The stock exchange plummeted to its lowest levels in a year following an announcement that it may be excluded from the MSCI emerging markets index on concerns over the country’s shrinking foreign currency reserves.
The benchmark EGX 30 fell 5.17% at close on Wednesday to 4,598.10 points, the lowest since 13 June last year. This follows a 1.7% rise on Tuesday after a seven day decline based on political uncertainty ahead of June 30 protests against Islamist President Mohamed Morsi. The index lost 15.82% since the beginning of this year, according to its website.
Out of the 169 listed shares, 143 stocks ended in the red zone, while eight gained and 18 remained unchanged.
MSCI, an international provider of investment decisions, said in a statement on Tuesday that it “may be forced’’ to exclude Egypt from the emerging markets index due to recent shortage of Egypt’s foreign currency reserves.
“The recent shortage of foreign currency on the domestic foreign exchange market is of great concern to international institutional investors,” MSCI said in its review of the annual market classification markets in indexes for this year.
The MSCI report said it “may be forced to launch a public consultation” with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index, if the situation were to worsen any further in the coming months.
Egypt is currently struggling with its foreign currency reserves, which are necessary to purchase staple commodities of wheat and fuel. The country’s international reserves inched to $16.04bn in May, a slight increase compared to a low $13.4bn in March which was sufficient to cover only three months’ worth of imports.
If Egypt’s foreign currency issue worsens, it could result in “the inability of international investors to repatriate their funds,” MSCI explained.
Muhammad Ebeid, head of brokerage at EFG-Hermes, attributed the precipitous decline to panic among investors regarding the downward direction of the market and declining price of local currency. Planned protests scheduled for 30 June have led many to fear that their funds will be frozen and become inaccessible, much as they were after the initial outbreak of the 25 January Revolution.
He added that recent negative economic indicators have increased the downward spiral within the stock market. Such indicators include repeated downgrades of Egypt’s international credit rating, shortages and crises in water and energy prices, stalled negotiations with the IMF, in addition to fears of renewed bouts of violence and clashes between protesters and police.
Muhammad Omran, chairman of the stock exchange, plans to question MSCI’s reports of problems faced by foreign investors operating in the local money market, adding that it would have a negative effect on Egypt’s bourse and the country’s status as a growing market.
According to a statement forwarded to Daily News Egypt, Omran asserted that the report was based on inaccurate information, saying that the conclusions drawn within it were not consistent with recent developments in the international money market seen within the last few months.
He also noted that the Central Bank of Egypt (CBE) released on 13 March a decision to activate new mechanisms to ensure the safe transfer and conversion of funds belonging to foreign investors both to and from dollars at any time, using international investment funds recently established by the CBE.
On the other hand, Mohsen Adel, vice president of the Egyptian Society for the Study of Financing and Investment, attributed the report’s likely exclusion of Egypt from the MSCI to the problems currently facing foreign investors.
He said however that “the fact that Egypt [has until now] remained on the Emerging Markets list, despite the political and economic challenges, boosts confidence of international counterparts in the Egyptian economy.”
Adel warned that lack of foreign currency will affect the Egyptian equity market, while at the same time pointing out that the report had “nothing to do with the Egyptian stock market and its performance.”
MSCI stated that the current lack of foreign currency on the domestic foreign exchange market will likely aggravate the problem to negatively impact the liquidity of the Egyptian equity market.
This may trigger the global firm to reclassify the Egypt Index to Frontier Markets, “due to the lack of liquid investable stocks.”
Accordingly, the global company said it will be closely monitoring the country’s foreign exchange market.
Adel said the report will likely raise concerns for international investors, which the government should address to maintain its relations with investors.
“It is essential that Egypt issues a clarification on the report regarding the current situation of the foreign exchange market in order not to lose potential relations with foreign investors.”
He emphasised that by doing this, “there will be complete transparency with foreign investors.”
Other Arab countries on the other hand, namely Qatar and the UAE, are to be upgraded to Emerging Markets status effective next May.
“MSCI welcomes the progress made to date and the further commitment of the Qatari authorities to increase the Foreign Ownership Limit (“FOL”) levels applied by Qatari companies,” the report said.
As for Egypt, fears are now arising that mass demonstrations set to take place on 30 June to protest against President Mohamed Morsi’s government could weaken the economy even further.