Pound devaluation, IMF deal send Egypt’s stock market soaring


Al-Monitor Pro Members


Marc Español 

Freelance journalist covering Egypt and Sudan 



Jan. 30, 2023

Bottom Line:

The Egyptian Exchange (EGX) has started 2023 as one of the world’s best-performing stock markets in local currency terms following a strong but volatile 2022. To expand further, it needs the country’s economy to start stabilizing and the government’s privatization program, which envisages the IPO of some SOEs, to get underway. 

Background Facts:
  • Fears of recession, high inflation, energy and food prices, and rising interest rates made 2022 a rough year for many stock markets across the world.
  • The Egyptian Exchange (EGX) in the last quarter reversed huge initial losses and nominally closed the year as the best-performing stock market in the Middle East.
  • Its rise followed the devaluation of the Egyptian pound announced in late October, along with a new $3 billion deal with the International Monetary Fund (IMF).
  • The EGX has also become one of the best hedges for capital against the sharp fall of the pound.
  • By the end of January 2023, EGX’s market capitalization surpassed EGP1.1 trillion for the first time, well above the previous four years in local currency terms.
  • The market capitalization of its benchmark index, the EGX30, climbed by around 66% in local currency terms from late October through the end of January, making it one of the world’s best performers.
  • During the same period, the EGX witnessed record numbers in both trading volumes and new investors registered.
  • Year-to-date earnings on the EGX30 stood at around 19% by the end of January.
  • Many of these figures, however, have only been possible because the EGX reached low levels in mid-2022, pushed by strong market volatility, widespread risk-averse sentiment and Egypt’s critical financial position.
  • The EGX30 fell 6% quarter-on-quarter in Q1 2022 and 17.9% in Q2, while the other indices — the EGX70 and EGX100 — suffered similarly steep declines. In July, the EGX30 plummeted to 8,598 points, its lowest since November 2016.
  • Despite the general rise since October, the EGX is still behind other emerging markets. At the end of December, the EGX30’s average forward price-to-earnings ratio stood at 7, below the average 11.3 of the MSCI Emerging Markets Index. Its price/earnings ratio was 8.64, also below the average 12.2 of the same index.
  • In dollar terms, the EGX30 is up around 9% since the October devaluation, and while it is 26.4% above its July lows, it is still 23.17% down compared to January 2022.
  • EGX was the best-performing stock market in the region in 2022, but its average stock trading value in 2022 was $62.7 million (at end of December exchange rates), well below the more than $2 billion in Saudi Arabia or the close to $500 million in Abu Dhabi.
  • Moving forward, the big challenge ahead for the EGX is to find ways to capitalize on the momentum it is enjoying and create favorable and attractive conditions that will allow the exchange to leave behind its stagnation and extreme volatility, build solid fundamentals and begin to unleash its potential.
  • To this end, the EGX and the Financial Regulatory Authority (FRA), in charge of supervising capital markets, have introduced in recent months several regulatory changes and developed new products to inject greater dynamism into the stock market, boost its liquidity and attract greater interest among foreign investors.
  • The EGX management held meetings with state institutions in recent months in an attempt to persuade them to invest more in Egypt’s stock market, and it has been doing the same with private companies that are contemplating listing.
  • The chairman of the EGX, Rami Al Dokani, is also on a roadshow of sorts in a number of GCC countries to promote investment opportunities. In December he visited the UAE, and in February he is scheduled to travel to Saudi Arabia.
  • However, forecasts for 2023 should be rather cautious as the reasons that made 2022 a rough year for stock markets are expected to continue and in some cases even worsen. And Egypt’s macroeconomic prospects are particularly bleak.
  • One of the moves that would certainly inject more dynamism and liquidity into the EGX would be for the government to finally start implementing its plans to list some state-owned enterprises (SOE).
  • Among the 10 SOEs in the pipeline are Banque du Caire, Misr Life Insurance and the Egyptian Drilling Company. There are also two military-owned companies on the exit ramp: fuel retailer Wataniya and bottled water company Safi.
  • But the government has been announcing that it will offer stakes in SOEs for years, only to then backtrack and repeatedly postpone its plans citing unfavorable market conditions or lack of preparation.
  • Prospects for significant improvement on this front in the near term are slim, and in September the Sovereign Fund of Egypt set up a pre-IPO Fund to first offer SOE stakes directly to strategic investors while leaving potential IPOs to an undefined, later stage.
Alternative Scenarios:

Scenario 1: Egypt pushes ahead with some IPOs, but the stock market fails to expand

The Egyptian government has paved the way for a sweeping privatization program of SOEs pushed by its precarious financial position, and one of the declared ways it intends to implement this plan is by public share offerings on the stock exchange. The government has also said that in February it will unveil another plan for the SOEs it plans to list this year.

The anticipation raised by the Cabinet’s new reform drive has been an important factor behind the stock market’s rise recorded in January, but the government risks that its next steps will not live up to expectations, leading the EGX to lose its current momentum.

In 2016, following Egypt’s decision to float the pound after a $12 billion agreement with the IMF, the EGX experienced a bonanza similar to the current one and also surpassed a market capitalization of EGP1 trillion, only to later stagnate and finally collapse in 2018 in the absence of effective action and reform.

Scenario 2: Egypt’s stock market grows based on IPO expansion

In its latest four-year strategy issued in 2022, the FRA stated that it wants the market capitalization of the EGX to reach EGP1.6 trillion by 2026 and noted that the listing of lucrative SOEs could push the figure as high as EGP2.6 trillion.

This target set by the FRA had already been raised for 2018, with bleak results at the time. Just like then, what separates the EGX from being able to reach these figures is largely the implementation of reforms and promises, a field in which Egypt has a long history of breaches. But Egypt’s financial situation is now critical, and even if a radical turnaround is not to be expected, authorities will be forced to make at least some concessions.

However, for this scenario to materialize and for the EGX to be able to absorb significant IPOs and keep growing, Egypt’s economic situation must first stabilize, especially with regard to the value of the pound, and foreign investors must return, and it is still unclear when it will happen.

Conclusion - Most Likely Scenario:

Egypt’s stock exchange, the EGX, closed 2022 and started 2023 with one of the world’s best performances. The devaluation of the pound and the new deal with the IMF in October, coupled with new promises of reform, have sent the bourse soaring, placing it in a promising position. However, its good figures are not a reflection of a strong performance of the national economy, but rather a result of its weakness and volatility, which have made the EGX one of the best hedges for capital. The key to remaining competitive and continuing to expand largely lies in the government’s plans to privatize SOEs and leave more room in the economy for the private sector. The authorities will go ahead with these plans due to the large financial gap in the state’s coffers, but will proceed with stake sales to strategic investors, especially from the Gulf, and park significant IPOs for the foreseeable future. Coupled with Egypt’s inability to correct its serious economic imbalances anytime soon, the EGX’s prospects of further expanding at the current pace and unleashing the potential projected by the authorities remain dim.

Contributor Background:

Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed).

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