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Monday, 15 November 2021

The jury is out on the tax + fee incentives on the EGX

Market watchers have welcomed a basket of EGX-centric tax incentives and fee cuts unveiled last week, but they want specifics — and they’re still not entirely sold on the idea that the incentives will allow domestic investors to swallow the 10% capital gains tax on EGX trades due to come into effect in January 2022.

Okay, before we move on, you need to remember one thing: This story is all about the psychology of domestic investors (retail and institutional) — folks who are resident in Egypt for tax purposes. Local investors (retail in particular) have been driving trading on the EGX since foreign institutional investors left the market in the early days of the pandemic. As non-residents, foreign investors are exempt from the capital gains tax here.

We’ve been picking up plenty of chatter that foreign investors are rediscovering their appetite for Egyptian equities, with folks on the buy side lining up conference calls with local issuers — and doing in-person visits and small roadshows to Egypt for the first time since February 2020.

Market reaction to the basket of tax and fee cuts has been muted (the EGX is up just 1.6% in the two sessions since the announcement) for two reasons:

  • Many traders were clamoring for the capital gains tax (CGT) to be scrapped entirely, Arqaam Capital’s Noaman Khalid reminded us. Brokerage houses are worried the tax will discourage trading volumes and were buoyed by parliamentarians in both the upper and lower houses of parliament who were pushing for the CGT to be scrapped (or postponed yet again). Those bids appeared to fizzle a little over a week ago.
  • Traders are still waiting for details on many of the tax and fee cuts (more on that below).

Okay, so what are the incentives? The package, announced by cabinet last week, combines fee reductions on EGX trading on the one side, and tax cuts on the other. Fees that could be slashed include tithes payable to MCDR and the state’s investor protection fund, while a stamp duty on trades by resident investors will be scrapped. Taxes on gains on mutual funds by retail investors would be taxed at a lower 5% rate. A recalibration of how the CGT is calculated (designed to protect long-time shareholders of a given equity) will also soften the tax’s impact — and trading, clearance and regulatory fees will be made tax-deductible. Intriguingly, policymakers have also promised a 50% break within a two-year window on realized capital gains from the sale of shares bought as part of an IPO.

(That last bit also opens the question of whether newly listed companies will face a selling wave ahead of the expiration of the two-year window as investors look to book gains at lower tax rates, but that’s a question for another morning — and one best answered when the final regulations are handed down.)

At the end of the day, fee cuts — while most welcome — will probably have a marginal impact on trading volumes, the analysts we spoke with suggested. The planned cuts to trading and clearing fees won’t have a huge impact on the cost of EGX participation, most of the analysts we spoke with said, with much of the cost coming in the form of (a) brokerage fees and (b) the proposed CGT. The incoming capital gains tax and the new caps on margin trading will both impact the market more significantly, they said.

Still: Fee cuts and tax write-offs are better than nothing, and retail investors have a habit of absorbing things like the CGT after a period of foot-dragging and loud complaining and then … moving on. After all, if you want to trade shares in an Egyptian company, the EGX is basically the only game in town.

It’s still unclear how much the cuts to EGX trading fees are worth. Local press reports yesterday claimed to have the exact percentages of the tax and fee cuts investors would be getting. A Financial Regulatory Authority (FRA) official we spoke with under condition of anonymity tells us that these were figures suggested by stakeholders and were not necessarily the numbers the FRA plans to make official. The extent of the fee cuts will be decided at the FRA’s next board meeting, the official said, which has yet to be scheduled.

At the end of the day, the EGX has one primary problem, the analysts suggest: We’re not adding large-cap, blue chip stocks fast enough, leading to low trading volumes and a lack of liquidity, Arqaam’s Khalid told us. Most analysts echoed similar sentiments. New listings by large state-owned firms have proven to reinvigorate other regional exchanges, Khalid said.

The 50% break on gains made by domestic investors on new IPOs within a two-year window will help spur IPO activity, Prime Holding’s Amr Elalfy told us. The move makes both primary and secondary offerings attractive, Sara Saada, senior economist at CI Capital, wrote in an email. The two-year break is good news for the recently rebooted state privatization program: “We see the two-year tax rate cut on offerings as beneficial to the government’s plan to offer four to six companies in FY21/22, along with the private sector pipeline,” she wrote. Changes brought in to ease listing requirements will also help, Elalfy added.

Which IPOs could we be seeing soon? Despite much buzz about both state-owned and private IPOs coming down the pipeline following e-Finance’s EGP 5.8 bn IPO, it’s been all quiet on the listing front so far since then. Ghazl El Mahalla sports club could make a small splash with its EGP 135 mn sale planned for November, and e-Finance has suggested it could separately list two of its subsidies. On the private-sector side, Abu Auf announced this fall that it would go to market in the first half of next year, but Macro Pharma, and non-bank financial services player Ebtikar have been silent as of late about their plans.

SPEAKING OF IPO NEWS-

Al Gioshy Steel is considering an IPO on the EGX and wants to list on the bourse as soon as market indicators improve, company CEO Tarek Al Gioshy told CNBC Arabia (watch, runtime: 4:21), without disclosing further information.

It’s been a while since we’ve heard “Al Gioshy” and “IPO” in the same sentence: The steel manufacturer said back in June 2019 that it was looking to offer up to 25% of its shares in 2020.

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