CAIRO: The Egyptian Financial Supervisory Authority (EFSA) approved on Wednesday rules for margin trading and same-day short selling, set to be enacted as new trading methods in the Egyptian Stock Exchange.
Shares of companies that have reported at least one annual financial statement will qualify for the transactions, the EFSA announced on their official website.
Experts say more sophisticated instruments like these are needed for Egypt’s bourse to compete with international markets, but question if the timing is right.
“You can’t make laws that constrain the stock exchange. If you do, you might as well close it,” said Tarik Salama, an investment consultant. “Even China…has a liberal stock exchange with fewer constraints.”
However, a stable economy is necessary to garner the full benefits of such trading tools. “These are ideas enacted in order to encourage activity in the market and encourage foreign investors,” he said.
While the diversity is needed in the market, he added, this may not be the right time to deploy these tools.
Minoush AbdelMeguid, managing director of Union Capital private equity, which is the first equity firm to focus on the SME investment space, shares Salama’s concerns.
In June, former bourse chairman Mohamed Abdel Salam said there were plans to introduce short selling and other trading tools to the market.
Essentially, margin trading involves partially borrowing from a broker to buy a stock, while short selling is selling stocks that you do not actually own and buying them back at a lower price to return to lender. The latter is typically used by hedge funds as an instrument and is often adopted by short-term investors. Meant to boost liquidity in the market, it could prove dangerous if too many investors bet on declining prices.
“Unless they know something we don’t know, unless they think this is going to attract more trading volume in the market, I don’t see the benefits of adding these methods right now,” AbdelMeguid said, referring to EFSA officials.
“The market is volatile, what is happening now in the market with political instability does not really advocate introducing new concepts,” said AbdelMeguid.
Salama questioned the EFSA’s decision to approve short selling. “Before enacting new laws, we have a problem that needs to be addressed very quickly in the stock market and that is transparency,” he said.
According to Salama, short selling relies on speculation and “bluffing.”
While it is a risky method that may seem like it is allowing the Egyptian exchange to compete in a global economy, it may not prove to be successful at a time where there is no established economic policies and permanent government.
Current challenges
“Every couple of weeks you also have global rating agencies downgrading the economy, it has been happening constantly since the uprising on January 25. We have pressure on our currency, foreign reserves have been constantly going down, the government is borrowing, and interest rates are going up, which is also directly related to margin trading,” she added.
On November 22 along, in the wake of violent clashes between protesters and security forces that killed over 40 people in what many called the “second wave” of Egypt’s revolution, the main benchmark index lost LE 12 billion of its total market capitalization.
Overall, the EGX 30 has fallen 44 percent since the start of the year.
This week, the Egyptian pound weakened to its lowest in almost seven years against the dollar, with bids as low as 6.0085 to the dollar from Tuesday’s low of 6.0061, Reuters reported.
With increased political and social unrest mounting as the market flails, Salama said it will not be the government that revives the country’s economy, rather “local capitalists, businesses or foreign investors.”
The Supreme Council of the Armed Forces (SCAF) has been “talking about the effects of the revolution on the ‘wheel of production’ and the collapse of the economy since they took power nine months ago,” he said, as opposed to boosting optimism in the market.
“There is a limit, if they continue scaring people like this, with this amount of poverty and hunger, people will hit the streets again with nothing to lose this time,” he said.
Egypt’s Central Bank of Egypt announced on Thursday that foreign reserves have fallen to $20.2 billion as of the end of November from $22.07 billion in the end of October — dropping by $1.87 billion in just one month.
“Interest rates have also been going up over the past six months because banks have been less reluctant to lend the government, which has become a risky lending partner for them, and thus rates went up to protect the foreign currency, which has been decreasing,” AbdelMeguid pointed out.
“Everything is interlinked, and this is why the economic process now is so complicated,” she added.
Margin trading allows buyers to borrow from their brokers and exposes them to being called upon for the money they borrowed, thus putting them in a position where they can lose a lot of money in a volatile market.
AbdelMeguid said if the government is lending Treasury bills at an interest rate of 15 percent, then potential investors will choose to buy bills from the government as a safer bet, rather than investing or marginally trading in the stock exchange.
Essentially, she said, officials enact such trading tools in a mature market when they know that they will encourage diversity amongst investors and attract more people to invest. However, the real benefit for the economy now would be for officials to pause and reflect.
“To benefit from the current slowdown in the market is to stop and review regulations and look at the microeconomic factors that could be reformed,” she pointed out. “They can revise laws that will help small businesses, protect current investors, and they can even revise the old stock market law that they are currently operating under.”
She added that the Egyptian Stock Exchange Law has been the same since 1992, while Egypt witnessed three local economic recessions and two global recessions.
Salama, on the other hand, pointed out that strict laws in the Egyptian market and lack of transparency are the main reasons foreign investors flee.
