Several capital market experts ruled out the possibility that the Egyptian Exchange (EGX) would play a prominent role in financing projects that are scheduled for implementation in the Suez Canal Area, specifically during the initial phases of the operations.
The launch of these projects coincides with the Egyptian Financial Supervisory Authority’s (EFSA) amendments to the bylaw which aims to prepare the EXG for the implementation of national projects.
This includes the introduction of development mechanisms to establish projects by launching initial public offerings (IPOs) through the EGX, as well as issuing regulations that allow the Suez Canal Authority (SCA) to establish stakeholder companies so the projects can be offered on the EGX.
The view of the EGX by experts and companies as a secondary financial instrument rather than a main one makes the prospect of using the stock exchange to fund projects in the initial phase difficult. This also reflects how the government views the EGX, according to experts.
This view of the EGX became evident when the government resorted to financing national projects by borrowing, such as the new Suez Canal investment certificates.
The EGX does not represent a secure source of funding, due to the possibility that the IPO will be undersubscribed0, thereby resulting in losses for investors, according to the experts.
This comes in the wake of a decline in the EGX over the past six months due to the slow growth of the global economy and difficulties locally, as well as repercussions from the drop in oil prices on stock exchanges in the region.
Chairman of EFSA Sherif Samy however said the stock exchange can play several roles in financing companies planning to implement projects in the economic area of the Suez Canal.
Amendments to the capital market bylaw in 2014 allow companies to be established through launching IPOs, aiming to enable both the government and the private sector to finance major projects.
Samy attributed these amendments to the EGX’s “proven efficiency” throughout the past two years in terms of IPOs subscriptions for companies that offered their shares; noting that the EGX can be relied upon as a financial instrument.
In 2015, the EFSA amended the capital market bylaw, allowing the SCA to establish stakeholder companies to be offered in the EGX as a financial instrument for projects in the Suez Canal Area.
Samy believes financing through the stock exchange is not only limited to offering companies on it through IPOs, as the government can also resort to issuing revenue bonds.
The EFSA has included revenue bonds in the amendments to the capital market bylaw, especially for the government and its authorities, in order to finance projects that are found to be economically feasible, like factories, infrastructure projects, road networks and power plants.
Revenue bonds may be part of the mechanisms to finance the Suez Canal Area Development Project, especially as these bonds could minimise the burden on the government to obtain financing for investments in the Suez Canal Area projects, said Samy.
The capital market bylaw stipulates that the Ministry of Finance must approve the issuance of revenue bonds to finance projects with independent budgets, such as power plants, roads, and docks. This is conditional upon the repayment of the value and revenues of the bonds through the cash flow resulting from these projects, as well as other revenues determined by the authority issuing the bonds.
Samy said the success of the stock exchange in financing projects, for both private and public sectors in the Suez Canal Area, is directly related to the feasibility of the projects that attract IPO liquidity, as well as the amount of revenues investors will obtain.
However, Hussein El-Sherbini, managing director of the brokerage sector in Pharos Holding for Financial Investments, denied the likelihood that the EGX would play an influential role in most projects in the Suez Canal Area Development during the initial phases of the projects’ implementation.
Companies can resort to the EGX as an additional source, not a main one for financing, after having begun a significant part of the implementation of the projects or after beginning the production phase, if there is a desire to expand, said El-Sherbini
Ahmed Darwish, chairman of the General Authority for the Suez Canal Economic Zone (SCZone), said several days ago that the plan for the infrastructure in the area has been completed, to allow companies investing there to begin actual production by 2020.
Since its inception, the government made it clear that it preferred to minimise the role of the EXG in the Suez Canal area, as evidenced by their resorting to investment certificates with a value that exceeded EGP 60bn in order to finance the drilling of the new Suez Canal and a number of tunnels, said El-Sherbini.
The EXG’s current standing is not encouraging for the launch of numerous new IPOs simultaneously, whether in terms of IPO subscription, or the increase in the price of shares after the offering, according to El-Sherbini.
Several projects have been charted for the Suez Canal region, including ports, factories for ship and container repair and manufacturing, car assembly factories, petrochemical factories, furniture, glass, steel factories and power plants.
Further, Ehab Rashad, managing director of Mubasher Financial Services, concurred with El-Sherbini’s views, stressing that EGX’s role in financing projects may become more pronounced after companies begin implementing their projects. It may also be influential during the production phase.
The private sector will not rely on the stock exchange as a main source for financing as companies view it as a secondary financing source, in contrast with banks, investment certificate or bonds, said Rashad.
According to Rashad, this is demonstrated by the government’s delays in launching IPOs for companies on the EGX, whereas three petroleum companies had previously revealed that they would offer their shares, before retracting.
This was prior to the presidency’s announcement of an initiative to launch IPOs for banks and companies; however, no further information or clarification has been provided with regards to this initiative.
Rashad nonetheless highlighted construction and industrial companies as the most advisable companies to finance future projects through IPOs.