Economy & Trade, Financial Crisis, Headlines, Middle East & North Africa

EGYPT: Market Crash Crushes the Poor

Cam McGrath

CAIRO, Apr 29 2009 (IPS) - Egyptians facing economic hardship know how tough it can be to put food on their table. Now they have also learned the cold, hard reality of the capital market.

“We’ve lost everything,” says Hamdy Abdel Aziz, a factory worker and father of two living on less than 100 dollars per month. He and five of his neighbours each put 400 dollars into a gamaiya, an informal arrangement common among poor Egyptians where money is pooled to purchase stocks and then share the earnings.

Their portfolio has lost 80 percent of its value. “It took me four years to save up that money. We weren’t being greedy, we were just desperate and the stock market seemed to offer the only way out of poverty.”

The Egyptian bourse was one of the world’s top performing markets until mid-2008. Its five-year bull run, during which its benchmark index soared over 2,000 percent, made it the darling of foreign retail and institutional investors, and encouraged many Egyptians who had never considered investing to take a gamble. A belief spread amongst working class Egyptians that getting in on the ground floor of an initial public offering (IPO) or joining the run on a hot stock was a sure way to double their money overnight.

Market euphoria peaked in late 2005 with the public offering of a 20 percent stake in Telecom Egypt (TE), the country’s sole fixed-line operator. More than 200,000 Egyptians tapped the market for the first time, scraping together their savings to purchase shares of the heavily oversubscribed IPO. Many of these investors could neither read nor write. Some had never owned a bank account.

“I expected TE’s shares would skyrocket,” recalls Ali Sherif, a sales clerk in a telecom company, who got caught up in the excitement. “My salary at the time was 50 dollars per month and I invested 1,000 dollars, which was more than 80 percent of my life savings.”

Sherif watched his savings evaporate as TE’s stock value peaked, then plummeted. Hoping to recover some of the losses he rolled over his investment into other stocks, all of which have failed.

Thousands of Egyptians on limited budgets found themselves in a similar trap as they followed the herd and put their money on “hot” stocks that quickly went cold after savvy investors cashed out. “People with no experience in the market or knowledge of how it worked…rushed in and put high asks, which helped experienced investors who had accumulated since (before the rush) to realise high profits of 500 percent or more,” says Karim El-Tahawy, chief technical analyst at Mashreq Capital. “It was a golden chance for these people to get out of the market.”

And when the Egyptian market collapsed last year, amateur investors were left holding all the cards. “You can divide these investors into two groups,” says El-Tahawy. “Some are stuck in the market and forced to continue. They dreamed of big profits, but their stocks rose then crashed and they had to stay in the market. Some even added money to try to offset their losses. The other group got all their money out at a loss. Their unrealised profits evaporated and turned out to be real-life losses, so they cut out.”

The Egyptian Exchange (EGX) 30 benchmark index tumbled from a high of 11,935 in May 2008 to a low of 3,389 earlier this year. The losses have cut across all socio-economic groups. Stories abound of affluent Egyptians selling their cars and properties to buy stocks, only to lose it all. Yet analysts agree that the hardest hit have been poorer Egyptians, who have neither sizeable assets nor disposable income.

Afifi Sayed, a farmer from a village on the western outskirts of Cairo, sold his only buffalo to join a gamaiya that invested in stocks. He had hoped the shares would make money quickly so he could buy back his buffalo and use the profit to start a business. “I was following a mirage,” he regrets. “After our stocks fell I wanted to get out of the market, but the others in my gamaiya said we should wait until we break even. It’s been four years, and in the meantime I have no money, and no means to make money.”

Sayed says Egypt’s market regulatory officials used poor, under-educated Egyptians as fodder for the market’s growth. “They saw us coming, and they paved the way.”

Ahmed Adel, an accountant with three children, has accepted his losses as a tough lesson learned. He says poor investors like himself entered the Egyptian market hoping to ride the coat-tails of a handful of wealthy and influential investors they believed were manipulating stock prices to make enormous profits. “Stock magnates who have the financial means of controlling the market sell all their shares in a company so that its price drops dramatically. Then they can buy them all back again at a lower price,” he says. “Small-fry investors like me are fuel for this game.”

Poorer Egyptians are more inclined to risky investment, and tend to invest far beyond their means, says El-Tahawy. Often they are aware of the risks of various get-rich-quick schemes, but in seeking a way out of their dire economic situation, become convinced they have an edge or can somehow outmanoeuvre the scheme’s architects. Inevitably they fail and end up in a far worse situation than before they started.

In many parts of Egypt, the optimism that pervaded the market’s boom years has been replaced with a sense of guilt and gloom. “My family suffered for four years while I set aside a small sum each month,” says Abdel Aziz. “And now they’re suffering again because our savings have been lost.”