Prepared by the researcher
Dr. Ahmed Mohamed Adel Abdel Aziz – Economics researcher former Member of the advisory office of the Minister of Social Solidarity – EGYPT
Dr. Marwa Salaheldin Fahmy Mahmoud – Assistant Professor of Economics Sadat Academy for Management Sciences- EGYPT
Democratic Arab Center
Journal of Afro-Asian Studies : Twelfth Issue – February 2022
A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin.
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This research seeks to answer two questions; First: What is the impact of floating the Egyptian pound on foreigners’ transactions in the Egyptian Stock Exchange? Second: What is the impact of floating the Egyptian pound on the performance of the Egyptian Stock Exchange, as measured by the EGX30 index? The limits of this research are the period from 2015 to 2021. The statistical method will be used in this research to test the relationship between changes in the exchange rate of the Egyptian pound in US dollars and each of the foreigners’ transactions in the Egyptian Stock Exchange and the EGX30 index, during the study period. The research found a clear impact of floating the Egyptian pound on foreigners’ transactions in the Egyptian Stock Exchange, as their net purchases doubled during the year following the flotation, but the general effect during the study period as a whole was not statistically significant. While the effect on the EGX30 index was positive and statistically significant.
On November 3, 2016, the Egyptian government took a decision to float the exchange rate of the Egyptian pound, after a widening gap between its price in banks and its price in the black market. This research seeks to find out a specific point represented in knowing the impact of this government decision on foreign investment decisions in the Egyptian stock market only, and it will not be exposed to any other effects.
This research seeks to answer two questions; First: What is the impact of floating the Egyptian pound on foreigners’ transactions in the Egyptian Stock Exchange? The second: What is the impact of floating the Egyptian pound on the performance of the Egyptian Stock Exchange, as measured by the EGX30 index? By testing the following two hypotheses:
- There is a significant Statistical relationship between exchange rate changes and foreign investment in the stock.
- There is a significant Statistical relationship between exchange rate changes and EGX30 index.
The research will use the statistical method to test the two previous hypotheses, based on official data on the exchange rates of the Egyptian pound in US dollars issued by the Central Bank of Egypt, and the EGX30 index issued by the Egyptian Stock Exchange.
- Floating the exchange rate and attracting hot money for speculation in the stock exchange
When countries face a shortage of capital needed to finance investment, they use several solutions, including attracting foreign investments, whether direct (in the form of establishing factories, for example, which leads to an increase in the growth rate and employment of labor and thus a decrease in the unemployment rate) or indirect investments. (Such as investing in portfolios in the stock market). (Konar, 2019)
Probably the foreign direct investment is less risky than foreign investment in financial portfolios in the stock market. (Razin & Sadka) It is known that the investment decision in general and the decision to speculate in the stock market in particular is governed by many determinants, including psychological, financial, social and others. (Tate & Thompson, 2017)
Hot money is one of the most prominent manifestations of short-term foreign speculation in the stock market. It waits for the opportunity to flow in and then waits for the next opportunity to come out with the largest possible gains. (Adil, Fiaz, & Ahmad, 2021) Although this may be beneficial for both local and foreign parties in the short term, this type of foreign indirect investment is not appropriate in achieving sustainable development for the host country for this hot money, and therefore foreign capital flows must be reformed in line with local development goals. (Bigg, 2002)
The sharp decline in the exchange rate of the local currency is attractive to hot money, as the purchasing power of foreign currencies increases dramatically, but at the same time, the influx of these foreign currencies in abundance leads to a rise in the exchange rate of the local currency, and then the foreign speculator can buy back his foreign currency at a cheaper price, That is, he gets a larger amount of money that he has contributed to the flow of money into the country, and then this money flows again abroad. (ŞEKEROĞLU & ACAR, 2020)
- The US Dollar Exchange rate in Egyptian Pound from 2015 to 2021
The Egyptian government took a decision to float the exchange rate of the Egyptian pound on November 3, 2016, which led to a significant drop in its value against the dollar, which reached half, as the exchange rate of the US dollar doubled against the Egyptian pound. The following table shows the exchange rate evolution from November 2015 to November 2021.
Table (1): Exchange Rate of the US Dollar in Egyptian Pounds (2015-2021)
|N||November||US dollar Exchange rate in Egyptian Pound||Change rate
Source: (Central Bank of Egypt, 2021)
For more clarification, we can represent the data of US dollar exchange rate in Egyptian pounds by the following figure.
Figure (1): Exchange Rate of the US Dollar in Egyptian Pounds (2015-2021)
It is clear that the exchange rate of the US dollar in Egyptian pounds took a general upward trend during the period as a whole, With an annual average growth rate of about 16%. If we divide the whole period into two terms, we will find that it took an upward trend from 2015 to 2018, As it increased from 7.94 pounds to 17.97 pounds, then it takes a downward trend from 2018 to 2021, where decrease from 17.97 pounds in 2018 to 15.77 pounds in 2021.
- Foreigners’ transactions in the Egyptian Stock Exchange
Egypt’s economy is an open economy, therefore the Egyptian Stock Exchange, foreigners are allowed to deal in it, buying and selling in accordance with the legislation and rules regulating the work of the stock exchange in Egypt. The following table will show the value of foreign purchases and sales in the Egyptian Stock Exchange, and the net value of these transactions by subtracting sales from purchases.
Table (2): Foreign Transactions in the Stock Market in Million Pounds (2015-2020)
|N||June||Purchases||Sales||Net||Change rate %||Ratio of Foreigner transactions to total transactions|
Source: (Financial Regularity Authority, Egypt, 2021)
For further clarification, the data of the net value of foreign transactions in the Egyptian Stock Exchange from 2015 to 2020, can be represented in the following figure.
Figure (2): Foreign Transactions in the Stock Market in Million Pounds (2015-2020)
As it is clear, the value of foreign transactions in the Egyptian Stock Exchange took a general declining trend during the period from 2015 to 2020. But by dividing that period into two terms, we found that it took an upward trend in the first term from 2016 to 2018, where it rose from 4296 million pounds to 8751 million pounds (net purchases), then took a downward trend in the second term from 2018 to 2020, where it decreased from 8751 million pounds to reach a negative value (net sales) of -7330 million pounds. Which is consistent with the trend of the exchange rate divided into two terms.
The huge rise in the net value of foreign transactions in the Egyptian Stock Exchange can be explained, as the dollar can buy a larger number of securities and thus foreigners are able to buy a large number of securities with the same amount of dollars in the year preceding the flotation, and thus they will achieve several gains. The first gain is the purchase of a larger number of securities, the second is to obtain the interest of bonds or profits distributed to shareholders, and the third is to make profits from selling those securities and borrowing more dollars when the exchange rate of the dollar decreases after the increase in confidence in the Egyptian economy after the success of the flotation process, and therefore it is a profitable process for foreigners, and at the same time, the Egyptian government and Egyptian investors in the stock market have benefited from it by activating the Egyptian Stock Exchange.
1. Estimating the US Dollar Exchange Rate impact on net foreigners’ transactions in the Egyptian Stock Exchange from 2015 to 2021
In order to answer the first question of this research, we need to conduct statistical tests to find out the impact of exchange rate changes on the net value of foreign transactions in the Egyptian Stock Exchange. The SPSS output results are shown in table No. 1 in the appendix.
The results showed a non significant positive correlation between them, with a weak degree of 30.4%, which is the value of the Pearson correlation coefficient (R).
From the data, it is clear that the flotation of the Egyptian pound has led to an increase in the net value of foreign transactions on the Egyptian Stock Exchange by more than five times its value in the year preceding the flotation, But the results of the statistical test showed that the general impact of the exchange rate change on the value of net foreign transactions in the Egyptian Stock Exchange during the period from 2015 to 2020 It was not definitively clear, As it was not statistically significant. Therefore, the first hypothesis of this research has not been confirmed.
2. The EGX30 Index from 2015 to 2021
The Egyptian Stock Exchange launched the main index of the Egyptian Stock Exchange on February 1, 2003, to include the 30 largest companies in terms of liquidity and activity, weighted by market capitalization adjusted for trading shares. The index is distinguished by avoiding focusing on a specific industry, thus providing a good representation of the various industries and sectors operating within the Egyptian economy. It reflects diversity and provides suitable options for investors and helps them to make investment decisions. The index was calculated as of January 4, 1998, with a value of 1,000 points. The index was denominated in dollars calculated starting from March 1, 2009 .okan issued under the name of) CASE30) that changed its name to EGX30 on March 1, 2009, to reflect changes in the stock market name as was replaced by Cairo and Alexandria the Egyptian Stock Exchange according to the encroachments Head Market Law Money No. 95 for the year 1992. (The Egyptian Exchange, 2021)
The following table shows the evolution of the value of the EGX30 index from 2015 to 2021.
Table (2): The EGX30 Indicator from November 2015 to 2021
|N||November||EGX30||Change Rate %|
Source: (EGX30, 2021)
For more clarification, we can represent the data EGX30 in the following figure.
Figure (2): The EGX30 Indicator from November 2015 to 2021
It is clear that the EGX30 has fluctuated around an overall upward trend, rising from 643 points in 2015 to 11,396 points in 2021, with an annual average rate change of 14%. The Egyptian Stock Exchange, like all other stock exchanges in the world, was affected by the Covid-19 pandemic, and its indices decreased significantly since the beginnings of 2020. (Elsayed & Abd Elrhim, January 2020) This is evident in the previous figure, where the EGX30 index decreased from 13892 points in 2019 to 10891 points in 2020, then recovered relatively in 2021 to become 11396 points.
3. Estimating the US Dollar Exchange Rate Impact on EGX30 Indicator from 2015 to 2021
The second question seeks to find out what is the impact of the change in the exchange rate of the dollar in Egyptian pounds on the performance of the Egyptian Stock Exchange, as represented by the EGX index. Therefore, statistical tests were conducted between the two variables, and their results are shown in Table No. 1 in the appendix
The results showed a significant positive correlation between them, with a degree of 93.4%, which is the value of the Pearson correlation coefficient (R).
The result of the coefficient of determination also showed that the change in the exchange rate of the US dollar in Egyptian pounds (the independent variable) explains about 87.4% of the change in the EGX30 index (the dependent variable).
From the value β1, which is the linear marginal slope, we find that the increase in the exchange rate of the dollar in the Egyptian pound by one pound leads to a rise in the EGX30 index by approximately 748 points.
These results indicate that the effect of the rise in the exchange rate of the US dollar in the Egyptian pound is positive, as the rise of the first leads to the rise of the second, and this is the answer to the second question of this research. Thus, the second hypothesis of this research has been confirmed.
In this research, we answered two questions, the first is what is the effect of floating the Egyptian pound on foreign transactions in the Egyptian Stock Exchange, and it was found that the decision to float has led to an increase in the net value of foreign transactions by about five times, but no significant statistical relationship was reached during the study period As a whole. This indicates that the capital that flowed into Egypt after the flotation of the Egyptian pound is hot money.
The second question was also answered, which is what is the effect of exchange rate changes on the performance of the Egyptian Stock Exchange, and it was found that there is a statistically significant positive correlation between the dollar exchange rate and the EGX30 index during the study period.
Table (1): SPSS output statistical relation between US Dollar exchange rate and Net foreigners’ transactions in the Egyptian Stock Exchange
|Net foreigners’ transactions in the Egyptian Stock Exchange||US Dollar exchange rate in Egyptian pounds|
|Net foreigners’ transactions in the Egyptian Stock Exchange||Pearson Correlation||1||.304|
Table (2): SPSS output statistical relation between US Dollar exchange rate and EGX30
|EGX30||US Dollar exchange rate in Egyptian pounds|
|**. Correlation is significant at the 0.01 level (2-tailed).|
|Model||R||R Square||Adjusted R Square||Std. Error of the Estimate|
|a. Predictors: (Constant), US Dollar exchange rate in Egyptian pounds|
|Model||Unstandardized Coefficients||Standardized Coefficients||t||Sig.|
|US Dollar exchange rate in Egyptian pounds||748.477||128.500||.934||5.825||.002|
|a. Dependent Variable: EGX30|
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