Arab stocks fall due to Greece's debt crisis

16 May 2010

Egyptian Exchange records steepest drop

The Egyptian Exchange (EGX) was hit the hardest by the Greece debt crisis, due to a scramble by foreign investors to sell their holdings.

Cairo’s AGX30 index, which measures the performance of the market’s 30 most active stocks, plummeted 4.4 per cent in the trading week from 2 to 9 May to close at 7,116 points.  

Of all the Gulf bourses, at roughly 25 per cent, Egypt has the largest volume of foreign investors, with local investors comprising the remaining 75 per cent.  

“Early last year when the US was pumping money into the local economy through quantitative easing measures, the dollar was being devalued,” says Tudor Allin-Khan, Chief Economist at Dubai-based HC Research. 

“So people sold the dollar short and went to look for attractive investment opportunities abroad in an emerging market, making Egypt an obvious choice.”

Indeed, US investors were looking for non-dollar based investment opportunities in the region which ruled out the Gulf currencies because of their peg to the dollar. Consequently, the EGX rallied by around 100 per cent in the six months from March to October 2009.

However, Egypt’s fortune began to turn earlier this year when the US’ Federal Reserve raised its discount rate by 25 basis points on 19 February.

“Investors were reluctant to short the dollar and long the Egyptian pound which led to huge outflows from the Egyptian market,” says Khan. “Foreigners began selling the pound and buying dollar denominated equities instead.” 

As a result, since 15 January, the Egyptian pound has depreciated relative to the dollar by approximately 3.5 per cent - moving from 5.41 to 5.60 EGP to the US Dollar. 

Rasmala Investments, a Cairo-based research house has warned that failure to bounce may result in another wave of aggressive selling and shift the direction into a long-term downtrend.  

Egypt was not the only exchange to be hit. GCC bourses had a strong reaction to the sharp fall in global markets in the first trading week of May over fears surrounding Greece’s $146.2bn debt crisis.

The value of GCC traded shares declined 14.12 per cent to $6.93bn, while volume plunged 24.19 per cent to 2.61 billion of shares.

The Kuwait Stock Exchange Index retreated 1.9 per cent, the most in more than five months. Oman’s MSM30 Index slid 1.1 per cent, Abu Dhabi’s index lost 1.4 per cent and Bahrain’s index dropped 1 per cent.  

Meanwhile, the all-share index of Jordan’s Amman Stock Exchange fell 2.84 per cent.  

Analysts and bankers have also warned that Greece’s debt problems could make it harder for Dubai’s sovereign borrowers to raise funds in international markets going forward as credit tightens and investors shun riskier regions.

“We’ve already seen the cost of funding increase in the last few weeks for high-profile UAE government-related entities such as DEWA and Aldar,” says Ali Khan, managing director and head of brokerage at Arqaam Capital. 

The yield on Dubai Electricity and Water Authority’s (Dewa) $1bn, five-year bond increased from an average of 6.75 per cent in to its current 8.5 per cent, while the yield on Aldar’s convertible bond has increased from 7.5 per cent to around 8.5 per cent today.    

Investor wariness of the region will have been compounded further by the news that broke on 10 May that a second government-owned conglomerate, Dubai Holding, was looking to restructure several billion dollars of debt on its two subsidiaries, Dubai International Capital and Dubai Group. 

These moves echo those of the troubled conglomerate Dubai World which is currently renegotiating $23.5bn of debt. According to International Monetary Fund estimates, Dubai and its state-owned companies owe $109.3bn.

The falling oil prices due to weakened sentiment and shrinking global demand also had a downward pressure on regional stocks. Crude oil fell from $85 a barrel to $75.

On Saturday 8 May, Saudi stocks recorded their biggest daily fall since February 2009, led by the petrochemical index which fell 6 per cent after oil prices slipped below $80 a barrel on the back of Greece concerns.  

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