Capital Markets and Portfolio Investment
To date, high returns on Egyptian government debt have crowded out Egyptian investment in productive capacity. Consistently positive and relatively high real interest rates have attracted large foreign capital inflows since 2017, most of which has been volatile portfolio capital. Returns on Egyptian government debt have begun to come down, which could presage investment by Egyptian capital in the real economy.
The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange. Some 240 companies were listed on the EGX, including Nilex, as of February 2021. There were more than 500,000 investors registered to trade on the exchange in 2019, and the Egyptian market attracted 28,240 new investors in 2020. Stock ownership is open to foreign and domestic individuals and entities. The Government of Egypt issues dollar-denominated and Egyptian Pound-denominated debt instruments, for which ownership is open to foreign and domestic individuals and entities. The government has developed a positive outlook toward foreign portfolio investment, recognizing the need to attract foreign capital to help develop the Egyptian economy. Foreign investors conducted 16 percent of sales on the EGX in 2020.
The Capital Market Law 95/1992, along with Banking Law 94 that President Sisi ratified in September 2020, constitute the primary regulatory frameworks for the financial sector. The law grants foreigners full access to capital markets, and authorizes establishment of Egyptian and foreign companies to provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities. The law specifies mechanisms for arbitration and legal dispute resolution and prohibits unfair market practices. Law 10/2009 created the Egyptian Financial Supervisory Authority (EFSA) and brought the regulation of all non-banking financial services under its authority. In 2017, EFSA became the Financial Regulatory Authority (FRA).
Settlement of transactions takes one day for treasury bonds and two days for stocks. Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions. A significant number of the companies listed on the exchange are family-owned or -dominated conglomerates, and free trading of shares in many of these ventures, while increasing, remains limited. Companies are de-listed from the exchange if not traded for six months.
Prior to November 2020, foreign companies enlisting on the EGX had to possess minimum capital of $100 million. With the FRA’s passage of new rules, foreign companies joining the EGX must now meet lesser requirements matching those for Egyptian companies: $6.4 million (100 million EGP) for large companies and between $63,000 and $6.4 million (1-100 million EGP) for smaller companies, depending on their size. Foreign businesses are only eligible for these lower minimum capital requirements if the EGX is their first exchange and if they attribute more than 50 percent of their shareholders’ equites, revenues, and assets to Egyptian subsidiary companies.
The Finance Ministry announced in May 2020 the suspension of stock market capital gains taxes for Egyptian tax residents until December 31, 2021, and made stock market capital gains permanently tax-exempt for non-tax residents and foreigners. The government also set the stamp tax on stock market transactions by non-tax residents at 0.125 percent and at 0.05 percent for tax residents.
Foreign investors can access Egypt’s banking system by opening accounts with local banks and buying and selling all marketable securities with brokerages. The government has repeatedly emphasized its commitment to maintaining the profit repatriation system to encourage foreign investment in Egypt, especially since the pound flotation and implementation of the IMF loan program in November 2016. The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in fewer than two days, though in practice some firms have reported significant delays in repatriating profits due to problems with availability. Foreign firms and individuals continue to report delays in repatriating funds and problems accessing hard currency for the purpose of repatriating profits.
The Egyptian credit market, open to foreigners, is vibrant and active. Repatriation of investment profits has become much easier, as there is enough available hard currency to execute foreign exchange (FX) trades. Since the flotation of the Egyptian Pound in November 2016, FX trading is considered straightforward, given the re-establishment of the interbank foreign currency trading system.
Money and Banking System
Benefitting from the nation’s increasing economic stability over the past two years, Egypt’s banks have enjoyed both ratings upgrades and continued profitability. Thanks to economic reforms, a new floating exchange system, and a new Investment Law (Law 72/2017) passed in 2017, the project finance pipeline is increasing after a period of lower activity. Banking competition is serving a largely untapped retail segment and the nation’s challenging, but potentially rewarding, small and medium-sized enterprise (SME) segment.
The Central Bank of Egypt (CBE) requires that banks direct 25 percent of their lending to SMEs. In December 2019, the Central Bank launched a $6.4 billion (100 billion EGP) initiative to spur domestic manufacturing through subsidized loans. Also, with only about a quarter of Egypt’s adult population owning or sharing an account at a formal financial institution (according press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently. A low median income plays a part in modest banking penetration.
The CBE has taken steps to work with banks and technology companies to expand financial inclusion. The employees of the government, one of the largest employers, must now have bank accounts because salary payment is through direct deposit. The CBE approved new procedures in October 2020 to allow deposits and the opening of new bank accounts with only a government-issued ID, rather than additional documents. The maximum limits for withdrawals and account balances also increased. In July 2020, President Sisi ratified a new Micro, Small and Medium Enterprises (MSMEs) Development Law (Law 152 of 2020) that will provide incentives, tax breaks, and discounts for small, informal businesses willing to register their businesses and begin paying taxes.
As an attempt to keep pace with best practice and international norms, President Sisi ratified a new Banking Law, Law 94 of 2020, in September 2020. The law establishes a National Payment Council headed by the President to move Egypt away from cash and toward electronic payments; establishes a committee headed by the Prime Minister to resolve disputes between the CBE and the Ministry of Finance; establishes a CBE unit to handle complaints of monopolistic behaviors; requires banks to increase their cash holdings to $320 million (5 billion EGP), up from the prior minimum of $32 million (500 million EGP); and requires banks to report deficiencies in their own audits to the CBE.
Egypt’s banking sector is generally regarded as healthy and well-capitalized, due in part to its deposit-based funding structure and ample liquidity, especially since the flotation and restoration of the interbank market. The CBE declared that 3.6 percent of the banking sector’s loans were non-performing by December 2020. However, since 2011, a high level of exposure to government debt, accounting for over 40 percent of banking system assets, at the expense of private-sector lending, has reduced the diversity of bank balance sheets and crowded out domestic investment. Given the flotation of the Egyptian Pound and restart of the interbank trading system, Moody’s and S&P have upgraded the outlook of Egypt’s banking system to stable from negative to reflect improving macroeconomic conditions and ongoing commitment to reform. In December 2020, Moody’s affirmed Egypt’s government issuer rating of B2 stable due to the government’s relatively low issuance of foreign currency loans and relatively low external government debt.
Thirty-eight banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979. The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase an existing bank. To this end, in 2013, QNB Group acquired National Société Générale Bank Egypt (NSGB). That same year, Emirates NBD, Dubai’s largest bank, bought the Egypt unit of BNP Paribas. In 2015, Citibank sold its retail banking division to CIB Bank. In 2017, Barclays Bank PLC transferred its entire shareholding to Attijariwafa Bank Group. In January 2021, Bahrain’s bank ABC completed its purchase of the Egypt-based, Lebanon-owned BLOM bank, while First Abu Dhabi Bank (FAB) signed an agreement to acquire Bank Audi in Egypt. In 2016 and 2017, Egypt indicated a desire to partially (less than 35 percent) privatize at least one state-owned bank and a total of 23 firms through either expanded or new listings on the Egypt Stock Exchange. As of April 2020 the only step towards implementing this privatization program was the offering of 4.5 percent of the shares of state-owned Eastern Tobacco Company on the stock market. The state-owned Banque du Caire postponed plans to offer some of its shares on the EGX due to the novel coronavirus.
According to the CBE, banks operating in Egypt held nearly $446 billion (7 trillion EGP) in total assets as of December 2020, with the five largest banks holding more than 69 percent, or $309 billion (4.86 trillion EGP), of holdings by the end of 2020.
The chairman of the EGX recently stated that Egypt is exploring the use of block chain technologies across the banking community. The FRA will review the development and most likely regulate how the banking system adopts the fast-developing block chain systems into banks’ back-end and customer-facing processing and transactions. Seminars and discussions are beginning around Cairo, including visitors from Silicon Valley. While not outright banning cryptocurrencies, authorities caution against speculation in unknown asset classes.
Alternative financial services in Egypt are extensive, given the large informal economy, estimated to account for between 30 and 50 percent of GDP. Informal lending is prevalent, but the total capitalization, number of loans, and types of terms in private finance is less well known.
Foreign Exchange and Remittances
There had been significant progress in accessing hard currency since the flotation of the pound and re-establishment of the interbank currency trading system in November 2016. While the immediate aftermath saw some lingering difficulty of accessing currency, as of 2017 most businesses operating in Egypt reported having little difficulty obtaining hard currency for business purposes, such as importing inputs and repatriating profits. There are no dollar deposit limits on households and firms importing priority goods such as food products, pharmaceuticals, and basic raw materials. With net foreign reserves of $40.2 billion as of February 2021, Egypt’s foreign reserves appear to be well capitalized, although recent inflows are in part due to assistance payments by international financial institutions such as the IMF.
Funds associated with investment can be freely converted into any world currency available on the local market. Some firms and individuals report the process is slow. But the interbank trading system works in general, and currency is available as the foreign-exchange markets continue to react positively to the government’s commitment to macroeconomic and structural reform.
The value of the EGP generally fluctuates depending on market conditions, without direct market intervention by authorities. In general, the EGP has stabilized within an acceptable exchange rate range, which has increased the foreign exchange market’s liquidity. Since the early days following the flotation, there has been very low exchange-rate volatility.
The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales. Prior to reform implementation throughout 2016 and 2017, large corporations had been unable to repatriate local earnings for months at a time, but repatriation of funds is no longer restricted. The Investment Incentives Law (Law 72 of 2017) (IIL) stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad. Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the IIL.
The Investment Incentives Law (Law 72 of 2017) (IIL) stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad. Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the IIL. Banking Law 94 of 2020 regulates the repatriation of profits and capital. The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock-exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit-repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in less than two days, though in practice some firms have reported short delays in repatriating profits due to the steps involved in processing.
Banking Law 94 of 2020 regulates the repatriation of profits and capital. The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock-exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit-repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in less than two days, though in practice some firms have reported short delays in repatriating profits due to the steps involved in processing.
Sovereign Wealth Funds
Egypt’s sovereign wealth fund (SWF), approved by the Cabinet and launched in late 2018, holds 200 billion EGP ($12.5 billion) in authorized capital as of December 2020. The SWF aims to invest state funds locally and abroad across asset classes and manage underutilized government assets. The sovereign wealth fund focuses on sectors considered vital to the Egyptian economy, particularly industry, energy, and tourism, and has established four new sub-funds covering healthcare, financial services, tourism, real estate, and infrastructure. The SWF participates in the International Forum of Sovereign Wealth Funds. The government is currently in talks with regional and European institutions to take part in forming the fund’s sector-specific units.