Sherif Sami, Chairperson of the Commercial International Bank (CIB) Egypt and former chairperson of the Financial Regulatory Authority, reflected on the situation of the local financial market amid the uncertainty that may confuse investors and market dealers.
In an interview with Daily News Egypt, Sami said that he believes this year represents a great challenge for the Egyptian capital market, urging the government to accelerate any initiatives or legislative amendments, as the rapid movement in this regard gives investors, especially foreign institutions, the impression that they come at the forefront of the country’s priorities, which reduces the risks associated with uncertainty.
What occupies the minds of investors and dealers in the financial markets globally?
The vision is still unclear about the coronavirus pandemic, nearly two years after its appearance. While some believed that the last months of 2020 would be the last of sorrows, the world entered into other cycles of infection. We have nothing but hope that the second half of this year will see full recovery.
As a result of the foregoing, confusion continues in a number of important economic sectors, including tourism, aviation, and entertainment, in addition to the real estate sector.
Remote work has led companies and banks to review their need for a rented place, so rentals and selling prices were affected. Similarly, the rise of e-commerce negatively affected retail and real estate designated markets and commercial complexes.
More importantly, the two-year precautionary measures; government intervention with quantitative easing policies, such as increasing loans and reducing the cost of lending; and the disruption in production, international trade, and transportation for some time, resulted in the relatively constant conditions. High inflation waves hit the developed as well as the emerging ones.
We also witness great disruption in supply chains, high transportation costs, and a shortage of available containers, all of which affect selling prices as well as the profitability of companies. The automotive sector is a clear example of the extent of being affected by the lack of available electronic chips, which led to a reduction in production and sales for many manufacturers. This is a reality we see in the Egyptian market for imported and locally assembled cars.
All of the above represent factors of concern or uncertainty for investors and market dealers, and are linked to the reactions of central banks to deal with inflation. Such steps affect emerging markets as a result of the expectation that their capital flows will decrease in light of higher interest rates in the major low-risk industrial countries.
Egypt is not far from these challenges, and there is no doubt that those who make our monetary, financial and economic policy are closely following the situation and the extent of its impact on the exchange rate of the pound in light of our trade balance deficit and the need to attract foreign capital, whether in sovereign debt instruments, direct investment or portfolios in the Stock Exchange.
What is your vision for the Egyptian Exchange and the capital market in general during 2022?
The year 2022 represents a great challenge for the Egyptian capital market, as our stock exchange globally and regionally occupied a lagging rank over the past two years, in light of many factors, foremost of which is the COVID-19 pandemic and the associated precautionary measures and confusion for tourism and export. We must all unite, whether the government, the business community, the stock exchange, and of course the Financial Regulatory Authority, so that 2022 could be a year of transformation. We accelerate any initiatives or legislative amendments, to assure investors – especially foreign institutions – that they come at the forefront of the country’s priorities.
We all have to work to increase Egypt’s weight in the MSCI Emerging Markets Index, as 0.7% for Egypt is unacceptable and puts us in a threatening situation if other emerging markets come ahead of us and if the weights of the markets that precede us increase. Targeting this increase in Egypt’s relative weight requires the presence of major companies whose shares are listed on the Egyptian Exchange, and that the market value of the ratio of free trading and trading activity on the stock is high. Just as we have the Commercial International Bank and we had Orascom Construction, we need four or five similar heavyweight companies. This formula can be reached through the acquisition of listed companies, whether from public money companies or the private sector – through exchange operations or by providing financing through capital increases on companies that integrate with them or achieve vertical or horizontal expansion. It is a mechanism that increases the market value of the company and increases the value of free trading, in addition to making it more attractive to major international funds and financial institutions, whose investment appetite is raised by medium and small companies, as it aims to form centres estimated at tens of millions of dollars, which requires that the value of free trading is worth hundreds of millions of dollars, and then the market value of the company will not be less than the equivalent of $1bn. Currently, we have less than ten companies whose main listing on the Egyptian Exchange exceeds this number. Free trading volume, successful business model, high level of governance and communication with investors, are all important factors in this respect.
The market is viewed it in terms of both equity and debt instruments. 2022 will witness more booms in the field of bond, securitization bonds, and sukuk issuances. In light of the increased interest in the environmental aspect, and in light of Egypt’s hosting of the World Climate Summit in Sharm El-Sheikh next November, we are supposed to witness an expansion in specialized financing, whether green bonds or sukuks.
How do you see the government’s IPO programme?
The return of the Egyptian government’s IPO programme is a good thing, and it should be keen to complete it. What we have witnessed so far is the sale of part of the public business sector’s contributions to companies whose shares are traded on the stock exchange, namely the Eastern Company and Abu Qir Fertilizers.
President Al-Sisi recently emphasized the importance of the private sector and the necessity of its participation and making companies’ shares available to citizens, which is what we are supposed to see further in this path.
With the importance of public sector companies, the origin is the private sector, and therefore the real confidence and positive trend will be embodied in the presence of a number of stock offerings for strong companies from the private sector. A limited number of large companies are more beneficial to the market than larger numbers of medium companies. Of course, we welcome both types. The movement is a blessing.
Public sector companies provide the opportunity to form large entities through the acquisition by some of them of other companies such as the petroleum sector, as well as we should carefully study the internationally recognized business models for the launch of a new company, especially in sectors that the market is not accustomed to, including electricity companies or infrastructure and infrastructure operations companies.
We need not to neglect the aspect of debt instruments with regard to government proposals. I hope to activate issuing bonds and securitization instruments, as well as revenue bonds in financing public projects in the field of transportation, electricity, highways, and others. In recent years, we have seen nothing but securitization bonds for the New Urban Communities Authority. This trend will activate the bond market and diversify financing outside the state’s general budget.
The Egyptian government recently showed its interest in real estate investment funds, how do you see this sector?
The REIT sector is like a “wisdom tooth” that appears late.
The capital market is still waiting for a prominent activity for real estate investment funds, and I was pleased with the government’s interest and the meeting chaired by Prime Minister Mostafa Madbouly a few days ago to discuss this file and study proposals to facilitate and stimulate their establishment and increase the elements of attraction for such investment vessels.
These funds represent one of the pillars of the financial markets in many developed markets, and the time has come to activate them to achieve multiple goals, the first of which is to increase financing channels for the real estate sector, especially projects not designated for sale from administrative buildings, commercial centres and multi-storey garages, in addition to real estate designated for logistical and industrial areas, and recently data centres and mobile phone towers. It also provides a mechanism to allow investment in the real estate field away from direct participation in a specific company, which helps to benefit from the growth in the real estate market and hedge against inflation.
Real estate investment funds globally depend mainly on the approach of allocating a large part of their investments in revenue-generating real estate assets such as leasing, exploitation rights, advertising, etc., which enables them to make annual distributions of their profits to stakeholders. It also achieves the possibility of estimating revenues in the medium and long term, away from the cycles of building and selling real estate projects. Stakeholders also benefit from the growth in the value of the shares resulting from the increase in the market value of the invested real estate assets over the years, which is demonstrated by the periodic evaluation of shares of the Real Estate Investment Fund by independent evaluation experts registered with the Financial Regulatory Authority. These characteristics of real estate investment funds make them attractive to medium and long-term investors, especially insurance companies, pension funds and other savings systems.
President Al-Sisi directed for the provision of apartments for rent to citizens, instead of selling. Real estate investment funds represent an ideal tool for building and owning these housing units and then renting them to citizens, as recurring income is the core of the business model of such funds.
The reason for the delay in launching these funds in Egypt, as only one fund has been established so far, and a second fund is being established, is due to the fact that the tax legislation in force did not discriminate in the treatment between the real estate company and the real estate investment fund. The cabinet should consider amending the income tax to exempt the fund’s dividends and capital gains made on its documents from income tax and to be satisfied with tax accounting for the results of the fund’s activities itself.
How do you see the regulation of Special-purpose acquisition companies (SPACs) in Egypt?
SPACs have begun to gain traction in developed markets, especially the United States, in recent years.
The investor subscribed to the shares of those companies, which are also called “blank check companies”, necessarily knows the facility that will be acquired, which is an investment based on his trust in the management who promote the SPAC in the field of investment and their previous work. The statistics published abroad showed that a large percentage of the SPACs’ offerings for acquisition in the past two years did not bring profits to their shareholders, while of course there is a smaller percentage that achieved very rewarding returns.
This category of assets is then relatively high-risk, and not the magic apple to achieve large profits as some portray it, just like underwriting any new offering, bearing profit or loss depending on the business model, pricing, market conditions, etc.
The topic is new to us in all emerging markets, and if we find sponsors to launch such companies and an appetite to invest in them, it will take a number of years before the experience can be evaluated objectively. The financial market regulators should intervene more in organizing fundraising and promoting these entities, in order to achieve greater disclosure and a fairer balance in the relationship between the promoted founders and the investors who are being attracted. This includes postponing the founders’ exit, as well as greater transparency regarding their advantages. The requirements that are required to be met by the founders may be enhanced in terms of experience in the fields of direct investment and venture capital, as it is noted that some celebrities in the fields of sports and art promote investment opportunities through special purpose companies for acquisition that they sponsor depending on their fame, which may not extends to the areas of management, investment, structuring and finance.
