International investment banks are betting on Egypt to emerge as a vibrant capital markets centre. With Egypt's economic reforms billed as the most advanced in the region, the potential for expansion in capital markets has persuaded several investment houses to set up shop locally. These include ABN Amro, Flemings, ING Barings and HSBC.

Whether the market will produce enough business to satisfy the foreign players, however, will depend on the government fulfilling its pledge to speed up the pace of privatisation and following a coherent policy of economic reforms that sends reassuring signals to local and foreign investors.

"This is the largest domestic market in the Middle East," says Iyyad Malas, general manager of Flemings CIIC in Cairo. "The experience of other investment banks in the region suggest that if you don't have a big enough domestic market, you cannot claim to be able to get business regionally. So the conclusion for many is to start here and establish yourself."

Flemings entered the Egyptian market in 1998 through the purchase of a local brokerage. A year later, it merged with Commercial International Investment Company, which owned a brokerage, to form Flemings CIIC. Similarly, ABN Amro past year bought a large stake in a local brokerage and asset management firm and established operations. The company took off to a good start, winning this year's biggest initial public offering - the sale of 10 per cent to 20 per cent of Egypt Telecom.

Investment bankers admit that competition will be fierce. At nearly $30bn in capitalisation, the Cairo stock exchange is illiquid, with insufficient numbers of companies being privatised and not enough private sector enterprises seeking finance.

Indeed, much of the trading these days is in only two stocks, a mobile telephone operator and a film studio company. In the last three years, a total of 25 private sector companies only tapped the stock market for finance.

oreover, because many privatisations were only partial sales to the private sector, listed companies remain predominantly controlled by the public sector. "There's no excitement in the market and for most of companies listed are still run like they were 10 years ago so fund managers are frustrated and they keep hearing the same stories," says a senior investment banker.

Newcomers to the Egyptian market face competition from local institutions as well as other international investment banks servicing Cairo from the London base. The industry today is dominated by EFG-Hermes, born out of the 1996 merger of Egypt Financial Group and Hermes Financial. Aggressive and controversial, EFG-Hermes has rapidly expanded in recent years and attracted talent from international institutions. With strong relationships with local companies, it has won a string of deals that would have been expected to go to international houses. For example, the company is now preparing a $500m initial public offering for Orascom Telecom.

But the investment house, with $193m in market capitalisation, has also extended its reach beyond Cairo, winning a mandate two years ago for a cement privatisation in Jordan and introducing Egyptian clients to deals in other parts of the Middle East. It has applied to set up an investment bank in Algeria and, along with clients, is investing in a cement plant there.

Investment bankers say income will be derived from merger and acquisition activities as consolidation is expected to pick up in the banking sector. Meanwhile, more privatisation could raise foreign and domestic interest in the stock market and the corporate bond market, still in its infancy, will certainly expand.

Bankers also expect convince local companies to more aggressively to tap the market. "It will be very tough," says Mr Malas. "But in the domestic market, there is a need for issues of between $20m and $40m as many companies need this type of fund-raising."

The asset management business also has growth potential. "There are EŁ3bn of assets under management in mutual funds today but pension and social security and employee funds of the private and public sectors have about EŁ114bn and they invest very little on the market so the potential is huge," says Omar Ramzy, managing director of portfolio management at ABN Amro. He adds that asset managers are now proposing a change in regulations to reduce a restrictive capital requirement now impeding their ability to expand.

The key to the further development of capital markets, however, is for the government to ensure that investors maintain confidence. A string of odd decisions taken in the past two years have sent worrying signals. Bankers cite government insistence on overpricing privatisations sold on the exchange and a recent attempt to sell a state-owned cement factory to another public company instead of a foreign investor - a case which led to an uproar in the business community.


Struggling to spread its wings
With notable exceptions, unease still reigns
Search for a new formula
Banks race to follow where new arrival leads