total investments fell by 16 per cent to LE56.1 billion in January-March 2012, down from LE66.8 billion in October-December 2011.