Economy in a week: Egypt reclassified as frontier market

After a three-year review, Russell’s Annual Index reclassified Egypt’s status from an emerging to a frontier market. And yet Sherif Sami, chairman of the Financial Supervisory Authority (EFSA), refuted the downgrade, claiming it was irrelevant. Egypt meanwhile launched its “We Miss You” tourism campaign shortly after recording the lowest quarterly tourism revenue in over 10 years.

Russell’s Annual Index reclassifies Egypt from Emerging Market to Frontier status

On March 3, Russell Investments’ annual index reconstitution process – designed to capture and reflect global equity market shifts – reclassified Egypt from an emerging market to a frontier market country. After a three-year market review process, the research firm concluded that Egypt did not meet the macro and operational risk criteria for an emerging market status. The changes will become effective after the conclusion of the annual index reconstitution process at the end of June.

The index analyzes risk factors through a process designed to identify material changes to the country risk and degree of investability. Although reclassifications are rare, it takes up to three years of sustained changes in economic criteria for a country to be reclassified.

The rising political risk since the 2011 revolution made the Central Bank of Egypt (CBE) ensue a policy of currency controls, which, according to the report, “created a major barrier to efficient trading in the market.”

The term frontier markets, coined by the International Finance Corporation in 1992, refers to equity markets that are at an earlier stage of economic and political development than larger and more mature emerging markets. They are characterized by having lower market capitalization and liquidity.

Yet these markets have an upside, as investors seeking high, long-term returns with low co-relations to other markets typically pursue them. The fact that they are priced relatively lower to mainstream emerging counterparts makes them attractive to investors.

Nonetheless, the reclassification is a downgrade from Egypt’s previous status and may not be considered investable markets by index providers, due to frontier markets being typically perceived as more vulnerable to sovereign, geopolitical, structural and inflation risks.

Sovereign risks were pronounced earlier this year when the government seized British Gas’s export share of natural gas, forcing the company to declare a force majeure. Inflation has also been in the double digits, though most of it, according to the CBE’s monetary policy committee, can be attributed to rising food prices.

The Egyptian government refuted Russell’s reclassification, claiming that little attention should be paid to its findings.

The economic prospects will turn around soon, said EFSA chairman Sherif Sami, last Sunday.

Sami expounded his argument by pointing to the EGX 30 performance over the past seven months, crossing the 8,000-mark last week – the first time in over six years – while daily market turnover has surpassed one billion Egyptian pounds, coming up from LE350 million last year.

Foreign reserves have also increased. The CBE announced last week that net international reserves rose to US$17.3 billion at the end of February.

The economy will grow regardless of any evaluations, Sami added, bolstered by political stability after the upcoming presidential and parliamentary elections.

Q1 2014: Lowest revenue for tourism in over 10 years met with “We Miss You” initiative.  

In its latest bid to bring back tourism to Egypt, the Ministry of Tourism launched a campaign under the name of “Wahashtoona” (We Miss You) that will target Arabic countries. The scheme is one part in a number of programs aimed at rejuvenating the dwindling numbers of tourists visiting Egypt since the 2011 revolution.

Being a main foreign currency-generating sector, tourism has received a serious blow over the past three years due to a lack of security, increased violence and social upheaval. In 2010, tourism represented more than 10 percent of Gross Domestic Product (GDP) and trickled financially into a multitude of sectors. Now the sector faced a 28.3 percent drop year on year in Q1 2014, garnering $931 million, the lowest quarterly figure in over 10 years.

Minister of Tourism Hisham Zazou said on Saturday that four mega projects are underway in Ain Sokhna, Ras Sudr, Safaga and Marsa Alam, as the ministry plans to bring back the peak number of tourists that the country witnessed in 2001: 15 million tourists a year generating $12.5 billion.

Tourist numbers have been falling steadily since July 2013, after the army-backed ouster of former President Mohamed Morsi, to a low of 300,000 in September, with average nights spent at 3.8 (compared to an average of 12 nights in 2012). The numbers have picked up since with the latest number on record at 670,000 in November and average nights spent at 8.1.

The minister’s counsellor, Ibrahim Ashmawy, told Al-Mal papers on Monday that the Tourism Ministry completed a three-year plan that aims to attract 17.8 million tourists by 2017 with an expected income of $14.4 billion by the end of that period. This includes spurring investments worth $10 billion through various rental, usufruct and partnership developmental schemes.

Last week, Zazou flew to Germany to appease travel bans to the Sinai Peninsula after the bombing of a tourist bus that resulted in four deaths.

He told Reuters at the ITB travel fair in Berlin last Wednesday that the German travel ban is the latest crisis affecting Egypt’s tourism.

Shortage in natural gas drives cement prices higher

In the government’s bid to reserve much needed gas supplies for electricity production, the Egyptian Natural Gas Holding Company (EGAS) had decreased the supply of natural gas to energy intensive industries. This occurred twice, once last year, cutting supplies by an average of 20 percent, and another time earlier this year, reducing gas supplies by 50 percent.

The low gas supply consequently resulted in a fall in cement production, pushing prices to spiral upwards by as much as 30 percent.

Although the government had opened up its own gas network for importing natural gas at international prices, the rising price of raw material prices would dramatically increase the price of the final product. Currently, energy-intensive industries receive gas a price of six dollars per MBTU, up from four dollars per MBTU. This is compared to international prices that range around $10 per MBTU.

Finding solutions to gas shortages

Egypt has recently signed a memorandum of understanding with Jordan and Iraq to transfer natural gas through linking Iraq to the Arab Gas Pipeline in Jordan.

The Arab gas pipeline stretches from Egypt to Lebanon through Jordan and Syria.

Last Thursday at the ceremonial signing, Egypt’s Oil Minister Sherif Ismail said the three countries are working to extend the $18 billion Iraqi oil pipeline that will transfer one million barrels of crude oil per day from Basra to Aqaba, to reach Egypt.

Gas is expected to be supplied to power generation plants through the Arab Gas Pipeline as of early 2015.

Sherif Zaazaa 

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