DEVELOPING WORLD The shape of things to come! [Archives:1998/49/Focus]

December 7 1998

This is an OPINION page.
Every week, a different intellectual writes a FOCUS on a pertinent issue! 

By: Riad Al-Khouri*
Whether we like it or not, change is coming to Yemen, and it will be up to everybody to make sure that it is managed properly.
Fortunately, like any late starter, Yemen stands to learn a great deal from its neighbors who have already gone a long way down the path to globalization. Yemen is an emerging economy that has yet to emerge, but when it does so, a stock market will be one of the country’s main features. So a look at other bourses in the region could be helpful.
In Cairo this week to work on the traditionally thorny question of Egyptian import procedures, gloom predominates among economists and businesspeople. Though acknowledging macro-economic stabilization and some reform, many indicators – such as a stock exchange did not cheer them where share prices continue to fall. The trade regulations I was looking at had become user-friendlier over the past few years, along with other government rules that are steadily being simplified. This is a good thing, but by itself such reform – though necessary — is not sufficient to keep an economy moving forward (surely a lesson for Yemen).
Meanwhile, Egyptian shares have been caught in a downward spiral. A showcase of the country’s shift to a market economy, Egypt’s bourse had boomed till the spring of last year. A host of reasons can be cited for the market’s doldrums, but the financial turmoil in Asia – the contagion factor – is probably not one of them, at least not directly. More relevant are lower oil prices and weaker regional and international markets for Egyptian goods and services. Thus, Egypt’s macro-economic performance, though still reasonably good compared to others in the Middle East, has been dented.
However, though it is difficult to put much of the blame for the Egyptian stock slump on the impact of the turmoil in emerging economies, there has been some flight of foreign funds as part of international investors’ moves to reduce exposure in emerging markets worldwide. Around a fifth of customers in the Cairo bourse for the first half of 1998 were foreign, but among them buyers continue to be outnumbered by sellers. Though more buyers had been there in June 1996, foreign players then still accounted for roughly the same twenty-percent of the value of transactions. In other words this indicator of international interest in Egypt has not moved over the past couple of years, though foreigners’ transaction were a mere eight percent in March 1996. In the heady days of that year’s boom, no less than 125 overseas financial institutions were participating in the market. Many of these are now holding back. There is no mass exodus of foreign funds, as happened in Russia and other contagion-plagued markets in the past year or so, but there has certainly not been an influx of fresh money.
In all this, we should remember that the Cairo bourse in its present incarnation really is new. It was only the government’s enactment of the Capital Market Law in 1992 that restored domestic and overseas interest in Egyptian shares. Since then, the market has gone through four distinct phases:
During the first (early 1993 to October 1994) it was on the rise as a result of some companies’ increased profits, a drop in interest rates, and dividend income becoming tax exempt.
The second phase (November 1994 to August 1995) was one of correction, characterized by depressed prices and a decline in daily trading volumes. Among the reasons behind the drop were the inexperience of individual local investors who are yield-driven and the lack of sufficient institutional traders who are more sensitive to earnings growth and capital gains.
The third phase (September 1995 to February 1997) witnessed a boom in the market, up around forty percent in 1996. The total value of trading also rose. That phase was characterized by the market’s responsiveness to privatization program and by the increasing interest of foreign institutions in Egypt. International fund managers had discovered Cairo as far as portfolio investment was concerned. Egypt’s allowing foreign intermediaries to operate on the same basis as national firms, with no limitations on capital mobility or restrictions on forex transactions, was also a factor in putting the country higher on the list of emerging markets to be looked at positively.
However, by the spring of 1997 the Cairo bourses had cooled down, and phase four – which continues till today – had begun. The trouble in Asian and other merging markets thus came later than the beginning of the current share slump in Cairo, but prices now are still around half what they were during the peak days of early last year. Though some shares are earning twelve percent, several points above what an Egyptian can get on a bank deposit, other companies have seen their stock fall by up to seventy percent since the 1997 Winter of Contentment.
Paradoxically, the putting on the market now of large chunks of privatized shares could actually move things upward. Usually, new stock on most bourses tend to depress prices of existing shares, for the obvious reason that the latter may temporarily be less attractive than their nascent competitors. In the case of Cairo, however, offerings by the government of lots of shares in the right companies on the right terms will boost the market. This would be the start of “phase five,” and after that, the sky could be the limit. Will we have to wait a long time for Yemen’s “phase one”?
* Riad Al-Khouri is a Beirut-based economist and leading intellectual. He writes regular columns in many Arab newspapers and magazines.