Egypt, new dimensions, new frontiers

Mr. Abdel Hamid Ibrahim, Chairman of Capital Market Authority

Capital Market Authority

Interview with:

Mr. Abdel Hamid Ibrahim

Cario, May 18th, 2000

20, Emad El-Din street, Down Town,
Tel: (202) 5741000/3111
        (202) 577 96 96
Fax: (202) 574 41 76
Q1. Last year you predicted that the market capitalisation was going to double within a year. Would you say that this has happened ?

A1. Well, it is not yet one hundred percent but it is moving in the right direction. As of today it is about EGP133 billion, which is close to double. Because Egypt Telecom has not yet been privatised, we are slightly below the expected figures. This sale should give us a minimum increase of 20%.

Q2. Then would you say that it has been a successful year for capital markets in Egypt?

A2. Yes, 1999 has been an active year for capital markets here in Egypt. Trading value was about EGP 40 billion last year compared to about EGP 23 billion in 1998. It has been a very good year for foreigners trading in the market, and there has been a net inflow of approximately US$1 billion, where as in 1998 there was a net outflow of about US$120 million.

Obviously we cannot compare the Egyptian stock exchange with New York or NASDAQ, but things are good, and improving. Trading in the first quarter of this year is double what it was in the similar period last year. The trading value for the first four months of this year was EGP29.5 billion compared to 10.7 for the same quarter last year.

Q3. Do you also work with the private sector to contribute to the growth of the CMA and to increase the securitisation of the market?

A3. Before I answer the question I must point out that we are actually totally independent from the Government, and we receive no funds from them. Our budget is completely from our own resources and this allows us to be genuinely independent.

We are an independent regulator, but we also do some work in promoting the market. We ensure that the market is properly organised and the market fulfils international legal requirements. We also disseminate information, so that everyone knows what is going on, and how changes in legislation will effect them.

In relation to this, I have some news on changes to the legal framework which resulted from recent Parliamentary approval of a new law on central depository. These changes are designed to make the market more organised, and bring it up to higher international standards. The new law covers six main issues. The first is central depository. According to the new law all companies listed on the stock exchange must be admitted to the central depository. Up until now it has been an optional issue, but from now on it will be compulsory. This will improve the liquidity of the market.

Secondly, we are going to have central registration. Some investors have been avoiding this, for whatever reasons, but now that will no longer be possible, and the registration process will be fully automated. All investors will now deal only with one body for registration purposes. In order to ensure that we met the most stringent requirements of international legislation, we worked very closely with Millbank and Tweed, the famous US law firm, when we drafted this law. This firm has a lot of experience in this part of the world.

Thirdly, to facilitate investment we will now allow foreign managers and other institutions to use nominees. We will have a register of legal owners and benefited owners, which was not the case before. Now any portfolio manager whether Egyptian or foreign, can buy either in his own name, on behalf of his client.

Stock custodians are also to be regulated. Up until now these were the responsibility of the central bank, but according to the new law sub-custodians will be under the jurisdiction of Capital Market regulator. Why sub-custodians? Well, foreigners need to go through a global custodian, and these use a local, or sub custodian. All of these will have to get licensed and be subject to new laws.

We are also introducing the idea of EDR, Egyptian Depository Receipts. We are going to licence one of two depository banks which can receive shares and issue EDRs, and then the trading can be done on EDRs. This has some distinct advantages.

For example, if a company wishes to diversify their shares then they can put them in the bank and get EDRs instead. The first implementation of this will be the sale of the Egypt Telecom. The nominal value of the share is EGP 100, which is quite high, so they are going to put it into the depository bank and issue EDRs, in order to facilitate both a split of shares and the listing of foreign companies. We have signed several agreements with other Arabic stock exchanges, and now it is possible to have, for example, an equity company listed on the stock exchange which operates in Kuwaiti Dinars, but whose transactions within the Egyptian exchange are done in EDRs for simplicity's sake.

The final issue is to have a guarantee fund. We have had a guarantee fund for security since the 11th of January this year, which means that I can say without any reservations that we have eliminated settlement risk. Any investor now is guaranteed that he is buying from, or selling to, the market in general, not one individual vendor or purchaser. The guarantee fund ensures Timely Settlement.

This is huge progress for the Egyptian market. The settlement period in Egypt is still T+4, and the guarantee fund will interfere in T+5. For the first time we are starting to use cash penalties, which have been proven the world over to be the most effective means of combating settlement problems. Any broker has to fulfil its obligations by 9 am on T+3. If they fail to do this, they pay a lump sum of 5% of the total value of the transaction. At 2pm, they get another 5% charge. This is a very effective means of ensuring compliance with the rules, and it allows us to meet a whole host of international rules and regulations.

Q4. With all these changes that are being implemented, what technology are you using to ensure that there will be security in the transactions and institutions?

A4. The regulators are going to be very open and very frank. They are not going to give licences for central registration authority to anyone unless we see a contract with an international firm, to assist them in establishing a system for central registration and give technical and technological support for the programme design. We have nine tenders by the way, but we still have a lot of negotiations to complete. You can rest assured, however, that we are going to insist on foreign management contracts for the first two years, before we consider handing out licences.

Q5. I understand that the stock exchange is implementing Canadian technologies, are you looking at importing technology too?

A5. Yes, it is not yet finalised yet, but the Bank of New York may be involved in helping us sort out the technological side of things.

Q6. There were some worries that the privatisation process was biased towards Egyptian capital. What is the Capital Market Authority doing to allay these fears?

A6. I am glad you asked this question, and I will answer by giving you examples of the action we have already taken to combat these fears.

The Egyptian market is an open one, and there are no restrictions, neither will there be any in the future. Three months ago there was a cement company that went to privatization by tender process. There is a state-owned cement industries holding company that had, as part of its objective, the disposal of cement companies to foreign companies. Many people assumed therefore that the holding company would dictate who the shares went to. This did not happen, but this assumption is where the worries stemmed from. We have made it clear to the government, and to the various holding companies, that the market is open and there is no room for interference.
As a regulator to the government, we said: "Look, this is an open market and we will accept any tender offer regardless of where it comes from, and Egyptian tenders will not receive any special treatment". This has happened, in the case I mentioned, and this just goes to show that there are no restrictions or national favouritism involved in the privatisation process. After the Asian crisis, this was an issue in many countries, not just in Egypt. We studied very carefully what was going on, and we concluded that the best possible course of action was to continue opening up the market as we were doing before.

These issues have already been settled here in Egypt. We have given a guarantee, through GATS, that we will continue to open up our economy to foreign investment, and remove obstructions. Finally, let me assure you that there is not preferential treatment for Egyptian capital, and that the regulator is fully independent.

Q7. What is the proportion of foreign capital in the Egyptian stock market at the moment?

A7. In November 1997 foreigners invested in 85 companies on the stock market, and on the 15th of May 2000 foreign companies were shareholders in 176 companies. The number of shares owned by foreigners has gone from EGP 40 Million, which represented six percent of the total, to EGP 372 Million, and this represents 13.8 percent of the total, over the same time period. As far as market value is concerned, in 1997 foreigners owned shares to the value of EGP 4.2 billion, and in May 2000 this value this was EGP 13.5 billion. We have gone from 10% to 17.2% in terms of value.

Q8. What quantity of this investment is from outside the Arab world?

A8. When I say foreigners, these are mainly financial institutions from the USA and the UK. There are some European counties investing too, as well as some individuals from the Gulf states. I believe that investment from the Gulf states would account for about approximately 15% of foreign investment.

Q9. What is your relationship with the Misr for Clearance, Settlement and Central Depository (MSCD)?

A9. It is an independent company. Sometimes people have misunderstandings about this. We started a programme in 1992 to reorganise the Egyptian market. The Capital Market Authority was the only institution in the market, and we did not really have any practical stock exchange. Neither did we have management; there was no full-time chairman and there was no board of directors. Therefore we were obliged to act as a promoter for other institutions such as the exchange and the central clearing house.

Now the system is better organised, so we do more regulating and less promoting. Now the three institutions have been set up: the Stock Exchange, the full-time chairman, and the board of directors who are mainly elected from market participants. There is also ECMA, which is the Association for Capital Market Participants. However, we still do promotion on two fronts. The first is training, where we still have significant challenges in this field, and savings. The Misr for Clearance, Settlement and Central Depository (MCSD) takes care of clearing and settlements at the central depository, and we will give them a licence to operate as a central registration authority, but only after we are absolutely sure they have the technological capability to do so, and in our eyes, a management contract with a foreign firm is part of this.

Now let me explain this misunderstanding. In 1996, when MCSD started, we had not the skills to design a computerised clearing and settlement solution. We did have an information centre, and the head of this sector resigned and went to work for this company. So people sometimes think that it is related to the regulator. We are completely independent from this organisation, and this is the way it has to be.

Q10. Looking at your international work, are you attempting to forge alliances and agreements with regulatory bodies in the region, and internationally as well?

A10. Yes, we are looking to work together with our counterparts across the world. We signed a memorandum of understanding with the SEC of the US about three years ago. Almost all Arab markets have similar memorandums, as well as agreements between the settlement and clearing agents. This means that, for example, if a Kuwaiti investor decides to invest in the Egyptian market then he can go to the Kuwaiti clearing house to get his money or shares. Similar projects are underway with Lebanon, Jordan, Bahrain and Tunisia.

Since our last meeting, we have become members of the executive committee board of directors of the IOSCO, the international organisation of capital market authorities. We also became the Chairman of the African and Middle East Regional Committee of IOSCO.

Moreover, during a recent United Nations Accounting Forum, Egypt was chosen to participate in a pilot project which will test and develop international standards in emerging markets.

Q11. Are you also going to be developing international partnerships to develop training?

A11. Yes, as I mentioned we already have a memorandum of understanding with SAC. We also have a project funded with USAID, and we are working very hard to develop our market surveillance system. In fact, we are about to sign a contract with the National Dealers Association, who own NASDAQ, to buy their surveillance system. In exchange, they will train our staff and adapt the surveillance system to the specific needs of the Egyptian market. We also send staff to the US to SAC training programmes twice a year. We are really very keen to work with our international partners.

Q12. How is the CMA promoting the Egyptian stock market as a reliable, safe place for foreign investors to invest their money, where there is no discrepancy between the treatment of Egyptian and Foreign capital?

A12. No discrepancy in Treatment between Egyptian and Foreign Firms. However you have met with Concorde and EFG Hermes, and many other market participants, both Egyptian and joint ventures, such as HSBC and ABN AMRO.

To promote the market we have to show that we are a strong regulator, which enforces the rules and regulations. It is not my role to talk about the performance of the market, but to demonstrate that we are doing a good job as a regulator and making the market a safe place to invest in.

Q13. What has been your biggest achievement as the head of CMA? Has it been setting the pace now for a structured system that will attract new investment?

A13. Yes, this is undoubtedly the case. We now have the structure and the systems which will allow things to really take off. I took this job in 1995, and prior to this we did not have institutions such as a central clearing house and central depository, or the laws to make them work. Getting these up and running has certainly been an achievement for the Capital Market Authority, and now I can proudly say that we are on a par with other markets, as far as institutions and regulations are concerned.

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© World INvestment NEws, 2000.
This is the electronic edition of the special country report on Egypt published in Forbes Global Magazine.
August 7th 2000 Issue.
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