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Egypt’s protests carry more risk for Sisi than for investors

By David Whitehouse
Posted on Tuesday, 29 October 2019 09:38

Egyptian President Abdel Fattah al-Sisi, June 18, 2019. REUTERS/Vasily Fedosenko

A series of protests against Egyptian President Abdel Fattah al-Sisi which started on September 20 triggered sharp falls in the country’s stock market, wiping out year-to-date gains.

Yet analysts argue that the outlook for Egytian stocks and bonds have been improving rather than getting worse.

  • The EGX30 index has since partly recovered and currently stands at 14,206, still 3.6% below its level before the protests.
  • The anti-Sisi protests mean that the government will most likely ease up somewhat on fiscal consolidation in the near term, providing support for consumer spending, Fitch Solutions says on October 24.

The protests have focused on the alleged misuse of public funds by Sisi and his inner circle – claims that Sisi rejects as defamatory.

The outlook for investors is clearer. Egypt has made massive strides to improve its economy under its three-year IMF program which began in 2016, Dylan Waller, founder of Indigo Frontier in the US, argues on Smart Karma September 24.

  • Most of the shocks from the IMF-mandated measures, such as fuel subsidy cuts, have begun to wear off, Waller argues.
  • The public deficit and inflation have been reduced, foreign exchange reserves have increased, the business environment has improved and the currency has stabilised, the piece says.

‘Deep State’

Sisi changed the entire leadership of Egypt’s security, defence and intelligence apparatus in 2018, and divisions within the “deep state” leave him vulnerable to popular discontent, Tellimer argues in research in September.

Decisive crackdowns against Egyptian protests have generally occurred when state military and intelligence interest groups are unified, the piece says, but protests have flourished when those groups are divided.

That leaves Sisi more exposed than investors.

  • The country’s foreign exchange reserves have nearly tripled from the lows seen in 2016 and, as of 2018, stood at around 19% of GDP.
  • Waller argues that this is considerably higher than most of the world’s middle-income countries.
  • Egypt’s forex reserves covered nearly eight months of imports in 2018, which Waller compares with other frontier markets with only three to five months of import cover.

In a poll carried out by Reuters at the end of August, six of 10 fund managers in the Middle East said they would increase their investments in Egypt, citing falling inflation and interest rates.

  • Since then, the price-to-book ratio on the EGX30 fell in September to a 12% discount to its five-year average, according to Tellimer.

Prospects for the country’s banks have brightened on the back of macroeconomic improvements, Waller argues.

  • Moody’s upgraded its outlook on five Egyptian banks in April.
  • The country’s unbanked population, Waller argues, is large compared with that of other frontier and emerging markets, providing growth potential.

With inflation falling quickly, local bonds also have “strong potential” and are “under-owned”, especially as they are not part of major emerging market indexes, Algebris Investments argues in September.

  • Still, public debt, at 93% of GDP in 2018, remains one of the key risks for the country. The level is very high compared with other frontier and emerging markets, Waller says.
  • For growth to be sustained in the medium term, structural reforms are needed to tackle rigid labour regulations, cumbersome red tape when opening and closing businesses, and heavy government involvement in sectors such as construction, Fitch Solutions argues.

Bottom Line: The bullish case for Egyptian stocks and bonds remains largely intact even as the outlook for Sisi clouds.

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