Van Eck, the ETF issuer behind international ETFs targeting several emerging and frontier markets, announced today the launch of the Egypt Index ETF (EGPT). The new fund is designed to track the performance of the Market Vectors Egypt Index, a benchmark measuring the performance of publicly traded companies that are domiciled and primarily listed on an exchange in Egypt or that generate at least 50% of their revenues in Egypt. EGPT joins existing Van Eck funds focusing on Vietnam, Indonesia, Poland, and Russia, among others.
With about 80 million people, Egypt is the most populous country in the Arab world and the 16th largest overall. Its per capita GDP is below the global average, trailing behind other emerging markets such as Brazil, South Africa, China, but ahead of India. If it were a U.S. state, Egypt would rank 23rd in terms of nominal GDP.
The index underlying EGPT has its heaviest tilt not towards the energy sector (as do most economies in the region) but towards financials, which make up about 40% of the benchmark. Egypt’s financial system is among the strongest in the developing world, as a wave of consolidation in recent years has resulted in fewer banks with stronger balance sheets. The loan-to-deposit ratio for Egyptian banks is just 50%, compared to ratios as high as 120% in less stable economies. Bad loans at Egypt’s largest banks are as low as 3%, far lower than double digit metrics in other emerging markets.
As evidenced by the relative scarcity of energy companies in the underlying index (the sector makes up less than 5% of the benchmark), Egypt’s economy is much more diversified than many in the region. Oil and gas makes up only about 15% of the country’s GDP, compared to as much as 50% for many oil rich states. Moreover, Egypt isn’t burdened by a “boom or bust” real estate market, a concern for many Middle East markets in the current environment. In addition to a strong financial sector, tourism, agriculture, and industrials account for significant portions of GDP.
Egypt has a long ways to go before reaching developed status, but the country has made major progress in recent years. Since Ahmed Nazif was elected prime minister in 2004, tax rates have been slashed, registration costs for new businesses have been reduced, and the Egyptian Stock Exchange has been opened to foreign companies. Foreign direct investment has surged from almost zero to $12 billion in 2009.
Risks To Egypt ETF
Of course, an investment in Egypt isn’t without risk. Two major obstacles facing Egypt’s economy include inflation government subsidies. Inflation, which is largely driven by increases in food prices, has surged near 25% in recent years, although more recently it has been brought down into single digits. Egypt is targeting a 6% to 8% range for inflation this year.
The Egyptian government has set a precedent for providing significant subsidies to its citizens. In order to deliver stable economic growth and progress towards developed market status these subsidies must be scaled back or removed altogether, but previous attempts to do so have resulted in social unrest. With unemployment officially at 9.5% (unofficially it’s likely much higher) and expected to rise further, reducing subsidies will be a challenging project.
EGPT is the first ETF to focus exclusively on Egyptian equities. Several other funds offer exposure to Egypt as part of a more diversified fund, including Van Eck’s Africa ETF (AFK, 19%), PowerShares MENA Frontier Countries Portfolio (PMNA, 20%), and Claymore/BNY Mellon Frontier Markets ETF (FRN, 14%). Global X has also filed for SEC approval on an Egypt ETF, although no date has been set for a launch.