Cairo’s depleted bank coffers weigh on stocks

Egypt’s once vibrant stock market is in the dumps. After initial hopes that a revolution-induced slump could be reversed, the market has drifted down, and has now shed half its value this year – making it one of the world’s worst performing indices.

Trading activity has slumped even more, from a daily turnover of about $150m in 2010 to an average of less than $50m over the past three months, according to Zawya, a data provider.

“The whole situation feels frustrating,” says Mohamed Ebeid, head of brokerage at EFG-Hermes. “Right now there’s no real sense of momentum.”

The renewed bout of unrest has caused the market to dip further, but with the deteriorating economy, one of the main reasons for the market’s woeful performance is the Egyptian central bank’s rapidly depleting coffers.

Heavy intervention to support the flagging Egyptian pound lowered reserves of foreign currencies, excluding gold, to a record low of $17.6bn at the end of November.

For a country that depends on food imports to feed swaths of its 80m inhabitants, this is an alarmingly low level. The central bank has hiked rates to stem it, but at the current rate of depletion, foreign exchange reserves will fall to less than three months of imports by February, according to Barclays Capital.

This has fuelled speculation that Egypt will either have to accept longstanding offers of aid from the International Monetary Fund – or cease interventions and let the Egyptian pound slump.

The local currency has for the most part traded above the informal E£6=$1 mark since late November. Forward-looking currency rates indicate that investors expect the pound to slump to E£7 against the dollar within 12 months.

Mounting concerns over Egypt’s vulnerable fiscal position has caused the government’s borrowing costs to increase in recent months.

The possibility of a sharp devaluation is also deterring foreign institutional investors, many of which are still attracted by Egypt’s potential.

Corporate profits have proved surprisingly robust, and the market looks cheap. The EGX 30 benchmark index’s constituents currently trade at about 5.5 times forecast earnings in 2012, according to analysts’ consensus, and only 0.5 times the book value. These are severely depressed levels.

The Egyptian authorities would probably prefer to see a gentle depreciation, but hedge funds could quickly pile in if they sense the Egyptian pound is heading south, most likely forcing a swift, deep devaluation.

The resulting surge in inflation as import costs immediately increase will bring more pain for Egyptians. But the hope is that devaluation, or the emergence of external aid from the IMF or the Gulf donors, could trigger foreign investment inflows in the stock market.

Egyptian bankers hope that any signs of political calm on the horizon could provide an additional fillip to the market next year.

“If there is a sense of political progress, and the currency issue is resolved some way, then things could get better very quickly,” Mr Ebeid argues.