The government is scrambling to limit the effects of Dubai’s debt crisis on the local economy. In an indication of the local significance of the crisis, Investment Minister Mahmoud Mohi Eldin reportedly delayed a scheduled trip to China in order to set up an ad hoc committee to deal with the issue.
Last Monday, the Dubai stock exchange closed down 7.3 percent after the Dubai government announced a debt-payment freeze by prominent local investment house Dubai World (DW). In the days that followed, the affair sent shockwaves across international financial markets.
DW, which manages an enormous portfolio of business assets for the Dubai government, caused a storm in 2006 when it attempted to acquire six US seaports.
In the wake of the crisis, Dubai officials have made calls not to confuse public debts with those of DW. "Mixing up between DW and the government of Dubai is a mistake," ruler of Dubai Mohamed Ben Rashid Al Maktoum declared on Tuesday.
Nevertheless, the Dubai exchange was hard hit by the news, despite a subsequent announcement by DW that it intended to restructure several of its companies, including Nakheel for real estate. These companies’ debts represent some US$26 billion of the group’s overall debt of US$59 billion.
Meanwhile, the Egyptian Exchange (EGX) has also felt the effects of the crisis, with the EGX30 index falling by almost 8 percent on Monday — 6.45 percent of which was attributed to selling among Arab investors. The loss represents the EGX’s most significant decline in four months, recalling the "black Tuesday" crash of October 2008.
Leading EGX stocks were hurt the most, with Hermes falling by 13.99 percent, Orascom Construction by 8.76 percent, CIB by 7.28 percent and Orascom Telecom by 7.17 percent. On Tuesday, the index partially recovered, rising again on Wednesday to close up by 2.84 percent, stimulated largely by a wave of buying among Arab and foreign investors — despite continued selling by locals.
Many observers, however, believe Egypt’s market decline to be out of proportion to the seriousness of Dubai’s debt crisis.
The Mubashir Information Center conducted a survey of 1,494 investors who were asked if the recent market declines were appropriate to the scope of the crisis. More than 80 percent of those asked saw the retreats as "inappropriate and unjustified." Respondents also expected the decline to continue in the short term.
Alorouba Securities CEO Hany Hendawy believes the media is responsible for exaggerating the depth of the crisis. "DW didn’t say it couldn’t deliver on payment, it just asked for a six-month delay," he told Al-Masry Al-Youm. "A retreat of almost 8 percent seems like an overreaction."
"The Egyptian Exchange is fragile one, where decreases are easier than increases," Hendawy added. "It’s always affected negatively because individuals lead the market, whereas institutions don’t take the initiative to stabilize it — often leaving it prey to irrational behavior by smaller investors."
Financial markets compete to attract foreign cash inflows. Therefore, if Gulf markets become unfavorable, the Egyptian exchange should — in theory — be able to pick up some of the slack. That logic has not applied to the EGX, though, leading some observers to believe the retreat was encouraged by certain quarters.
"Big investors and dominant companies always try to enlarge the decline by encouraging the feeling of panic among individual investors, which in turn eggs on the tendency to sell," local investor Yasser el-Nady told Al-Masry Al-Youm. "The Egyptian exchange in particular is known for this kind of ‘flock panic.’"
"Big players sometimes even sell intensively to encourage the decline, which enables them to buy cheaper the following day — and sometimes even by the end of the same day, if panic among small investors is significant enough," el-Nady added.
Notably, on 1 October, EGX Director Maged Shawky abruptly froze trading on the stocks of 29 companies that he accused of "manipulating" the market.
Other analysts agree with el-Nady’s assessment, pointing out that sharp retreats are usually based solely on panic selling among small investors — to which the Egyptian exchange is particularly prone.
"Once individuals see a ‘sell’ sign on screen, they all start selling too," local market analyst Abeer Ali told Al-Masry Al-Youm. "The EGX is elastic in retreats and inelastic in increases, as irrational panic often represents the dominant reaction."
