Egypt's stock market will be the point of focus this week amid increased investor concern over the country's lingering subsidies problem as government officials try to tackle a budget deficit and secure a US$4.8 billion IMF loan.
"It is the most urgent problem to deal with right now," said Sebastien Henin, a portfolio manager at The National Investor, an investment company based in Abu Dhabi. "From a social point of view, it's tricky to do such a thing."
Egypt's EGX index has gained more than 50 per cent since the start of the year after the country made crucial steps towards political stability following the parliamentary and presidential elections. Investor sentiment was bolstered even further after Mohammed Morsi was sworn in as the first democratically elected president in more than three decades.
"Egypt has received a lot of support from the Gulf, and specifically Qatar. Most companies have eradicated problems related to salaries. We have got the elections out of the way and seen a balance between Morsi and the military. Inflation has gone down by about 7 per cent. There are a lot of positives," said Mr Henin. "But now they have to manage the public deficit, and deal with the subsidies related to energy and food, which account for nearly one third of the total budget."
Mr Morsi said last week in a speech that about 100 billion Egyptian pounds were in his view owed to the government by various companies, including Orascom Construction Industries (OCI).
"After the speech, the atmosphere waned, with people looking at the likely candidates," said Saleem Khokhar, the head of equities at National Bank of Abu Dhabi.
Blue-chip stocks, including OCI and Talaat Moustafa Group, were subject to heavy selling by investors. On Monday, OCI was suspended from trading following allegations that it had evaded 14bn pounds in taxes. The broader market dropped 2 per cent. In response to the suspension, OCI rejected the allegations in a statement posted on the bourse website.
It said that all revenues generated from selling shares in an initial public offering were exempted from tax.
"It has left a sour taste for investors who do not know what is happening and put some uncertainty on the market," said Mr Khokhar. Egypt still owes about $6bn to $7bn to foreign oil companies. "Added to all that is a restless public which wants all the changes to happen now, so it is a bit of a volatile mix," he added.
Mr Sebastien says the Muslim Brotherhood's current leadership makes it easier to tackle economic reform regarding energy subsidies. "Morsi is the right guy for such unpopular measures. The MB are close to the people, they speak the same language, they are the guys of the street, not from the establishment."
Egypt's currency has declined 4.5 per cent since the uprising that ousted the former president Hosni Mubarak. The losses could have been far steeper had the central bank and the broader banking system defended the currency.
"Reserves are touching $15bn. The only way to hit the economic problem is to hit subsidies and everyone knows it," an equity trader in Cairo told Reuters.
Egypt, North Africa's most populous country, needs to maintain $15bn in foreign reserves to support the pound. It has lost half of its reserves since the uprising kept tourists and foreign investors away.
In the UAE, the Abu Dhabi Securities Exchange General Index ended the week little changed at 2,654.33 points on Thursday, while the Dubai Financial Market General Index was up 0.6 per cent to 1,636.12.
"UAE equity markets look stable with a positive outlook," said Nabil Al Rantisi, the managing director of brokerage at Menacorp, an investment company in Abu Dhabi. "Dubai's index above 1,590 is always positive."
