16 - 22 September 1999
Issue No. 447
|Published in Cairo by AL-AHRAM established in 1875|
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Money crunch and summer lullBy Sherine Abdel-Razek
Once again and for the seventh month in a row the market suffered from subdued and thin trading. But this time it was not the low appeal of market offerings that undermined investor interest. In fact, the market was plagued by a number of hard-to-overcome problems. Topping the list was the liquidity crunch. This has negatively affected the market in a number of ways as it pushed banks to liquidate their securities holdings to get highly needed liquidity which resulted in an oversupply of shares and thus put a downward pressure on the value of traded securities.
On the other hand, the spiralling interbank rate, a consequence of the lack of liquidity in the banking sector, has reached new highs, raising investors' fears that this will lead to a parallel increase in bank deposits and dwarf the yield on stock market investments.
This development has been accompanied by uncertainties about the dollar exchange rate and investors' holding back their investments in anticipation of the power companies' offering next month. To top it all off, the previously mentioned factors have coincided with a seasonal factor -- the summer vacation lull.
The value of market activity declined by 3.9 per cent in August compared to the previous month to reach LE2.3 billion, or 16.4 per cent less than the corresponding July figure. But more significantly, almost all the most actively traded securities like MobiNil, Ezz Steel Rebars and CIB escaped the losing trend. These three companies have cornered 60 per cent of the overall value of market transactions, with MobiNil alone accounting for 47 per cent of the activity. This has become one of the main characteristics of the market. It leaves very little space for the second line companies to change hands. However, the market's governing bodies, the Capital Market Authority (CMA) and the Egyptian Stock Exchange, have exerted a lot of effort to lighten the picture by initiating some important developments.
In a move aimed at protecting investors from trading risks, the CMA has approved the establishment of a settlement guarantee fund. The fund, which gives memberships to all brokerage companies working in the market, will guarantee settlement of brokerage transactions in cases where there is no delivery of securities by a seller or failure of payment by a buyer. In the first case, the fund provides the buyer with documents that prove his ownership of the sold securities, while in the latter case, the fund intervenes and covers the obligations of the brokerage which in return will repay its debts to the fund later at an interest rate higher than the cost of borrowing from banks. The capital of the fund will be recalculated every three months as it depends on the volume of market activity. Mandatory contributions by members will be calculated according to each member's average daily trading figures of the last three months.
In another action later in August, the General Insurance Authority approved a new insurance document that covers all risks related to the activities of companies working in the stock market. The new document will be issued through a common bank account in which most Egyptian insurance companies will participate. According to the new document, these companies are committed to compensating the clients of companies working in stock market-related activities such as brokerage, fund management, portfolio management, etc., for any harm they might suffer due to the loss, theft or damage of their securities. Moreover, the document covers other risks related to malpractices of stock market companies such as deception, violating the client's secrecy or using forged documents.
Another promising change was the announcement by Sameh El-Turgoman, chairman of the Cairo and Alexandria Stock Exchanges, that the exchange's board is currently considering lifting the five per cent limit imposed on daily share price movements. This long-asked-for development came closer to reality after a recent International Monetary Fund (IMF) working paper criticised this limit, pointing to it as a "deterrent to market development". The paper also said this ceiling reduces the gains of shareholders in addition to hindering efficient distribution of resources. The ceiling was imposed in February 1997 to protect the exchange from sharp, unjustified daily fluctuations in the prices of traded shares.
Returning to the developments in market transactions, MobiNil maintained its position as the most active stock in the market, but could not resist the strong sliding trend as it lost 9.26 per cent of its value during August to end at LE78.51.
This was not all. MobiNil has asked its debtors to postpone their deadline for repayment of the LE1.7 billion bridging loan the company acquired early last year. The firm said its request was due to the delay in its LE340 million bond offering as it has not yet acquired the CMA's approval. MobiNil had planned to use the proceeds of the offering to cover part of the loan which matures this month.
Another busy stock, the Commercial International Bank (CIB), Egypt's largest private bank, has acquired a $200 million international syndicated loan from 26 financial institutions to be repaid in 3-5 years. The loan, CIB's second internationally, will be used to support its foreign currency liquidity and will enable the bank to expand its operations. This facility replaced the bank's plans to issue eurobonds which would have involved higher costs. The bank's stock kept orbiting around the LE30 level, edging up and down by one or two pounds.
The month has also witnessed an increasing interest from foreign multinationals in offered Egyptian companies. The cement sector received the lion's share of attention, a fact reflected in escalating demands for the sector's companies. Bids offered by British Blue Circle and Mexican Cemex to buy 76 per cent of Alexandria Cement and 90 per cent of Assiut Cement respectively were chosen by the holding companies as the best offers in terms of pricing and production-upgrading plans. The total value of the two offers came to around LE2 billion. The foreign companies are currently in the final phase of negotiations with the Egyptian government.
Another company in a different sector that attracted foreign interest was Misr Aluminium. The company, referred to as one of the public enterprise sector's crown jewels, is currently being subjected to due diligence studies conducted by an American Aluminium giant which considers it a potential investment. The Egyptian government has put Misr Aluminium in its strategic industries category, meaning it will not be fully privatised as the government will retain a 40 per cent equity in the company.
Another important development that will pave the way for the expected wave of mergers and acquisition deals in the Egyptian banking sector was opening the bidding for purchase of 93 per cent of the Egyptian Arab-African Bank (EAAB). However, things did not go as well as expected. After the EAAB's major shareholder Arab International African Bank approved the bid offered by the United Bank of Egypt, the deal was blocked by the Central Bank's unexpected refusal. The reasons for the CBE's decision remain unclear. Its approval is a prerequisite for finalising any merger or acquisition agreement concerning one of the banking sector's institutions.
In addition, Financial Investments Holding Company (Lakah Group) has registered 23 per cent of its equity in the Luxembourg Stock Exchange. The offering is valued at LE350 million. This raises the number of Egyptian companies with shares listed as Global Deposit Receipts (GDRs) in the international stock market to eight.
The performance of the other seven Egyptian GDRs was mixed in August. However, the losing tendency has affected their general performance during the month. This situation was attributed to unease in the international stock markets after the Federal Reserve Bank decided to raise interest rates to curb US inflation rates. The seven are the CIB, Misr International Bank, Suez Cement, Paint and Chemical Industries, EFG Hermes, Al-Ahram Beverages Company and Ezz for Steel Rebars.