Desperate for Dollars, Investors Line Up for a Sure-Fire Loser

Egypt's Top Trade Is a Sure Loser
  • Shares in top Egypt bank used to get around dollar shortage
  • Time running out for popular play as regulatory limit looms

The hot trade in Egypt’s stock market is a sure thing -- a guaranteed money-loser.

QuickTake The Almighty Dollar

Clients have been snapping up shares of Commercial International Bank Egypt on the Cairo market, paying in Egyptian pounds, only to turn around and sell them in London for dollars at a loss of as much as 30 percent, brokers say.

Big international companies are so desperate to get dollars that they’re willing to swallow the losses on the deals, according to four local brokers who handle the trades. The unexpected love of red ink is a side effect of Egypt’s tight controls on taking foreign currency out of the country, imposed over the last few years to stem the plunge of the local pound.

“For multinational companies, arbitrage is a perfectly legal method of sourcing dollars, which makes it attractive in the face of an intensifying dollar shortage,” said Mohamed Radwan, head of equities at Cairo-based Pharos Holding. “Cost isn’t an issue for investors that are looking for a full exit or immediate access to hard currency, because they cannot afford to wait and risk further devaluation of the pound.”

New Problem

Market players face a new problem, however, as the popularity of the trade means CIB is pushing up against regulatory limits on how much of the company’s shares can be traded offshore in the form of global depository receipts.

Several devaluations of the currency, including the biggest in 13 years in March, have failed to keep up with the market as the economy struggles to recover since a popular uprising toppled the government in 2011. Falling tourism and export income have added to the scarcity of foreign currency. S&P Global Ratings cut Egypt’s credit outlook to negative from stable on Friday, saying it expected the foreign-currency shortage to persist as aid from Gulf Arab allies recedes amid depressed oil prices.

As a result, when the central bank sells dollars at its weekly auctions at the current official rate of 8.88 pounds, it typically satisfies only one-fifth of bids, or about $120 million a week. Importers of food, medicine and machinery get priority, leaving many foreign companies with operations in Egypt unable to get as much as they need for importing goods or sending profits home.

On the black market, the dollar trades for 10.95 pounds, according to a Bloomberg survey of street dealers, who handle only cash and thus aren’t much use to big companies. The effective rate for conversions using CIB shares was 12.42 as of 2:03 p.m. in London, according to Bloomberg calculations.

‘Pretty Crazy’

“This trade is pretty crazy,” Luke Harris, head of arbitrage at Beaufort Securities in London, said of the GDR deals. “The only reason anyone would do this is because they must really want the currency. It’s purely to get the money out of the country.”

The Egyptian Exchange last year banned the practice for local investors, mandating they be paid for GDR sales only in pounds. But the rule change still left the door open to overseas investors. Exchange officials didn’t respond to requests for comment for this article.

There are no official statistics on how much of CIB’s daily trading volume is accounted for by currency conversions. Exchange data show about 369 million Egyptian pounds ($41.8 million) of its local shares were converted into GDRs in the two weeks ending May 12, amounting to nearly 40 percent of total turnover.

Other countries that have imposed currency restrictions have seen similar phenomena. In Argentina, the business was so common the effective exchange rate came to be widely known as the “blue-chip swap rate” after currency limits were imposed in late 2011. The rate averaged 42 percent above the official one until the government removed the restrictions in December, data compiled by Bloomberg show.

In Egypt, clients using the CIB trade include major European consumer-goods companies as well as importers, according to traders at local brokerages who handle the business but spoke on condition of anonymity to discuss confidential information.

The trade has been so popular this year that it’s helped boost CIB’s average daily trading volume by more than a quarter compared with the same period in 2015. All the buying has pushed up the price of local shares 2.2 percent this year in dollar terms, while the selling has driven down the GDRs 17 percent over the same period. Usually, the prices of local shares and GDRs are close to equal when adjusted for exchange rates.

But it could all be coming to an end as the proportion of CIB stock trading in London approaches the maximum 33 percent of total shares allowed by the Egyptian Exchange. Since other local stocks with GDR programs, such as Edita Food Industries and investment bank EFG-Hermes Holding, aren’t as liquid as CIB, there’s no clear alternative for companies looking to continue using the method to access dollars, according to Cairo-based Beltone Financial.

“There’s a sense that the GDR-trade window for acquiring dollars is closing, so it’s creating a rush among investors,” said Hany Genena, head of research at Beltone. “While we expect the impact of ending that trade to be limited to the market, the fact that not many investors are taking advantage of the opposite trade -- by buying stocks in London and selling them in Cairo -- shows that they are still wary of coming to Egypt.”

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