Special Euromoney Coverage: Egypt's financial forecast: mild turbulence, partly cloudy

Sherine El Madany
13 Min Read

CAIRO: As global economic woes deepen, the International Monetary Fund (IMF) expects global growth to drop sharply for the rest of this year and the next year. However, financial analysts expect Egypt to experience mild turbulence.

Government officials and economists agree that fallout from the global crisis, which has stoked recession fears, could come in the form of a drop in tourism revenues, exports, foreign direct investment (FDI) and Suez Canal receipts. However, a silver lining appears in a very cheap stock market, tumbling oil prices, as well as a solid banking sector that could boost local consumption and investment.

“Price levels on the Egyptian Stock Exchange are significantly lower than they should be. Even if you assume a severe worldwide recession will impact Egypt, a 50 percent decline from peaks is not logical, said Mohamed Younes, chairman of private equity firm Concord International Investments.

He explained that 86 percent of companies traded on the stock market reported increases in revenues and 84 percent reported increases in net profits compared to results of the previous year. “In addition, the percent increases for the top 70 companies were all in double digits, he said.

These increases, he added, are due to the “very strong Egyptian macro economy. “What we see now is a screaming buying opportunity unless you tell me the whole world is going bankrupt and Egypt with it. These sharp declines are not justified. They are based on rumors and gossip.

Ripple effects of the financial turmoil have reached Egypt in the shape of volatility on the stock exchange, with the benchmark CASE 30 index hitting almost a two-year low, plummeting around 47 percent this year.

Analysts said that the sharp drops in trading this year were largely pegged to panic selling as investors in Egypt took their cue from crashes in other markets. “Why are people replicating what is happening in US and other markets? Because nobody is looking at the facts. It’s the facts that tell me that it’s a big buying opportunity, Younes said.

Still, the sharp volatility in Egypt’s market could make both losers as well as winners. “If you are a speculator, don’t come near the stock market. But if you are a long-term investor [willing to leave] your money over two to three years, enter the market because we will not see these prices again when the economy picks up, he explained.

Elwy Taymour, managing partner at Pharos Holding for Financial Investments, agrees, saying that the market’s volatility is a high-risk investment for short-term investors. “If you are a short-term investor over a period of six-months to one year, this is not the right time to invest in the market. But investors who have a long-term horizon, [should] enter the market because prices are low. Within three to five years from now, you’ll make money.

Looking on the brighter side of the financial turmoil, Taymour said the global economic slowdown managed to drag down skyrocketing oil prices, which means that inflation rates will likely cool down.

“When oil prices go down, prices across the board follow suit because transportation costs become cheaper. This means that the imported inflation that Egypt had will go down, which is good news, he added.

Fears of a global recession have plunged world oil prices to around $70 a barrel from a record $147 in July. Meanwhile, consumer price inflation in urban parts of Egypt fell to 21.5 percent in the year to September from 23.6 percent in the year to August for the first time in several months – albeit at a 16-year high.

“Inflation is bound to come down almost as fast as it has gone up in this year [when it almost doubled] . as 40 percent of inflationary pressure in Egypt comes from food and energy costs, which are currently falling worldwide, said Concord’s Younes, explaining that this is why inflation is no longer the biggest challenge facing the Egyptian economy at this stage.

“The major problem facing Egypt ahead is the speed at which the recession in the US and Europe will reach our shores. That [looming] recession – and clearly there is no escaping it – will impact our exports and revenues from tourism and the Suez Canal, he clarified.

“Furthermore, the slowdown in construction activities may occur in Egypt and will probably [weigh on] most company earnings in the next year or two.

The consensus now among government officials and economists is that Egypt will not be completely immune to the relentless global economic meltdown. Wael Ziada, director of research at Egypt-based investment bank EFG-Hermes, rules out the decoupling theory.

His firm forecasts a 6.2 percent growth in fiscal year 2008/09 – down from last year’s 7.2 percent, the fastest pace in almost 20 years – mainly triggered by slower private consumption as well as a global economic slowdown.

The government, however, said it is maintaining its growth target at 6 to 7 percent for the current fiscal year.

On the other hand, Taymour expects a much lower growth rate between 5-5.5 percent. “That’s still very good growth in light of all that’s happening in developed markets and shrinkage in the US and Europe.

As for FDI, Investment Minister Mahmoud Mohieldin said earlier this month Egypt would be content to attract $10 billion in foreign direct investment in the current 2008/09 fiscal year, down from the record high $13.2 billion in the previous year.

However, EFG expects an even lower figure of $8 billion in the next year and the year after.

EFG’s economist Mohamed Abu Basha added that stalling economies in Europe could also play a part in contracting growth rates in Egypt, as revenues from tourism and exports could tumble.

The regional investment bank said in August it expected a slowdown in European economies to drag growth in tourism revenue down to 18 percent, bringing in $12.5 billion in revenue. Based on EFG’s figures, 40 percent of Egyptian exports are with Europe and 50 percent of tourist arrivals in Egypt come from Europe.

The light at the end of the tunnel, financial experts said, is Egypt’s liquid banking system. “Egypt’s strong banking system is providing a source of stability, as our banks in the aggregate are in a very strong position, said Younes. “Loan to deposit ratio is hovering around 50 percent, and therefore Egyptian banks are very liquid unlike other countries.

He added that Egypt’s banking sector has not participated in a significant manner in the sub prime lending fiasco which proved to be behind the demise of some of the world’s major banks. “There’s too much liquidity and not enough lending taking place, and that has protected us from this crisis.

Taymour added that Egyptian banks were spared any losses because their exposure to the real estate sector was minimal contrary to other regional and international banks.

He predicts inflation rates will go down 10-11 percent over the next year, which gives an indication that a cycle of raising interest rates could be nearing an end. If the monetary tightening cycle comes to an end, he explained, interest rates will eventually go down, which is good for lending and good for the economy in general.

“Lower interest rates will encourage lending and thus local investment, which will help expanding businesses. They will also help consumers, as they will pay lower interests on auto loans and mortgages. This could trigger an economy that is fueled by consumption, he said.

Banking experts agree, and have spoken confidently about the health of Egypt’s banks.

“As of last June, loan to deposit ratio stood at 54 percent, which proves that banks have more liquidity as opposed to the liquidity crunch [in developed markets], said Nancy Fahmy, banking analyst at Beltone FinancialIf anything, she argued, most of Egyptian banks have been very conservative with lending.

Banking on the banking sector

Lamise Negm, vice president for government relations at Citibank Egypt, reiterated these statements, saying the Egyptian banking sector “is totally secure, and the Central Bank Governor confirmed that not a single penny has b
een lost in this crisis.

Central Bank Governor Farouk El-Okdah, in a rare news conference with the prime minister and investment minister on Oct. 12, said the bank’s foreign reserves of around $35 billion and $15 billion in overseas positions of Egyptian banks, were secure.

El-Okdah added that Egypt’s foreign reserves were “97 to 98 percent invested in government securities. He said the bank had not lost any of its funds abroad and “all these deposits and investments are safe.

On the other hand, there is a concern that market jitters – in addition to driving down the stock price – can also fan fears among bank customers.

As a result, some banks will have to worry about a so-called “run on the institution, where customers pull out their money.

“It’s customers that are causing this panic. Psychologically, they are not confident, Negm pointed out. “However, on the ground, all Egyptian banks are doing a very good job. They are doing lots of business, acquiring new customers. The numbers are picking up.

In the worst case scenario, if customers panic and withdraw their deposits, banks will be able to give them their money back, she said, because they are “cash-rich.

But she said the opposite scenario is more likely: More investors will turn to banks now that interest rates have gone up and the stock market has taken a deep plunge.

Egypt’s central bank raised overnight interest rates for the sixth time this year by a cumulative 2.75 percent in a bid to battle inflation running at a 16-year high. The moves brings its overnight deposit rate to 11.5 percent and its overnight lending rate to 13.5 percent.

“Raising interest rates is good for customers. It makes banks a much safer place for investment [versus] the stock market, Negm said.

In the wake of the global financial crisis that saw giant banks go bust in the US and Europe, Negm is betting on Egypt’s banking sector, saying the country has what it takes to attract big names.

“The market is more fertile and promising than any other market around the world, she pointed out. “Products – from car loans, to personal loans, to credit cards – are getting absorbed quickly.

Several banking analysts criticized the government for postponing the sale of Banque Du Caire, Egypt’s third largest public bank, in June. However, Negm said it was a wise decision.

“Waiting is not a loss. The bank can still be sold [at a good price]. The market is booming and lots of people want to enter Egypt’s banking sector.

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