Egypt regulator readies steps to revive markets

Brokers work at the Egyptian stock exchange in Cairo in this file photo. Egypt's main stock index plunged 49 %   Egypt’s financial market regulator said he was preparing steps to help companies resume raising money in the country’s moribund capital markets, with active issuance of stocks and bonds still likely to be many months away because of political uncertainty. 
“There are two factors for the financial markets: The regulations and the political uncertainty. I can influence one but not the other,” Ashraf El Sharkawy, chairman of the Egyptian Financial Supervisory Authority, said in an interview.
The EFSA is close to removing the remaining curbs on stock market trading imposed in February during turmoil surrounding the ouster of President Hosni Mubarak, El Sharkawy said late on Monday. It is also readying regulations to make it easier for companies to issue bonds.
POLITICAL UNCERTAINTY
But many firms may continue to wait to raise money until the nature of Egypt’s next government becomes clear, added El Sharkawy, a former academic appointed just after Mubarak’s ouster.
It could be a long wait.
Although elections to Egypt’s lower house of parliament are drawing to a close and the lower house will hold its first session on Jan. 23, the military generals who took over from Mubarak plan to rule until the end of June, by which time a new president is to be elected. 
Key aspects of the new political system, including the balance of power between the presidency and the parliament, have not yet been decided.
Egypt’s Muslim Brotherhood, which is expected to dominate the next government, has said it will respect the financial markets and private business. But with the exact nature of its policies unclear, the prolonged transition to democratic rule has taken a heavy toll on the markets.
Egypt’s main stock index plunged 49 percent last year and is near three-year lows. Daily trading turnover has shrunk to around 200 million pounds ($35 million), a tenth of levels reached during a boom several years ago.
Many foreign investors have fled Egypt’s markets, though El Sharkawy said they still owned about 30 percent of the stock market’s capitalization of around $50 billion, approximately the same proportion as before the political turmoil.
Egyptian corporate bond issuance tumbled to 350 million pounds last year from 20 billion pounds in 2010, El Sharkawy said.
With the economy sluggish and companies’ expansion plans on hold, the weakness of the markets does not matter so much at present because most firms do not need to raise large amounts of money, El Sharkawy said. But moribund markets could damage a hoped-for economic recovery later this year.
“When people see the shape of the new government, the new president, the new Parliament, they will feel more confident in acting. It does not matter so much what the government is, as long as it is clear,” El Sharkawy said.
NEW RULES
The EFSA hopes to remove remaining emergency curbs on stocks’ daily price movements in the next few months, and may also restore same-day settlement of trades, which was suspended last February, El Sharkawy said.
Some traders think same-day settlement could help to revive trading turnover, by reducing risks for investors who could enter and exit positions in a single day. 
El Sharkawy said two fairly large companies had contacted the EFSA about the possibility of issuing shares, which might happen after their 2011 earnings statements had been compiled; he declined to elaborate. The stock market has not listed any new companies since Mubarak’s overthrow.
In the corporate bond market, El Sharkway said the EFSA had been working on rules to allow shelf registration for issues — provisions for bond sales to be prepared far in advance, giving companies flexibility in choosing the timing. It has also been drafting rules allowing special-purpose vehicles to handle more than one securitization deal each, which would reduce paperwork and costs for companies.
In coming weeks the EFSA will prepare regulations facilitating the issue of sukuk, Islamic bonds structured according to religious principles, El Sharkawy said. All sukuk will be required to carry credit ratings.
However, El Sharkawy said the weakness of the markets and recent downgrades of Egypt by credit rating agencies might deter issues of sukuk or conventional bonds for some time.
“It will be difficult — maybe not this year ... Companies may not feel it is the right time for expansion,” he said.
El Sharkawy also acknowledged that pushing through regulatory reforms, some of which required the approval of parliament, was challenging at a time of political change and economic crisis.
He said he had presented reforms to the government three months ago but, apparently distracted by other issues, “they weren’t interested.” When the new government meets after June, “Maybe they will be too occupied with the economic situation.”
CAPITAL CONTROLS
With Egypt’s foreign reserves sinking rapidly — they fell to $18.1 billion at the end of December from twice that level a year earlier — there has been speculation that the government might impose full-blown capital controls on flows of money out of the country, in order to support the Egyptian pound.
El Sharkawy would not make the final decision, but might be consulted by policymakers. He said he had not heard of any move in the government to impose them and did not expect them.
“I don’t think so,” he said. “In my experience this kind of thing tends to make things worse by making investors more afraid.”