June 20, 2012
By Farah Halime
CAIRO—The standoff over Egypt’s presidential elections is reverberating through the country’s financial markets, raising the threat of a collapse in the currency and driving investors away from its stocks and bonds.
Egyptian stocks have fallen 6.6% since this past weekend’s runoff elections ended in a political stalemate. The drop brings total losses to 20% since mid-May, when jitters about the vote surfaced.
The deepening uncertainty is raising doubts over whether Egypt will receive a $3.2-billion loan from the International Monetary Fund, a blow to investors who had expected a smooth transition to democracy would pave the way for the aid. On Wednesday, Egypt’s election commission said it would delay announcing the winner of the election.
Investors say the latest selloff in stocks signals worries that the close race, which still doesn’t have an official result, could spark a confrontation between Egypt’s military rulers and the Muslim Brotherhood.
“It reflects a clear fear factor,” Wael Ziada, head of research at EFG Hermes, an Egyptian investment bank, said.
Political instability has mostly driven away the foreign investors who flocked to Egypt’s market before the revolution that toppled former president Hosni Mubarak last year, attracted by the country’s high growth rate. The country’s stock index ended 0.5% higher at 4,108.40 on Wednesday.
The Egyptian stock market has a total capitalization of 306 billion Egyptian pounds, or roughly $50.6 billion—slightly less than the market capitalization of MasterCard Inc.
Earlier this month, Egypt’s stock market had the second-best year-to-date performance in the world, after Venezuela. Because of the earlier surge, Egypt’s stock market remains up 13% this year.
Salah Shamma, co-head of equity asset management at Franklin Templeton Middle East, said he doubled his fund’s exposure to Egypt after the first presidential elections in May, though he still keeps a “neutral” stance on the country that reflects the level of political risk.
Though most foreign funds have fled Egypt since the uprising last year, there is still buying interest from Egyptian investors, he said.
“We like markets that don’t have to rely on hot money coming in and coming out,” Mr. Shamma said. “Equities is a big part of Egyptian daily life—it’s partly ingrained in their society. Even without foreign participation, there is enough pent-up demand from domestic buyers” to drive the market.
But tempering optimism is the threat of a sharp devaluation in the currency, which economists say could trigger inflation and boost the cost of Egypt’s food imports. The Central Bank of Egypt’s foreign reserves have fallen from $36 billion early last year to $15.5 billion as of the end of May as the bank sells dollars to support the Egyptian pound. One dollar currently buys about 6 Egyptian pounds.
With Egypt’s foreign-currency reserves at dangerously low levels, a prolonged delay in securing help from the IMF could cause the Egyptian pound to weaken by as much as 15% by the end of the year, according to Said Hirsh of Capital Economics, a London-based consultancy.
Foreign investors have largely abandoned the government debt market, sending yields on one-year bills to about 16%, from 11% at the start of last year. Total foreign customer holdings of Egyptian treasury bills fell to 1.67 billion Egyptian pounds ($280 million) in March 2012, from 30.6 billion pounds a year earlier.
For now, sporadic injections of cash are helping Egypt’s economy limp along pending a wider deal to secure aid from the IMF. The country raised $1 billion by selling dollar-denominated treasury bills to domestic banks last month, and this month it secured $1.5 billion from Saudi Arabia.
Investors need to be convinced the election won’t lead to renewed violence, said Ahmed Fattouh, an Egyptian-American investor who heads Landmark Advisors, a New-York based investment management firm.
“We are long-term investors who think about owning businesses for many years, and we are a long away from having any clarity to make any long term decisions,” Mr. Fattouh said.
A version of this article appeared June 21, 2012, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Tumult Trips Egypt Stocks.