Egypt exchange plunges on reopening after uprising

AP News
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Posted: Mar 23, 2011 12:11 PM
Egypt exchange plunges on reopening after uprising

Egypt's stock market plummeted almost 9 percent in its first day of trading Wednesday in nearly two months, with foreign investors leading a sell-off that offered a window into concerns about the country's stability after mass protests toppled former President Hosni Mubarak.

The reopening of the Egyptian Exchange _ delayed several times _ had been viewed with a mixture of trepidation and impatience.

Analysts feared the stock market's prolonged closure would rattle investors already wary of the expected hit Egypt's economy would take following the Jan. 25 uprising. But many Egyptians argued that its reopening would offer a chance for capital flight, especially by former officials and wealthy businessmen under investigation for a corruption allegations.

In the end, the market opened and, about 16 seconds later, it fell hard. Trading was suspended for 30 minutes after the broader EGX100 benchmark hit a 5 percent "circuit-breaker" _ a mechanism aimed at halting trading and allowing time for sentiment to cool.

"I was not surprised at all. It's something to be expected give the market was offline for seven weeks," John Sfakianakis, chief economist for the Riyadh, Saudi Arabia-based Banque Saudi-Fransi, said of Wednesday's plunge. "The situation in Egypt has not created confidence among international, and of course local, investors."

The dueling arguments put forward ahead of the market's reopening, however, highlighted difficult crossroads that the government must navigate going forward.

Reflecting the delicate political balancing act the country is undergoing, the Egyptian Exchange's acting chairman Mohammed Abdel-Salam said that shares of 46 companies were suspended from trading. But he also vowed that they would not shut the market down again.

The moves were at least partly linked to the ongoing investigations into former regime officials and businessmen, and Abdel-Salam said those companies had either not responded to requests for full financial disclosures, or had sent incomplete responses about the holdings of the individuals in question.

Analysts and brokers were expecting the market to take a hard hit after a seven-week closure, and their predictions were realized.

The benchmark EGX30 index had fallen over 16 percent in two consecutive trading sessions before the market closed down on Jan. 27, and the day's decline brought it's year to date losses to slightly over 28 percent.

"Everyone was just selling," said Mostafa Abdel-Aziz, a senior broker at the Cairo-based Mideast investment bank Beltone Financial. "The foreigners were selling, the GCC (Gulf Arab) institutions were selling. Local institutions were mostly silent."

He added that a key mistake made by officials was allowing the listing of orders before the market opened, arguing that this undercut buying interest when investors saw a growing list of sell orders.

Ahead of the market's reopening, officials enacted a host of measures aimed at preventing a collapse and shoring up confidence. Trading was to be suspended if the EGX100 hit 5 percent and frozen at current levels for the session's duration if it shifted 10 percent. The government called on Egyptians to invest in the market, either through shares or mutual funds, and repeatedly said the country's economic fundamentals were sound.

But clouding those assurances was Egypt's tenuous political landscape.

A referendum on Saturday on proposed constitutional amendments saw a record turnout in the country's first free vote in decades. Some, however, worried that the reforms were moving too quickly to allow for the establishment of new political parties that would help drive the country forward.

Labor strikes that swept the country after the earlier mass uprisings against Mubarak also cast a pall over production and manufacturing, as did a host of other issues such as whether a new minimum wage would be set, and at what level.

The sell-off by foreigners seemed to confirm fears about the country's future, at least in the short-run.

Egypt's economy, projected just months ago to grown by 6 percent in the current fiscal year, is now expected to slow to 4 percent, according to government estimates. Some analysts project even lower GDP figures for fiscal 2010-2011 and negative growth for calendar 2011 as key sources of foreign revenue such as tourism and foreign direct investment take hits.

Already, the Central Bank has had to step in once to boost the Egyptian pound, which weeks earlier had approached 6 pounds to the U.S. dollar. The currency has been slipping again, and was trading at 5.95 pounds to the U.S. dollar, according to forex Web site Xe.com.

"It's a double-whammy," Sfakianakis said. "As the market is plunging, then there is a natural pressure that builds up on the Egyptian pound."

In addition, Egypt has seen its sovereign ratings cut by at least one ratings agency. Moody's Investors Service on Monday said it was also cutting ratings for five Egyptian banks, citing its earlier downgrade of the sovereign rating and the political uncertainties.

The reopening came two days ahead of a cutoff that would have left the Egyptian Exchange at risk of being de-listed from the MSCI Emerging Market Index, which is closely watched in relation to the more liquid developing world markets.

The trading session's direction appeared to confirm fears that people were more interested in exiting the market than following advice doled out by Finance Minister Samir Radwan during the opening session. Radwan urged investors to sit tight.

Virtually all the companies that traded _ especially blue chip firms like Orascom Construction, telecom Mobinil and investment bank EFG-Hermes spent the day trading at their 10 percent limit down.

Roughly 30 percent of market turnover was linked to one company _ Orascom Telecom. That company's shares rallied during the day, but closed down about 2.7 percent, at 3.52 Egyptian pounds, according to financial data provider Zawya.com.

Brokers and economists expected the decline to continue for a few more days.

"I think next week will be a good week," said Beltone's Abdel-Aziz. "There are a lot of buyers. But you need to reach this point where you can encourage the buyers to come out and attack the sellers."

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AP Business Writer Adam Schreck in Dubai contributed to this report.