Egypt seeks capital market boost with new futures exchange

Economists say the futures contracts exchange that was recently approved in Egypt will enhance the competitiveness of the Egyptian market in general, paving the way for launching a number of futures contracts and commodity exchanges.

al-monitor A trader works at the Egyptian Exchange in Cairo, March 8, 2016.  Photo by REUTERS/Mohamed Abd El Ghany.

Mar 24, 2019

Egyptian authorities are working on a facelift of the country’s capital market in a bid to lure more foreign portfolios. On March 17, the Financial Regulatory Authority approved a contract and statutes of a company to be charged with running the country’s first futures market, opening the way for trading in commodities through the Egyptian Exchange.

Economists say the futures contract exchange will enhance the competitiveness of the Egyptian market in general, paving the way for the launch of a number of futures contracts and commodity exchanges, such as for natural gas, cotton, flour and corn.

“We have laid the foundation for futures, options and commodities contracts,” Sherif Samy, former chairman of the Financial Regulatory Authority (FRA), told Al-Monitor. “However, these measures won’t necessarily bring in all of this the next day. This will take time. I think stock market index futures will be easier to begin with. The authorities should first decide on which commodities to be launched on the options market.”

The FRA, which will oversee the new exchange, released a statement on March 17 announcing that it has set the company’s issued and paid-in capital at 20 million Egyptian pounds ($1.12 million) and will form a management board of 7 to 11 directors. “The futures exchange is aimed at launching an electronic trading platform through which future contracts are traded deriving their values ​​from price indices or listed securities on the stock exchange,” the statement said.

“The story began in February 2018 with the new capital market law, which includes a chapter on futures contracts,” Samy said. “The futures contracts are divided into two types: financial instruments, such as stock, currency and stock market index futures, and commodities. The law regulates all of these instruments in line with the government’s objective of reforming the economy as a whole.”

Samy pointed out that even a country like Ethiopia, where there is no stock market, has a commodity exchange for coffee, the Ethiopian Commodity Exchange. Answering a question on the economic advantages of a futures contract, Samy explained, “Basically, trading on commodity futures is a sort of hedging for both the producer and buyer. Moreover, speculation on future prices pumps liquidity into the futures markets.”

“It will be more logical to launch stock market index futures first, as we already have a growing equity market, and investors are familiar with trading in stocks and indices in general. Besides, there should be an efficient warehousing system to launch before launching a commodity exchange,” Samy said, citing the need to develop infrastructure in terms of warehousing and noting Egypt’s earlier success story involving cotton.

“Egypt had the Alexandria Cotton Exchange in the 19th century, but the nationalization of the cotton industry in the 1960s brought the cotton exchange to an end,” Samy explained. “To have a commodity futures market, we should pick a commodity in which Egypt has a competitive advantage. In all cases, this commodity should be scalable, stored and priced freely.”

Amr el-Gohary, a member of the parliament’s Economic Committee, urged the government to establish a logistics zone, equipped with efficient transportation means prior to launching a commodity exchange.

“In fact we need many commodities exchanges to boost competitiveness and tame prices,” Gohary was quoted by the daily Al-Ahram as saying on March 6. “These commodities exchanges, if launched, will ensure competitiveness and put an end to monopolies as producers and buyers will meet at one marketplace without mediators.”

In January, the Ministry of Supplies and Internal Trade unveiled plans to launch commodity exchanges for flour, corn, cooking oil, steel and cement to rein in price hikes and organize home trade. The ministry says that commodity exchanges will minimize price fluctuations for the producers and buyers.

The Egyptian Exchange began talks with the Petroleum Ministry in August 2018 to launch a commodity exchange for natural gas. Petroleum Minister Tarek el-Molla said on Jan. 26 that by fiscal year 2019/20, which begins July 1, Egypt would produce 8 billion cubic feet of natural gas per day.

“It is an important move to set up a commodity exchange in Egypt,” Mohamed Younis, chief operating officer of Cairo-based Empire Markets, told the business daily Alborsa on March 18. “It will add a new financial instrument to the market. Currently, there are many companies that deal with world commodity exchanges. For instance, there are 140 Egyptian companies that import corn. These companies deal with the Chicago Board of Trade.”

Younis expects the new commodity exchange to increase the number of dealers and investors, especially foreign funds, on the Egyptian market. Foreign investors were net buyers of traded stocks worth 7.2 billion pounds ($406.7 million) in 2018, according to data from the Egyptian Exchange.

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