With ongoing questions and fears over what is to come after greater flexibility of the exchange rate of the Egyptian pound against foreign currencies was unleashed by the Central Bank of Egypt (CBE), some wonder: will the 2016 scenario happen again?
The CBE decided to liberalize the exchange rate and allowed banks to conclude currency futures, as well as exchange of currency contracts, and non-deliverable future contracts, for corporate clients only.
This was followed by Egypt obtaining a financing package worth $9bn from the International Monetary Fund (IMF) and development partners.
The stock exchange indices received the news with a strong rise at the end of the trading session last Thursday, bringing the main stock index to its highest level in seven months, supported by CBE’s decision today to liberalize the exchange rate, making the dollar price jump to EGP 23.05.
The main index of the Egyptian Exchange, EGX30 closed Thursday’s session with an increase of 4.92% to reach the level of 11072 points, and the EGX50 index of equal weights rose by 2.61% to reach the level of 2025.7 points.
Amr Hussein Al Alfy, head of the research department at Prime Securities, explained which sectors are most affected by the flotation and the fastest companies to respond to this impact in terms of operational performance and stocks, in addition to the general question of when the Egyptian market will recover again with the green flow.
Al Alfy suggested that exporting companies with pricing power over companies will be positive, while negatively affected companies will be those importing production inputs. The fastest negatively affected companies are those with production inputs linked to the price of an international commodity such as propylene or oil, due to the lack of price bargaining power with suppliers in addition to the inability to control cost.
He added, “If they have imported production inputs and pricing power while controlling costs, it will undoubtedly be positively affected”.
He explained that the ability to control by increasing the price of the product is not as easy as in 2016 due to the slowdown in demand in addition to companies’ inability to control the full pass-through of the cost or pricing power by raising prices to consumers due to the lack of market share. Those most sensitive to price change are the customers of the individual consumer market, such as the B2C. B2B companies are determined by other factors such as the customer’s bargaining power, their size and projects.
He added that local production companies are also affected, such as food sector companies, as they import diluted milk powder in dollars, which will lead to automatically passing the increase in cost to consumers.
He indicated that foreign investment return is subject to the determination and stability of the exchange rate mechanism and the existence of hedging contracts. However, with the current global events, they will be negatively affected, as the interest rate increases over the coming period.
The market recorded trading values of EGP 2.31bn, through the circulation of 701.7 million shares, implementing 72,700 buying and selling operations, after trading on the shares of 202 restricted companies, 93 of which increased, and the prices of 49 securities declined. The prices of 60 shares did not change, and the market capitalization of listed shares stabilized at EGP 754.8bn to gain a market capitalization of EGP 25.4bn during the session.
Mustafa Shafiea, Head of Research Department at Arabeya Online, said that the exchange rate liberalization process is positive and in line with the requirements of the IMF to implement economic reform, suggesting that the price range of the dollar against the pound will be fixed at EGP 22.50 to EGP 23.
It is expected that the Commercial International Bank, Abu Dhabi Bank and Faisal Islamic Bank will be on top of the beneficiary shares in dollars, in addition to Abu Qir Fertilizers, Egyptalum, Ezz Steel, Misr Chemical Industries Company, AMOC, and the Egyptian Kuwaiti Holding.
He added that raising interest rates is very logical in terms of controlling the large money supply in parallel with the monetary tightening policy.
He explained that the rate of the exchange rate increase is not exaggerated and is in line with the directives of the IMF and the ongoing global changes.
He added that Ezz Steel, Dice, Telecom Egypt, and Edita will likely be negatively affected. On the other hand, CI Capital and EFG Hermes will likely be positively affected, provided that the banking sector will stop benefiting from the issuance of investment certificates with high interest, similar to what NBE did after the decision to raise the interest rate.
The EGX70 index recorded an increase of 0.72%, stable at the level of 2241.7 points, and the “EGX30 capped” index rose by 4.17% at the level of 13,400 points, while the broader EGX100 index rose by 1.5% at the level of 3244 points.