Can Dubai Financial Market, Egypt Exchange framework succeed? (page 1 of 2)

In the wake of the uprisings which ended the regime of Hosni Mubarak, signs of economic life, let alone reform, have been sporadic from Egypt. And yet in May a delegation from the Egyptian Exchange - which encompasses two bourses in Cairo and Alexandria - came to Dubai and left with an agreement that could provide a much needed boost to both Egypt and the UAE.

The Dubai Financial Market (DFM), the emirate's main stock market, and the Egyptian Exchange have confirmed that they are in talks to establish a comprehensive framework that will pave the way for listed companies on both bourses - and specifically those with significant operations in the UAE and Egypt - to dually list their shares.

The Egyptian Exchange has already said it plans to introduce exchange-traded funds (ETFs) and short selling this year to boost trading, and the DFM announcement looks like another stepping stone on the way to restoring international faith in a market that has been badly burned by the political instability of the Arab Spring.

Social turbulence damages investor confidence in Egypt

"The political and social turbulence in Egypt has severely damaged investor confidence this year," says Gus Chehayeb, Associate Director of Research at investment bank Exotix. He notes that the CASE Index, which includes the 30 most active stocks in the Egyptian stock market, is still down 25% since the start of the year - only slightly above its March lows when the market was down 31% YTD.

"The political and economic landscape in Egypt still carries great uncertainty, and uncertainty is always very negative for market prices," he says. "Sectarian violence goes on, there is still no set date for a presidential election and the completion of a new constitution, and the economy is faltering quickly."

According to the Economist Intelligence Unit, real GDP growth in Egypt will drop to around 1.2% in fiscal year 2010/11 (July 1st-June 30th) owing to the continuing impact of the political crisis, but the economy is expected to recover from mid-2012. At Exotix, Chehayeb points out that since peaking at $36bn in December, FX reserves have fallen sharply to $28.5bn. Furthermore, Egypt's deficit is projected to reach a high 10% by 2012 - a concern given that public debt to GDP is already at 70%. And inflation has accelerated to more than 12%, as food prices constitute over 50% of Egypt's CPI, and the tourist industry and foreign direct investment have been severely damaged this year.

Egypt interim government focus on stability over economic reform

As a result of the turmoil, the country's interim government has said that it will postpone plans for economic reform and liberalisation, and instead concentrate on stabilising the economy. Nevertheless, although the collapse of Mubarak's regime has resulted in a period of prolonged political uncertainty, analysts expect a more stable system to emerge.

This belief is bolstered by the fact that the country has received recent assurances of financial assistance: $4bn in economic aid from Saudi Arabia, the US's cancellation of $1bn in debt, and $4.5bn in loans from the World Bank, with more expected from the International Monetary Fund.

"We think that although it will be a bumpy road, Egypt will successfully navigate this painful transition phase - the transition from an autocratic system to a democracy is never a smooth process," says Chehayeb.

"The longer term story on Egypt is attractive and that in the long term the country will create a functioning democracy and further market oriented/capitalistic reforms," he adds.