Egyptian Stocks Enter Bull Market as Devaluation Stokes Banks

  • Equity index gains 6.7% as central bank weakens the pound
  • Devaluation helps remove investor concerns: Mashreq Capital

Egyptian stocks entered a bull market after the central bank devalued the currency to lure back foreign investors and said it would adopt a more flexible exchange rate. The nation’s international bonds rose.

The EGX 30 Index soared 6.7 percent, the most since July 2013, to 7,003.85 at the close, 23 percent above a January low. All of the index’s 30 members climbed as investors traded 644 million shares, about three times the six-month average. Commercial International Bank Egypt SAE’s 6.8 percent gain was the biggest contributor to the gauge’s increase. Egypt’s $1.5 billion debt due 2025 rose for a third day as of 2:35 p.m. in Cairo to 87.641 cents on the dollar, an almost four-month high.

Egypt, grappling with a dollar shortage, devalued its currency about 13 percent at a local dollar sale on Monday. The central bank will use any tool to safeguard stability in its foreign-exchange market in the medium term, it said in an e-mailed statement. The prospect of a sudden devaluation as well as difficulties in repatriating funds had been among the concerns cited by investors for avoiding the Egyptian market after uprisings toppled two presidents in five years.

“The devaluation helps remove one of the biggest question marks that investors had, which was when the central bank was going to let the currency weaken,” said Reda Gomaa, a Dubai-based money manager at Mashreq Capital DIFC Ltd. “We already hold Egyptian equities and we were focused on the consumer sector. Now we’d consider looking into buying shares of industrial companies.”

Dollar Sale

Devaluing the currency will also help boost liquidity in the banking industry, Gomaa said. Commercial International Bank, which accounts for almost 40 percent of the stock index, climbed to 39.93 Egyptian pounds, the strongest level in more than four months. Egyptian Financial Group-Hermes Holding Co., the Arab world’s biggest listed investment bank, jumped 8.8 percent, the most since May.

The regulator on Monday sold $198.1 million to local lenders at 8.85 pounds per dollar, up from 7.73 pounds. The devaluation is the latest in a series of adjustments to help attract more foreign cash and tackle a dollar shortage. The Egyptian central bank on Wednesday removed the withdrawal and deposit cap for companies that import basic commodities, a day after it scrapped limits for individuals.

Options Product

The country plans to offer an option product that allows bond investors to hedge against currency risk, a senior policy maker said last week, asking not to be identified. National Bank of Egypt is offering investors in Treasury bills such contracts, Amr Mostafa, group head of treasury and capital markets at the state-owned bank in Cairo, said in a phone interview on Monday. The yield on Egypt’s 5.875 percent debt dropped 18 basis points to 7.77 percent.

The central bank on Monday said it aims to boost foreign-currency reserves to $25 billion by the end of the year from $16.5 billion in February. Even after rising for five straight months, reserves are less than half their December 2010 level, before President Hosni Mubarak was ousted.

Egypt’s next move may be to raise its benchmark deposit rate at the Monetary Policy Committee meeting on March 17. Policy makers may boost the rate 50 basis points, or half a percentage point, to 9.75 percent, according to the median estimate of seven economists surveyed by Bloomberg. It was last raised in December, by 50 basis points to 9.25 percent.

Inflation

The weakening of the pound will cause some “short-term pain: inflation is likely to rise,” Jason Tuvey, a London-based Middle East economist at Capital Economics Ltd., said in an e-mailed note. “The pound has a bit further to fall. We think a level of closer to 9.5 against the dollar would help to restore external competitiveness.”

The Egyptian pound was trading at 9.684 per dollar in the black market last week, according to the average quote from three unregulated dealers in Cairo surveyed by Bloomberg.

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