Egyptian bid-ask spread information is unfortunately not readily available to analyze patterns over time. It is however possible to estimate transaction costs based on the incidence of zeroreturn trading days, days on which no price movement was recorded. The assumption underlying this statistical model is that the marginal investor will not execute a trade unless the profit net of all transaction costs is positive. The model’s estimates in Exhibit 3.9 suggest that transaction costs have come down in the whole benchmark group compared to 2005. In particular, Egypt’s transaction costs have come down from over 130 basis points in 2005 to around 50 basis points for 2008 and could be the lowest in the region.

# **Exhibit 3.9 – Transaction costs**

_Transaction cost decomposition in 2007:Q2 for selected countries, basis points (left graph) Round-trip transaction cost estimates for the 25 largest stocks in Egypt and Qatar, 2005-08 (right Exhibit)_

|**90**<br>**100**<br>**bps**|||||||
|---|---|---|---|---|---|---|
|**70**<br>**80**||**Country**|**2005**|**2006**|**2007**|**2008**|
|**50**<br>**60**||**Abu Dabhi**|8.79%|6.82%|4.22%|4.83%|
|**30**<br>**40**||**Amman**|1.95%|1.30%|1.23%|1.24%|
|**10**<br>**20**||**Cairo**|1.32%|0.74%|0.44%|0.52%|
|**0**|**na**<br>**ile**<br>**ia**<br>**pt**<br>**ry**<br>**el**<br>**co**<br>**ru**<br>**ey**|**Casablanca**|2.48%|1.98%|1.73%|1.23%|
||**enti**<br>**Ch**<br>**lomb**<br>**Egy**<br>**unga**<br>**Isra**<br>**Mexi**<br>**Pe**<br>**Turk**|**Kuwait**|3.18%|5.02%|2.93%|2.73%|
||**Arg**<br>**Co**<br>**H**<br><br>|**Muscat**|5.43%|7.20%|5.31%|3.50%|
||Commission<br>Fees<br>Market impact|**Qatar**|1.53%|0.87%|0.83%|0.99%|

_Source: Elkins & McSherry, Bloomberg; World Bank staff analysis_ _Note for right graph: 2008 information is up to and including June 20_<sup>_th_</sup> _. These numbers might not be directly comparable to the left graph. The econometric approach is a maximum likelihood, limited dependent variable model that uses daily stock returns to estimate transaction costs. Details can be found in Lesmond, Ogden, and Trzcinka (1999). “A new estimate of transaction costs”. Review of Financial Studies 12:5._

# **3.3 Capacity to Raise Capital**

- _3.3.1 International comparison of capital raising activity: Overall, Egypt compares well, but privatizations and a relatively low gross fixed capital formation might distort the picture_

Exhibit 3.10 shows that Egypt’s exchange seems to have been fairly successful at raising capital, relative to gross fixed private capital formation (GFPCF): 40 percent versus almost 30 percent in 2006 and 2005, respectively. However these numbers need to be nuanced. First, the 2005 number is boosted by privatizations of Sidi Kerir Petrochemicals, Alexandria Mineral Oils Company, and Telecom Egypt. In that sense, 2006 gives a better picture, since there were no privatizationdriven IPOs. Excluding, these large privatization IPOs, the Egyptian Exchange was only able to raise less than 25 percent of GFPCF in 2005. Secondly, SPO activity is the largest component (14.6 percent of GFPCF). Without SPOs, Egypt public offering activity would be lower than India’s. Many Egyptian companies are closely held and therefore skip the IPO stage to do an SPO. Thirdly, Egypt’s GFPCF as a fraction of GDP has been low and hence Exhibit 3.10 overstates the ability to raise capital. For example, Egyptian GFPCF to GDP has been consistently lower than Jordan, Mexico, Morocco, Pakistan and Philippines since 2002. Only in 2007, did Egypt surpass Philippines (13.7 percent)―currently the country with the lowest private capital formation―but it is still well below the group average of 18.7 percent. Were Egypt rise to the level of its peer group average in terms of capital market contributions to GFPCF, annual 30