Category Archives: Stock Exchange

Why Egypt’s Pound Isn’t Strengthening

Take a look at this chart, which the Central Bank has been proudly parading this month:

[caption id="attachment_1917" align="aligncenter" width="552"]Bloomberg Bloomberg[/caption]

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi. 

If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12 billion of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 billion of that has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:

currency3

And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment. 

So the picture isn’t as rosy as the interim government may want you to think.

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

[caption id="attachment_1907" align="aligncenter" width="650"]Dcode Dcode[/caption]

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash. 



MARKET CHATTER: Egypt Economic Recovery

In the context of Egypt’s protests last night and renewed political turmoil, it is important not to forget the economic implications.

After all, the economy is where we see the clearest consequences of nearly two years of instability – foreign reserves have more than halved since December 2010 to $15.4 billion, the balance of payments deficit is at $518.7 million in the third quarter of 2012/13, and tourism revenues are depressingly low despite government efforts to boost earnings to 2010 levels.

The question for many politicians desperate to see some success is how quickly will Egypt’s economy recover?  To shed some light on the varied perspectives out there in the market, here are two conflicting views from analysts who keep a close eye on Egypt and its balance sheet:

Peter Garnry, equity strategist at SAXO BANK 

Garnry reckons Egypt’s economy is still a long way from recovery.

“It is impossible to say when will this be over. In Europe the crisis was expected to be over in one year, and now we are into the fourth year into the crisis… Egypt’s economy will likely take a long time [to rebound],” Zawya Dow Jones reported him as saying.

He also notes that it’s not advisable for the Egyptian government to devalue the currency directly via regulations, or indirectly via printing more money.

This “distorts the economy. It doesn’t solve the problem, as you don’t change structurally the things that are wrong in the economy,” adding “it is best to leave it up to the market to adjust the [Egyptian] pound’s value.”

Then there’s the more bullish view, from the ever optimistic Emad Mostaque.

Emad Mostaque, strategist at RELIGARE NOAH  

Egypt is open and functional today and we must look at these protests in proportion to their actual size and disruption on the economy.

All the complaining over the constitution is also overdone, we don’t even have one in the UK and the most liberal/ideal one I’ve seen is in North Korea. What matters is who gets elected and if those elections are fair.

Onto markets, we would expect more weakness into the weekend with more marches tomorrow, although foreign buying has finally started as investors look to the medium term picture with elections being pushed through and some very tactical Arab (Qatari?) buying supporting the market.

The real economy will be ok (minus some points on tourism but plus lots on foreign aid).



Breakfast Wrap: Is Egypt on the Cusp of Privatising Electricity? Taxes Take Two

Egypt’s first private-sector electricity station began operations in Alexandria yesterday in a move that appears to rattle, if not, break the mould of the seven state-run energy companies operating the nation’s power stations.

TAQA Arabia, a subsidiary of Citadel Capital, the Egyptian private equity firm, is running the $400 million station, which will have a production capacity of 11 megavolts and will be fuelled by natural gas.

Up until the early 1960s, electricity generation and distribution was practiced by private companies.  But in 1978, after a transition to nationalisation, seven regional electricity distribution companies were established under the supervision of Egyptian Electricity Authority, according to the Ministry of Electricity.

Some of these companies have now been split into two, but fundamentally Egypt’s electricity power supply is state-owned.

The station was acquired by TAQA as part of a Build, Own, Operate, and Transfer (BOOT) financing scheme.

I.e:

BOOT projects are used to fund large-scale public infrastructure without affecting the country’s debt profile. Private developers are allowed to recover their costs of construction through ownership and operation of the plant for a fixed period before handing it over to the state.

Citadel’s project will provide power to a particular company (the state-owned Egyptian Styrenics Production Company, according to Ahram Online), but it could signal a move toward expanding this scheme elsewhere.

Egypt’s gas shortages have caused some of the worst electricity black-outs in recent years.  But with electricity demand growing, could Egypt consider limited privatisation of the electric power sector? 

◊ ◊ ◊

Three big announcements were made yesterday by the ministry of finance:

1)  Egypt expects to reach a loan agreement with the IMF by mid-December after talks this month focusing on limiting the budget deficit and a minimum level for its foreign reserves.  Ahram Online reported that the loan amount, initially set at $4.8 billion has been reduced slightly to $4.5 billion.

2)  The cabinet also approved a new 10% tax on major transactions on the Egyptian stock exchange, including initial public offerings (IPOs). The president said in August there would be no new taxes.

3) Finally, the cabinet approved two new tax brackets for high-income individuals. A 22% tax will be levied on individuals with annual incomes between 1 million Egyptian pounds and 10 million pounds, while annual incomes higher than 10 million pounds will be taxed at a rate of 25%.  The new structure looks something like this, according to Ahram Online:

First segment (LE5,000 – LE20,000): 10 per cent

Second segment (LE20,000 – LE40,000): 15 per cent

Third segment (LE40,000 – LE1 million): 20 per cent

Fourth segment (LE1 million – LE10 million): 22 per cent

Fifth segment (LE10 million and up): 25 per cent

The move to implement taxes on corporations and individuals after previous cabinets had failed to do so signals how the current government is forced to impose hard austerity measures that were initially played down.

The decision to levy a capital gains tax comes despite repeated assertions by bourse officials that such a tax would not be “suitable” for the Egyptian market.

Last year, the finance minister at the time, Samir Radwan, proposed a 10% tax on stock dividends in the hopes of offsetting Egypt’s rising budget deficit. But the proposal was quickly rejected by investors and bourse officials and Radwan was removed in a cabinet reshuffle.  How policies change.

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In my latest FT report, I write how escalating disputes between labour unions and employers in north Africa are threatening to derail economic recovery after the uprisings that ousted long-ruling dictators in the region.

Emboldened by the spirit of political change, thousands of workers in Egypt and Tunisia have staged a series of protests and are now in deadlocked talks with companies over demands for a minimum wage.

The piece puts together a series of examples of how the quest for a minimum wage can also be detrimental to a country’s economic fortunes.  But it also shines a light on the lack of conversation between labourers and their employers.

Some of the companies quoted in the report include Kraft Foods, which has commenced legal action against strikers and DP World, which shut down its Ain Sokhna port twice this year.

◊ ◊ ◊

As UAE-based Dana Gas restructures its $1 billion sukuk payment, averting a potential seizure of its Egyptian assets, the “region’s debt market barely blinked,” according to this Reuters feature on sukuk, or Islamic bonds.

Not long ago, a billion-dollar payment miss would have triggered a crisis of confidence in the market; now, it is almost ignored.



Breakfast Wrap: Human VS Machine, IMF in Cairo, Interest Payments on Egypt Debt

And it underlined the indispensable role humans still play in a market dominated by machines

That’s a sentence from this Wall Street Journal story on the closure of the New York Stock Exchange because of Hurricane Sandy, and how people are critical to its successful operation (and equally to its demise).

It also reminds me of this brilliant speech from Charlie Chaplin in The Great Dictator, which all of you must watch if you haven’t already.  An excerpt from the speech:

Soldiers! Don’t give yourselves to brutes, men who despise you, enslave you; who regiment your lives, tell you what to do, what to think and what to feel!

Who drill you, diet you, treat you like cattle, use you as cannon fodder. Don’t give yourselves to these unnatural men – machine men with machine minds and machine hearts! You are not machines, you are not cattle, you are men!

Ω

An International Monetary Fund delegation has arrived in Cairo, and maybe this time Egypt can present an economic plan that is worthy of almost $5 billion.

It has been a long drawn-out road of failed negotiations that have stalled for various reasons (initially Egypt turned its back on the IMF saying it didn’t need the loan, then Egypt’s political parties couldn’t agree, and then Egypt asked for more money).

Rebel Economy put together a timeline of Egypt’s interaction with the IMF, with historical details of the Egypt-IMF talks back in the 1980s.

This morning Ahram Online also published an interview with the IMF’s Middle East director Masood Ahmed.

Ω

The biggest problem Egypt will have is to convince the IMF that it is doing a good job of reforming energy subsidies, or at least that it has a good plan in place.  Unfortunately contradictory news reports on how reforms would take place and repeated comments from the prime minister Hisham Qandil that energy subsidies will be banished are not helpful unless people see action on the ground.

What is clear is that along with subsidies, the government budget must be restructured to reallocate state cash where it is needed (i.e. health and education).  Meanwhile, Egypt is struggling to pay off interest payments on government debt (i.e. bonds and bills that the government sells every week to try to plug its deficit).

One London-based economist working at an international organisation told me that high interest payments make up around 15% or 16% of the budget – a huge drain on the government’s finances. 

Ω

A detailed Reuters story on how Egypt has secured oil supplies for the rest of the year, despite fears about its ability to make payments, from a small number of Western suppliers who have agreed to deliver unusual grades of crude for hefty premiums

Obviously this is at a cost.  But more so, it reflects Egypt’s narrowing customer base.  Fewer and fewer are willing to supply Egypt.  This is an unsustainable cycle which will end sooner or later.

In case you weren’t convinced, Egypt’s petroleum minister himself said delays in energy subsidy reform is costing Egypt 10 billion Egyptian pounds (or $1.6 billion) every three months.

That’s on top of allocations already made for the energy subsidy.  Phew.

Ω

Egypt’s foreign reserves probably rose $300-400 million in October thanks to loans from Qatar and Turkey, Reuters reported, quoting a newspaper report from state-run al-Gomhuria newspaper.

Reserves at the end of October will probably be $15.4 billion or $15.5 billion, up from $15.04 billion at the end of September, al-Gomhuria said.

Usually when this type of story is leaked, it’s normally true but don’t let that comfort you.

The trickle of funding that is coming straight to the central bank only serves to stabilise the currency or for subsidies (see how energy subsidies seem to get into every part of Egypt?), rather than the economy.  It appears like Egypt’s central bank is operating hand-to-mouth rather than coming up with a sustainable solution, like perhaps devaluing the currency.

Qatar lent Egypt $500 million in October, its second such loan in the last three months, and Turkey lent the country another $500 million, Reuters said.

Egypt drew $600 million from reserves to pay for petroleum imports and $100 million to repay foreign loans, the report said.



Guest Post: From Tiananmen To Tahrir Square

Guest post by Douglas Johnson, a New York-based investment banker and Islamic finance specialist.  He is chief executive at investment banking firm Codexa Capital.  This post originally appeared in Codexa’s regular newsletter to investors.  

Tahrir Square may be closer to Tiananmen Square than a mapmaker would lead you to believe.

After the 1989 uprising in Beijing, Deng Xiaoping accelerated economic reform. The Chinese have never looked back; their worst annual GDP growth figure since 1990 was 7.6% in 1999.

Explaining China’s growth trajectory is more complicated, of course, than extrapolation from a single event. But one common theme throughout this period has been China’s anxiety over recurring civil unrest—actual and threatened.

Read More



Breakfast Wrap: Tunisian Mafia, Egypt’s $15 billion Energy Bill

“The revelations about these assets show the involvment of a Mafia with branches abroad,” said Tunisia’s minister for state property, Selim Ben Hmidane yesterday of the wealth of Tunisia’s deposed regime.

Tunisia’s ousted president Zine El Abidine Ben Ali apparently possessed more than $13 billion in assets, a government commission formed to look into his wealth has found,  Al Ahram quoted a Tunisian news agency as saying.

Read More



Breakfast Wrap: Dubai Ski Dreams In Egypt, Oil Troubles Persist

You may have noticed that REBEL ECONOMY has had a face lift.

Following recommendations and feedback from designers and fans, we decided to opt for a cleaner, easier-to-read website that focuses on content rather than design. 

We are on the look out for edgy designers to come up with a logo for REBEL ECONOMY. Please get in touch on  rebeleconomy@gmail.com or contact the editor Farah Halime, on fhalime@gmail.com for any suggestions! 

Thanks for your support. 

Read More



Breakfast Wrap: EFG Signs Dotted Line, Tunisia Stock Market Focus

Shareholders of EFG-Hermes, Egypt’s biggest investment bank, tied the knot on Sunday and finally approved a planned tie-up with Qatar’s QInvest after demands by the regulator for more information on the deal were met.

That pushes the once quite exciting Planet Investment Bank out of the picture, for now.  Planet IB, headed by a few high profile Egyptian businessmen and women, and investors including Naguib Sawiris until the deal fizzled, was at one point a rival bidder for EFG Hermes.

But Planet needed EFG Hermes to open its books to conduct due diligence before proposing a formal offer.  EFG did not comply, and Planet couldn’t go ahead with a hostile takeover because its investors wouldn’t allow it.

But Planet is one financial institution to keep an eye.  Executives at the company told me that with or without EFG Hermes, the plan is to get Planet growing to one of the biggest investment banks in the region.  That may come across as mere propaganda until readers consider the dwindling competition in the region.

International banks are scaling back from the region. The latest is Deutsche Bank, after Societe Generale and BNP Paribas said the same about Egypt recently.

Deutsche is cutting several senior jobs in its investment banking business in Dubai, including directors, as it cuts costs to adapt to a tougher investment banking environment globally, three banking sources said according to Reuters.

DATA

Cotton: Egypt’s new cotton season started on September 1st.  Egypt’s Alcotexa (Alexandria Cotton Exporters’ Association), the country’s main cotton exporter, sold 842 tons in the last week.  It has committed to sell 2,417 tons since the new season began.  Egypt committed to sell about 90,000 tons last season.

Trade deficit: Egypt’s trade deficit, the clearest government indicator of how much Egypt is selling and buying, widened by 47.9% as chronically high imports significantly outweighed exports.

The deficit reached 17.6 billion Egyptian pounds ($2.8 billion) in June 2012, almost double the 11.9 billion pounds deficit recorded in the previous year, according to Egypt’s official statistics agency.

Keep an eye on the Tunisian stock market

Apparently the economic impact of last week’s attacks on western missions in the Arab world by mobs angered by a trailer for the film The Innocence of Muslims will most acutely hurt Tunisia, according to an FT article by Borzou Daragahi and Heba Saleh.

The reasoning is that Tunisia lacks energy reserves and depends heavily on foreign revenue from tourism. Its promise as a haven for western businesses in Africa may have also been damaged.

In Egypt however, the FT reporters say,  last week’s attacks against the US Embassy in Cairo “can only darken prospects for the economy”.  While Egypt’s stock market has managed to shrug off impacts from the protests, the FT reporters say, but investors on Tunisia’s market are expecting huge losses when the market opens today.

While stock market performance is one viable indicator of a country’s economy, it is not necessarily a reflection of economic growth/recession.

Plus Egypt and other Middle East countries subject to protests also have problems with energy reserves and revenue from tourism.  The reasoning behind why Tunisia will be the most economically impacted seems somewhat arbitrary.

Iran is going down the renewable energy route after the country’s nuclear, oil and natural gas ambitions Iran’s nuclear, have been the subject of intensifying sanctions from the international community, writes Benoit Faucon in the Wall Street Journal.

“Fossil fuels will run out, but wind will always be available and no one can put sanctions on it,” says Ali Shirazi Tabar, a mechanical expert at Mapna Group one of Iran’s largest power contractors.



Breakfast Wrap: Egypt Money Worries, Yemen Bailout, Egypt Hackers?

Egyptian prime minister Hisham Qandil has said the country needs 267 billion pounds ($43.7 billion) in investment, as officials prepare to secure a $4.8 billion loan from the International Monetary Fund.

Local reports also cited Qandil as stressing that the IMF  has not asked Egypt to devalue the Egyptian pound as a condition for granting the loan.  The country’s economic program is “purely Egyptian without interference from any foreign party,” an Egypt Independent article said yesterday.

Aside from pointing out the obvious (that Egypt is in fact reaching out to “foreign parties” to meet its deficit gap) it is the wrong game to play to continue to appease the public with vague nationalism while simultaneously doing the exact opposite.

In the last four months, Qatar, Saudi Arabia and the Jeddah-based Islamic Development Bank have pledged more than $5 billion to help Egypt stave off a balance of payments crisis.  The US this week said it was close to agreeing to write off $1 billion of debt.   This has provided impetus to the local stock market which rose 2% on Tuesday to its highest level since June 2011.

It shows some indication that the government’s efforts to bolster the economy is successful.

The good news just keeps coming.   Energy giant BP is to invest $11 billion in a natural gas project in Egypt, Zawya Dow Jones reported, quoting the State Information Service website.

The project is huge, and when it is completed in four or five years, it is expected to produce 40% of Egypt’s natural gas output.   That is significant considering the country is struggling to meet domestic demand because of gas shortages.  That was the main reason behind the electricity black-outs this summer (most electricity power plants are operated with natural gas).

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Egypt’s former culture minister Farouk Hosni, once a candidate for the top job at the United Nations cultural agency UNESCO, is to stand trial on charges of making illicit gains, an official said on Tuesday.

International donors on Tuesday pledged $6.4bn of aid to help Yemen navigate its rocky political transition at a conference organised by the Friends of Yemen in Riyadh.  It is the latest of such “Arab Spring” bailouts and far more than anything we’ve seen in neighbouring countries.

Al-Sayyed Hamed, a lawyer and member of the freedoms committee at the Lawyers Syndicate, has filed a suit with the Attorney General accusing former President Hosni Mubarak and other officials of killing Egyptians through the importation of spoiled wheat.  

The website of Qatar-based satellite news network Al Jazeera was apparently hacked on Tuesday by Syrian government loyalists for what they said was the television channel’s support for the “armed terrorist groups and spreading lies and fabricated news”.

After this string of hacking incidents in both Saudi Arabia’s Aramco and Qatar’s RasGas, I asked a person in the know (an internet entrepreneur and CEO of internet security company) if something similar could happen in Egypt.

Egypt’s hacker community is mostly entrepreneurial, and the bigger companies (Vodafone, TEData, Damas, etc) have fairly modern IT infrastructure, so the probability of some spectacular attack due to corporate espionage or kiddie hackers is low.

Egypt is a bit different in that it doesn’t have a large globally competitive industrial monopoly to target by foreign entities, and the local fringe groups who are opposed to the post-revolution rule of law, large corporations, etc do not have the technical prowess to do anything of the sort.

Stuff of interest:

Turkey’s gold sales to Iran extended a record streak in July, the WSJ reported.  It’s an odd mix, and especially so because usually Turkey exports most of its gold to Germany.

 “The redirection of exports to the Middle East and away from Europe is a trick that few other countries have managed to pull off. Therefore, Turkey looks good in a world where most countries are struggling,” said Nigel Rendell, senior analyst at Medley Global Advisors in London in the WSJ story.

The Economist’s global debt clock is a great project the magazine has run for quite some time.  Compare and contrast total debt of different  countries.  Try the US and Egypt for one stark comparison that might make you think twice about Egypt’s economic problems…



Breakfast Wrap: Egypt Lives Hand-to-Mouth, Libya Strikes Oil, Tunisia Energy

Big numbers from Egypt yesterday.   Namely, Egypt’s closely watched foreign reserves pot rose $705 million to $15.12 billion in August, from $14.42 billion in July.   The excitement was short-lived however, because the temporary lift was, well, temporary.

The boost came from a $500 million deposit the central bank received from Qatar and by the central bank’s sale of 513 million euros’ ($642 million) worth of euro-denominated T-bills.

Egypt is expecting another $2 billion from Qatar this month, but this hand-to-mouth approach is not helping investor confidence.  Sustainable and long-term investment is needed.

One way is to buoy exports.  One of the most reliable exports Egypt has is cotton.  Last week alone, Egypt’s cotton exporter, Alcotexa, sold 1,513 tons of famed Egyptian cotton. Alcotexa has shipped 77,086.62 tons since last September 2011.

Another way Egypt is trying to cut its deficit is increasing and diversifying the debt it sells.  It did well selling its Euro-denominated bills last week, and yesterday it did well with ordinary EGP bills (domestic banks buy up most of this debt offered by the government – therefore they support Egypt’s government immensely).

That’s all while the pound is still devaluing of its own accord. According to Bloomberg, the pound fell to as low as 6.1072 a dollar on August 31, the lowest since December 2004.  That shows that Egypt’s government are running out of steam to protect the currency.  How long can they go without forcing a devaluation? 

Unfortunately, Egypt is stuck in a vicious cycle of supply and demand.  So, for example, it cannot cut off bread from its people just like that.

Egypt this week bought 355,000 tons of Russian, Ukranian and Romanian wheat in its fourth international tender in three weeks, local Egyptian newspaper Al Ahram reported this morning (Arabic).

The wheat will be shipped for shipment between October 11th and 20th.   Drought concerns in Russia have prompted Egypt to increase tenders to stockpile while it can.  Egypt cannot afford to run out of bread, or it faces a repeat of 1977 bread riots.  But it also cannot afford to continue with this inefficient subsidy system.  

Egypt’s stock market, often a litmus test of domestic confidence in political decisions, has done extremely well considering it was shut for almost two months last year when the uprising began.

Emad Mostaque, of Religare Capital Markets, has always been optimistic on Egypt.  In a note this morning, he says:

Egypt leads the way again rising 9.7% to almost 50% year to date. We think this can continue as foreigners have yet to come into a market still trading at a discount.

Regionally, country’s are beginning to implement changes in subsidy systems. Tunisia is the latest to raise petrol prices and yesterday announced the price hikes. 

Meanwhile, Libya struck gold.  It made an oil and natural-gas discovery in the Ghadames basin about 150 kilometers (93 miles) southwest of the capital Tripoli, National Oil Corp, Bloomberg reported.

And finally, an update on Glencore’s battle with Qatar Holding.  Glencore has said it will stick to the terms of a $33 billion bid for Xstrata, resisting mounting pressure from shareholders to sweeten the offer four days before investors vote.