Egypt’s turmoil is having limited impact on global financial markets, where investors see few parallels with Iran’s 1979 revolution or the contagion that followed Thailand’s meltdown 13 years ago.
World equity-market capitalization climbed to $53.6 trillion this week, the highest level since June 2008, even as protests against Egyptian President Hosni Mubarak’s 30-year rule intensified and forced the nation’s bourse and banks to close for a fifth day. Dubai’s equity index rose the most in nine months yesterday and emerging-market bonds rallied, according to data compiled by Bloomberg.
While the uprising in Iran three decades ago sparked a 140 percent surge in oil and Thailand’s devaluation led to a global equity selloff, Egypt has about 0.3 percent of the world’s crude reserves and its foreign-currency holdings exceed overseas debt by $29 billion. Traxis Partners LP’s Barton Biggs says it’s a mistake to sell shares because of Egypt’s crisis, while Pacific Investment Management Co.’s Mohamed El-Erian sees signs of a “reconciliation” in the most-populous Arab country.
“The one thing to avoid is to exaggerate the probability for chaos,” El-Erian, the son of an Egypt diplomat and chief executive officer at Pimco, which oversees about $1.2 trillion worldwide, said in a Feb. 1 interview on “Bloomberg Surveillance” with Tom Keene. “There’s a lot of talk of ‘what if Egypt becomes Iran?’ I don’t think that’s the case.”
Street Clashes
Gunfire erupted in Cairo’s Tahrir Square early today as supporters of Mubarak battled with demonstrators demanding his ouster. Egypt’s largest opposition group rejected talks with Mubarak after at least six protesters were killed overnight, and vowed to stay at the scene of the fighting until he steps down. The president, 82, said on Feb. 1 that he intends to step down at the end of his term this year.
Mubarak’s son Gamal will not run for president, the state- run television reported today, citing Vice President Omar Suleiman.
While the markets in Cairo closed after the benchmark EGX 30 Index tumbled 16 percent last week, overseas investors have been betting on a rally in Egyptian assets. The Market Vectors Egypt Index ETF, an exchange-traded fund that holds Egyptian shares, has climbed 11 percent since Jan. 28, and the fund is trading at an 11 percent premium to its net asset value, the second-biggest of about 1,400 U.S. ETFs tracked by Bloomberg.
London-traded global depositary receipts of Orascom Telecom Holding SAE, the biggest mobile-phone operator in the Middle East by users, have gained 5.8 percent from an almost two-year low on Jan. 31. Orascom’s billionaire Chairman Naguib Sawiris called for a nullification of the country’s parliament in an interview on Bloomberg Television today, stopping short of seeking Mubarak’s immediate exit.
‘Not Panicked’
Egyptian lenders will open on Feb. 6, the central bank said in an e-mailed statement today. The stock exchange may start trading the following day, the state-run Middle East News agency reported.
“I’m not selling, and I’m not panicked by these events in Egypt and the Middle East,” Biggs, 78, who runs New York-based hedge fund Traxis Partners, said in a Bloomberg Television interview on Jan. 31. “The ongoing economic data is very encouraging.”
U.S. government reports last month showed consumer confidence rose more than forecast in January, while the Institute of Supply Management-Chicago Inc.’s gauge of business expansion rose to the highest level since 1988. German unemployment fell to an 18-year low and European retail sales increased at the fastest rate in more than four years in January.
Gulf Insulated
The MSCI All-Country World Index of global shares slipped 0.5 percent at 10:06 a.m. in New York, after closing at the highest level since August 2008 yesterday. The MSCI Emerging Markets Index slid 0.2 percent, and the extra yield investors demand to own developing-nation debt over U.S. Treasuries dropped 2 basis points to 276, JPMorgan Chase & Co.’s EMBI Global Index shows.
While protests in Tunisia led to the ouster of President Zine El Abidine Ben Ali on Jan. 14 and Jordan’s King Abdullah replaced his prime minister on Feb. 1 after anti-government demonstrations, oil-rich Middle Eastern countries have been largely insulated from the turmoil.
“People are still assuming a velvet transition and do not expect this to end in a harsh outcome,” Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said yesterday in an e-mailed response to questions. “The consensus is that Gulf states should be okay as they have the cash to spread around and avoid some of the poverty issues which have underpinned the demonstrations in Tunisia and Egypt.”
Dubai Gains
The Dubai Financial Market General Index climbed 3.3 percent yesterday while Saudi Arabia’s Tadawul All Share Index advanced 2.2 percent. Yields on Qatar’s notes maturing in 2015 declined 2 basis points, or 0.02 percentage point, the past two days to 2.87 percent, according to data compiled by Bloomberg.
Saudi Arabia, the biggest Arab economy, and the U.A.E., the second-largest, are spending billions of dollars to diversify away from oil and develop their financial services industry. Dubai, which rocked global markets in 2009 by announcing plans for a debt standstill, has built a financial center that is home to the regional offices of New York-based Goldman Sachs Group Inc., Morgan Stanley and Standard Chartered Plc, the British bank that generates most of its earnings from Asia.
Cheapest Shares
The Tadawul index is valued at about 1.9 times net assets, the cheapest level relative to the MSCI emerging-market index since Bloomberg began compiling the monthly data in April 2006. Qatar’s QE Index trades at 2 times book value, a 29 percent discount to the average level since June 2005.
The Dubai gauge slipped 0.9 percent today. Saudi Arabia’s markets are closed on Thursdays.
Investors say Persian Gulf assets are still in demand.
“This is unlikely to spread to oil-exporting countries,” Mark Diab, a money manager at GLG Partners who runs the Ocean MENA Opportunities fund and Ocean GCC Opportunities fund, said in an interview from Doha.
There are signs in the credit markets that assets in Egypt are losing value.
Yields on the country’s 30-year dollar bonds rose 18 basis points yesterday to 7.5 percent and were little changed today, data compiled by Bloomberg show. Egypt had its credit rating reduced by Fitch Ratings today, following downgrades earlier this week by Moody’s Investors Service and Standard & Poor’s.
Auction Delays
Three-month non-deliverable forwards for the Egyptian pound retreated 1.8 percent to 6.34 per U.S. dollar today. The contracts suggest traders expect the currency will sink 7.6 percent in three months, from the current spot rate of 5.857 per dollar.
The turmoil is disrupting Egypt’s financing plans. The government delayed two debt sales scheduled for Jan. 30 as the protests spread. Yields on 182-day bills jumped 40 basis points at a Jan. 27 auction from the previous sale to 10.6 percent. Once the government resumes auctions, it will see “less appetite” and higher borrowing costs, according to John Sfakianakis, the Riyadh, Saudi Arabia-based economist at Banque Saudi Fransi.
“Things are clearly a bit messy, but the market has moved on and said ‘There’s a solution here it’s just taking time,’” said Oliver Bell, who helps oversee about $10 billion of emerging markets assets as a London-based money manager at Pictet Asset Management.
Higher Oil
While Egypt isn’t a major oil producer, the nation’s crisis may still drive prices higher and curb global economic growth, according to Nobel Prize-winning economist Joseph Stiglitz.
“In terms of the global economic impact, it’s likely to be most felt, at least in the short-run, through oil,” Stiglitz said in a Bloomberg Television interview yesterday.
Egypt’s Suez Canal, which is used to carry about 8 percent of global seaborne trade, has been operating normally throughout the protests, according to the waterway’s operator. The 120-mile canal connects the Mediterranean and Red Sea and cuts the journey for a supertanker traveling from Saudi Arabia, which holds about 20 percent of the world’s oil reserves, to Houston by about 12 days, according to Riverlake Shipping SA in Geneva.
Crude oil has climbed 2.6 percent in New York trading since Jan. 24, to $90.15 a barrel.
Smoother Transition
Mass protests in 1979 forced Iran’s pro-U.S. Shah Mohammad Reza Pahlavi to flee the country, which is now home to about 10 percent of the world’s oil reserves. The revolution, which handed power to the anti-Western Supreme Leader Ayatollah Ruhollah Khomeini, sent the price of Saudi Arabia’s Arab light crude to about $34 a barrel at the end of 1980 from $14 two years earlier, according to data compiled by Bloomberg.
The transition of power in Egypt is likely to be smoother than in Iran because Egypt has a better-educated “middle class” with moderate political views, according to Gabriel Sterne, an emerging-market economist at brokerage Exotix Ltd. in London. Mohamed ElBaradei, the Nobel-prize winner and former chief of the United Nations atomic agency, has emerged as the face of the Egyptian opposition.
“In Egypt there’s a constituency for democratic moderate reform in a way that there wasn’t in Iran in 1979,” Sterne said.
Egypt’s government finances are stronger than those of the Asian countries that spurred the region’s financial crisis in the late 1990s.
Trade Gap
The North African nation’s current-account deficit will probably fall to 1.6 percent of gross domestic product this year from 2.4 percent in 2009, according to estimates from the International Monetary Fund. Thailand had a trade gap of 7.9 percent in 1996, just before the collapse of the baht sparked a wave of capital outflows across Asia and forced Thailand, Indonesia and South Korea to seek IMF bailouts.
The Egyptian economy, which the IMF estimates at $239 billion this year, will probably expand 5.5 percent in 2011, faster than the 4.4 percent global growth rate, the Washington- based fund predicts. Egypt’s gross government debt will amount to 72 percent of GDP this year, compared with 99 percent in the U.S., according to the IMF.
Egypt has “strong long-term fundamentals and potential,” Michael Hasenstab, co-director of the Franklin Templeton Fixed- Income Group, said in an e-mailed note to clients Feb. 1. His $14 billion Templeton Global Total Return Fund held Egyptian dollar bonds at the end of December, data compiled by Bloomberg show.
‘Must Begin Now’
The army would probably intervene to prevent the conflicts from escalating, said Barak Seener, a research fellow at the London-based Royal United Services Institute for Defence and Security Studies.
U.S. President Barack Obama urged Mubarak to start the handover process quickly, saying at the White House on Feb. 1 that an orderly and peaceful transition in the government “must begin now.”
Egypt received about $1.5 billion in U.S. assistance last year and has been one of the biggest recipients of U.S. aid since 1979, after Egypt signed a U.S.-brokered peace treaty with Israel.
French President Nicolas Sarkozy, German Chancellor Angela Merkel and U.K. Prime Minister David Cameron called for a “quick and orderly transition” in Egypt, according to a joint statement today with Italy’s Silvio Berlusconi and Spain’s Jose Luis Zapatero.
“Such periods of volatility can take time to pass,” Templeton’s Hasenstab said. “But we are confident that by maintaining exposures that we believe are attractive relative to their fundamentals, we can be well positioned to potentially benefit when the market normalises.”
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