2 minutes with Hisham Tawfik: Why companies and investors exited the EGX in the past few years

In late 2018, the government announced the restructuring of the public sector through a reform program to revive state-owned companies with funds aimed at reducing their debts and implementing better governance.

During a seminar by the Egyptian Center for Economic Studies (ECES) entitled “What is happening in the Egyptian capital market: A sector crisis or a reflection of economic performance?”, Minister of Public Enterprises Hisham Tawfik explained that Egypt stands at a rough point bearing substantial economic challenges that accumulated over the past three decades out of negligence. He talks about how to improve the Egyptian Exchange’s (EGX) performance, the latest developments in the government’s initial public offering (IPO) program and why investors and companies have been exiting the stock exchange in the past few years.

How can the EGX’s performance be improved?
The stock exchange market is not an indicator to the country’s economic performance but rather a prediction and vision. Before the global financial crisis in 2008, Egypt’s stock exchange was very vibrant, achieving $350 million during daily trading sessions.

The EGX is improving due to economic reforms that began since the currency devaluation in 2016. To improve the stock market’s performance, one needs to – for instance – halve trade handling costs at least. A short-selling system will also be introduced soon in the stock market to  reduce the dependence on margin trading.

Could the stock exchange recover amid the current economic pressures?
Egypt never went beneath the 10% inflation rate. A stock exchange can never revive under these high inflation rates and interest rates set by the Central Bank of Egypt (CBE).

We always assume that investors can tolerate current economic pressures, such as high interest rates, inflation and taxes, but in the end, they prefer to stay in a fixed-income growth plan. While I worked in asset management over the past years, I witnessed a severe decline in the number of active traders, dropping from 160,000 traders per session back then to 15 traders  today.

Why did some companies exit the stock market?
Throughout the past years, a total of 1,000 companies exited the stock market due to the lack of tax incentives. Hence, we only have 250 companies enlisted today. The problem does not lie in the delisting itself, but rather in the size and sectors that these delisted companies operated in, namely mega-businesses and companies in the telecom, construction and banking sectors.

How is the government reforming state-owned enterprises that are recording losses?
We need to attract foreign and local direct investments through first decreasing interest rates and the country’s debts, and secondly, making use of unused assets. I discovered that companies that have been recording losses have substantial, unused assets. If these assets are used wisely, those companies will perform better on the long-run. The same concept applies to the state. The government is currently compiling a database of unused state-owned assets to put them to use.

There is no point in developing a company that continues to record losses. Without a doubt, the government will shut down any public company that is unable to get back on track. We have 40 companies affiliated to the public enterprises sector that are being developed, and whether they are recording losses or profit, they have the potential to improve.

What are the latest updates on the government’sIPO program?
The program is not meant to attract funds; instead, we are aiming to attract new investors to the stock exchange, as well as bring back the ones that had exited. The second phase of the IPO program will show new companies in new sectors to be announced soon.

The first phase of the program included offering an additional 4.5% stake of the Eastern Company in March, which did not witness a demand from local investors. Therefore, the second phase was delayed until September. The program will not be affected by market turbulence and the ministry is set to meet with Alexandria Containers and Cargo Holding and Abu Qir Fertilizers to discuss the date of offering their shares.

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