x Abu Dhabi, UAESunday 23 July 2017

Egypt slams brake on falling pound

Egypt Focus: Financial markets display signs that international investors are less concerned with Egypt's political upheaval

The steep drop in the value of the Egyptian pound was halted abruptly yesterday after the central bank said it had intervened to shore up the ailing currency.

The pound rose 1.2 per cent against the dollar after the central bank's announcement, further details of which it did not reveal.

But the currency is still down 11 per cent since January 12 because of mass street protests and calls for the resignation of Hosni Mubarak, the Egyptian president.

The currency decline has forced down the value of Egyptian assets, both within the country and of those listed overseas. That has led international investors to focus on bargains that could become available when the Egyptian stock market reopens, which is scheduled for Sunday.

"I see this as a buying opportunity," said Rami Sidani, the head of Mena region portfolio management at Schroders, a major international investment house with US$286 billion assets under management. "But let's be clear: I am going to be very selective."

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Mr Sidani said that when the Egyptian market opened, shares of exporters could be available at attractive prices.

The pound's fall is likely to benefit exporters such as Orascom Construction Industries, which produces fertiliser, because their goods can be sold more cheaply abroad. Conversely, the lower currency will hurt importers that buy products from overseas.

Egyptian companies with securities listed on foreign exchanges have enjoyed sharp price increases in the past couple of days.

Egyptian companies' global depositary receipts (GDR) have rebounded about 10 per cent on the London Stock Exchange since the Egyptian market closed on February 2, Mr Sidani said.

The GDR of Orascom Construction Industries fell 33 per cent on the London exchange ahead of the Egyptian stock market close, but has since rebounded 23 per cent.

The cost of insuring against an Egyptian sovereign debt default continues to fall as investors grow less concerned about the political crisis.

The price on five-year Egyptian credit default swaps (CDS) was flat yesterday at 345 basis points, having fallen 45 basis points since Friday.

CDS generally get more expensive when traders perceive more risk.

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Oliver Bell, a senior investment manager at Pictet Asset Management, echoed the prediction that exporters' share prices are likely to rise.

But he also argued that Egyptian companies with ties to the Mubarak regime could be punished and experience large capital outflows from international investors.

Companies that have traditionally been subsidised or handed a competitive advantage by the government could suffer, Mr Bell said.

The property sector and basic industries such as construction and steel, which require mass buying of raw materials, were cited by analysts as possible losers when the market reopens.

The extended outlook is hardly rosy and some fund managers have slashed growth forecasts for the Egyptian economy this year. Schroders has cut its forecast from 6 per cent to 3.5 per cent and estimates each day of protests costs the government US$300 million (Dh1.1 billion).

Tom Stevenson, an investment director at Fidelity Investments in London, said the crisis had "certainly" affected the Mena region's attractiveness as a long-term investment.

Insuring $10m of Egyptian debt now costs $345,000, down from $450,000 at the height of the protests.

 

rjones@thenational.ae