Mustafa Gad, head of investment banking at EFG Hermes, believes that the fundamentals of the Egyptian market are able to attract new investments on the medium- and long-term. He added that the Egyptian market will be able to solve and overcome the obstacles it is facing in the short-term.
Gad told Al-Borsa that the Egyptian market is large and has many opportunities and high returns on investment due to the large volume of consumption. Trade agreements between Egypt and the Arab and African countries qualify it to be a strategic market and a port to export to many countries.
He explained that the most important obstacle facing foreign investors is the exchange rate crisis, which is expected to be resolved soon. The lack of currency availability and the instability of the price constitute a factor of concern for many of investors who wish to enter the market, in addition to the difficulty of transferring foreign currency out of Egypt.
Gad added that the Central Bank of Egypt (CBE) is working on a solution to solve the US dollar crisis, but it must change the legislation and bureaucracy in dealing with investment, particularly regarding trade, industry, and investment, since it has not been developed.
He pointed out that the main demand made by investors is the facilitation of the new project establishment procedures, including the allocation of land, connecting to utilities, and extracting the necessary licences. He continued by saying that some companies took three to five years to finalise such procedures.
Gad said that the US dollar crisis is the accumulation of many errors that occurred in the past years, including the decline in the foreign currency resources after the decline in tourism and the decrease of Suez Canal revenues, due to the drop in world oil prices and its impact on global trade.
He added that the agreement between the current government and the International Monetary Fund is the only currently available solution, and that it requires great effort to maintain strong positive results.
He explained that the new Investment Law solved a big part of the obstacles faced by investors in the last period, and the government’s efforts to reconcile with investors provide a positive impression of the Egyptian market.
He also said that the government’s reform programme is based on liberalising the economy through the reduction of subsidies and the imposition of the value-added tax (VAT). It also includes the restructuring of the public sector, due to its deterioration and its need for a new perspective to make it strong and capable of competing with the private sector.
He added that the government seeks to offer some state-owned companies in the stock market, not only in order to attract money, but rather to revive the spirit of the Telecom Egypt acquisition—namely the merging of private sector management and government ownership.
He explained that the government’s offerings are an important, positive, and useful step for the market to increase capital and revitalise IPOs. Also these offerings will oblige companies to send in periodic reports and improve their performance.
It is also important to select companies with high profitability and strong management to be able to attract private investment, Gad said.
He pointed out that the main sector the government must begin to put in the stock market is the banking sector, due to the strength of its profitability and its excellent financial performance in the last period, as the sector includes a number of distinctive banks.
He said that the Egyptian Exchange (EGX) can bear public and private offerings at the same time, but that depends on the size and timing of the offerings. In the case of a large number of offerings with high values, investors will not be able to cover all of them.
He expected that government offerings would attract a large segment of individuals with adequate liquidity after the Telecom Egypt offering, especially if the bank or the company involved is performing strongly. After the CBE’s decision to devaluate the Egyptian pound, trading sizes easily broke the barrier of EGP 1bn.
He added that the telecommunications companies are reviewing their plans after the approval of the 4G licence by the minister of communications and information technology. Those companies are looking to re-arrange for a capital increase of the parent company or to launch offerings on the stock market.
He explained that the first half of 2017 will see the first government offering, as discussions with Hermes were conducted. However, there are no formal decisions or tenders so far.
Gad revealed Hermes signed contracts with two companies in the industrial sector and one company in the consumer sector to offer them in the EGX in 2017, as the group is currently working on processing companies.
Regarding the criticism directed at Hermes for offering companies at high prices and falling shortly after the IPO goes up, Gad indicated that the share price needs to be seen before offering and not after trading, as these companies have been covered more than once, and were met with high demand from foreign funders.
He said that the performance of these companies was affected by the sector and capital market. They did not experience the decline alone, as the vast majority of sector companies also declined. This is in addition to the foreign currency crisis and the rising prices that have negatively impacted the entire market.