The news from Egypt’s Stock Exchange has not been good recently. Low turnover, the actual and threatened delisting of several of the biggest stocks and the imposition of new taxes have all contributed to a feeling that the exchange is at risk of becoming irrelevant. Egypt’s failure to secure a $4.8bn IMF deal is also weighing heavily on sentiment.

The most high-profile case involves Orascom Construction Industries (OCI), Egypt’s largest listed company. In March, the authorities slapped a travel ban on chief executive officer Nassef Sawiris, claiming the firm owed £E14bn ($2bn) in taxes from the sale of its cement operations to France’s Lafarge in 2007. This followed comments by President Mohamed Mursi in October that corrupt businessmen had defrauded the country. A settlement was announced at the end of April under which OCI will pay £E7bn in 10 installments. OCI’s Dutch-listed parent, controlled jointly by the Sawiris family and Bill Gates, is looking to delist the firm from the Egyptian exchange.

Prohibitive costs

Orascom Telecom, the second-largest listed company on the Egyptian Stock Exchange, is also looking to leave the bourse. Its Russian owner is reported as saying the high cost of running the firm’s Cairo headquarters and “material regulatory risks, such as extra tax claims, and political risks due to broader instability” have contributed to the decision. Politics may also be a part of it. Russian President Vladimir Putin refused Mursi’s request for a $2bn loan in April and Moscow’s support for the Syrian regime is a point of dispute.

The refusal by market regulator Egyptian Financial Supervisory Authority (EFSA) to give the go-ahead to QInvest’s bid to take a 60 per cent stake in Egypt’s largest investment bank, EFG Hermes, may also be political. The deal announced in May 2012 was dependent on regulatory approval within 12 months and lapsed on 1 May. The bank’s former senior executives are co-defendants with Gamal Mubarak, son of the ousted president, in a corruption trial, although EFG Hermes said before the 1 May deadline that there was “no relation” between the trial and the regulatory delays.

The EFSA gave its reason in an official announcement: “In light of the limited experience of the purchasing company [QInvest] and its lack of activity since its inception, it does not meet the legal requirements for acquiring subsidiaries of EFG Hermes.”

There were also rumours the deal was blocked following pressure from other Gulf Arab countries that have watched Qatar assume the role of the Muslim Brotherhood’s number one financial backer. All the other relevant authorities in Qatar, UAE, Saudi Arabia and Jordan had given their consent.

At the end of May, EFG Hermes’ share price stood at £E8.83, not far above its 52-week low, and compared to a 52-week high of £E14.00. This weak performance is reflected in the market as a whole amid the ongoing political and economic uncertainty. The EGX 30 Index stood at 5,438.77 at the end of May, compared with a 52-week high of 5,462.42 in September 2012.

Turnover is £E200-400m a day, down from £E1bn in 2010, according to Gamal Khalifa, board member at Cairo-based Egde Portfolio Management. Of the players in the market, roughly three quarters are Egyptian, with the remainder split 75:25 between Western and Arab investors, he says.

The issue of taxation also reared its head in relation to recent takeovers by Gulf banks of listed Egyptian banks, namely Emirates NBD’s acquisition of BNP Paribas Egypt for $500m and the purchase of National Societe Generale Bank (NSGB) by Qatar National Bank (QNB) for $2.5bn.

A sudden demand for 10 per cent tax on capital gains left investors reeling. The money was collected, but Misr for Central Clearing, Depository and Registry announced on 27 May that it would return the £E10.2m it had collected on behalf of the tax authority.

Diminishing presence

Although good news in terms of foreign direct investment in Egypt, the takeovers of the two banks have meant they have been delisted, further reducing turnover on the exchange.

The reduction in the number of listed firms raises the spectre of Egypt falling off the MSCI Emerging Markets Index. Inclusion in this index is a necessary qualification for many global investors. Although the process of removing Egypt would take up to two years, the possible disappearance of OCI and Orascom Telecom, added to already delisted banks, would make Egypt the smallest country on the index.

“There is a severe economic downturn and the stock market is reflecting that,” says Simon Kitchen, director of Middle East and North Africa strategy at EFG Hermes. “Turnover is down and companies are leaving because of mergers and acquisitions. There are not as many investible stocks as there used to be.”

Analysts say it is down to the government to restore confidence in the bourse. “The government should go in with a positive attitude and change things gradually, rather than taking decisions that drive away investment,” says Khalifa. The issue of Mubarak-era land deals, which is depressing the shares of several listed property companies, also needs to be cleared up, he says.

While the agreement with OCI and the restitution of money to the bank investors are positive signs, according to some investors, the flip-flop policymaking suggests a lack of coherent strategy, warn others. There is also the problem of the wider economy and the inability of the government to articulate a coherent plan for it. Parliamentary elections due in April were first expected in October, but a court decision at the end of May pushed the likely date into 2014. A parliamentary mandate might have given Mursi and the government a strong mandate to carry through unpopular reforms.

“We need to have a decent devaluation to bring in the investors. But devaluation on its own is not enough. We need to see confidence in the public finance framework and currently it’s difficult to see that,” says Kitchen.

EFG Hermes does not expect to see an IMF deal, which would require the government to address chronic structural imbalances, such as food subsides, until the fourth quarter. In the meantime, Kitchen says, “The large informal economy will help to keep things ticking over.”

Lending slow

Looking at the market in detail, Kitchen comments: “It’s a shame there are fewer liquid listed banks [after the takeover of NSGB], but they are not particularly cheap compared with the rest of the region. Generally, the return on equity is good; they are lending to the government, but there is no strong loan growth.”

There are, however, several shares that are worth looking at, he says. Talaat Moustafa Group has been effective at delivering value housing units on time and its off-plan projects have been surprisingly successful. Carpet-maker Oriental Weavers is a net exporter and has a good market share in the US. Cable-maker Elsewedy Electric, meanwhile, has gained from the fall in copper prices. Both companies are trading well below book value. Finally, Sidi Kerir Petrochemicals (Sidpec) is effectively a US business paying a high-dividend yield.

Following the acquisitions of BNP Paribas Egypt and NSGB, Commercial International Bank is the only major bank left on the exchange. Its largest shareholder is the UK’s Actis, an emerging market private equity firm that remains committed to Egypt and is even considering new investments. “We invest in developing markets with large youthful populations where we see changing patterns of spending,” says Hossam Abou Moussa, a Cairo-based director of Actis. “Financial and political crises don’t affect these consumer trends.”

Actis’ other Egyptian investment is limestone quarrier Sinai Marble, which is not publicly quoted. “At the moment, we are looking at several companies in Egypt, all of them unlisted,” he says.

While the long-term potential of Egypt as a consumer market is strong, the political and economic uncertainty has the potential to wreak damage in the short term. Losing MSCI emerging market status would be a huge blow to the exchange.