ECONOMY-EGYPT: New Regulations Seek to Revive Bourse

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Jul 22 2002 (IPS) - New regulation has been introduced to revive the Cairo and Alexandria Stock Exchange after the beating it has taken in recent months.

A controversial ceiling on daily share price movements was abolished Sunday. Share prices were earlier barred from rising or falling more than 5 per cent in a day. Brokers said this hampered liquidity.

This is among several new measures introduced to check a dismal performance in recent months. The Federation of Arab Banks said in a recent report that a 37 per cent fall last year made the performance of Egypt’s stock market the worst in the Arab world.

Investor confidence has dried up and a negative outlook by international ratings agencies has kept many foreign players away.

Officials and market authorities met earlier this month to find ways out of the crisis. They agreed to introduce margin trading, revamp the arbitration system, create a fund to cover risk and fraud, and abolish the 5 per cent barrier. Some of these changes have taken effect, and others will be introduced over the next few months. Margin trading on active stocks will be introduced by the end of the month.

“A proposal for a credit system was discussed whereby 50 per cent of the total value of shares sold would be paid in cash by way of deposit and the balance would be negotiable between buyer and sellers,” chairman of the Capital Market Authority Abdel Hamid Ibrahim told media representatives.

New market disclosure and listing guidelines are expected to improve investor confidence and increase transparency. Companies will now be expected to file quarterly results, and tougher new listing rules should put an end to the practice of listing just to enjoy tax exemption. “This will create more confidence in the market and push out loss-making companies,” says a broker.

The new regulations go hand in hand with a proposed new fund to cover risk and fraud. Investors will make regular contributions to the fund. Disputes can be settled out of court under a new arbitration system. “We have a slow legal system, so an arbitration system set apart from the judiciary should speed things up,” Hussein Abdel Halim, head of research with the brokerage firm Sigma Capital told IPS.

Lifting of the ceiling on price movements has been the most significant change. “Whenever a stock price was going up, you would find that offers would disappear because people wanted to wait for a 15 per cent rise before selling,” says Halim. “When stocks went down the barrier would stop them from falling and you would not find buyers, which is a huge problem for investors because they invest mainly because of liquidity.”

Abolition of this barrier is being applied at first to about a dozen of the most traded stocks, but will apply later to all stocks.

As a precautionary measure, traders on the floor will be alerted when the volume weighted average price (VWAP) of any stock rises or falls more than 5 per cent in a single session. If the movement exceeds 10 per cent of the opening price, trading will be stopped for 30 minutes. A 15 per cent change will mean a 45-minute suspension and a 20 per cent change will mean that trading in the stock will be stopped until the end of the session.

Traders have welcomed the changes but say more measures are needed to revive the ailing market. “This will improve liquidity and it’s a good thing for the market, but it’s not everything,” says Halim. “This will not in itself bring up the market. What will is improvement in the economy, which we have not seen yet.”

Shady Sharaf, head of research with Al-Shorouk Brokerage says removal of trading restrictions on newly acquired shares could help re-activate the market. A settlement period in which such stocks cannot be sold on the transaction day or in the following two trading sessions makes investors jittery. Investors unfortunate enough to buy shares whose prices begin to plummet can be stuck with them for three days.

Traders are looking to more measures and a better economy to bring the foreign players in.