This paper aims to examine the effect of the spread of Covid-19 on the Egyptian companies trading in stock markets. The outcome of such an infectious disease is regarded as serious. It actually affected stock markets worldwide. Using an event study method, our results indicate that the stock markets in major affected countries and areas fell quickly after the spread of the virus. Egypt is one of the highly affected countries with a high rate of deaths. Further panel fixed effect regressions also support the adverse effect of Covid-19 confirmed cases on stock.
Introduction
The date 31st December 2019 marks first identification of the first case of Covid-19, which the World Health Organization (WHO) identified in Wuhan China. During January 2020, Wuhan was not the only country with Corona virus but China witnessed a huge spread in almost all the states. One of the main reasons of the virus spread is a huge movement of people towards their hometowns to celebrate Chinese New Year. Despite Wuhan officials declaring a complete the outbreak of the virus continued to be very rapid. The WHO declared a global emergency because of the outbreak of Covid-19 by the end of January, 2020. The rapid spread of such a contagious disease does not just affects people’s health and lives, however, it seriously has a negative impact on the economic growth (Liu et al, 2020).
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There are various factors that affect the market participants’ decisions. Covid-19 created multiple challenges to personal lives, such as lockdowns (or lockdown-like situations) for a large number of people. Further, all over the world people started to be scared because of the huge number of death and catching the fast-spreading infectious disease. This panic wave can easily lead to the decline of the economic trends and sudden changes in the investor’s sentiments (Liu et al, 2020). Bad mood and anxiety can negatively affect investment decisions; anxious individuals may be more pessimistic about future returns and therefore tend to take fewer risks. Anxiety is usually followed by negative feelings, these feelings affect investment decisions and the subsequent returns on assets (Kaplanski and Levy, 2010).
Research Problem
The consequences resulted from Covid-19 propose a chance to evaluate the pandemic’s impact on the stock markets of affected nations because of an unforeseen and feared disease. This paper aims to examine the impact of the outbreak of Covid-19 on the performance of Egyptian companies in stock markets.
Literature Review
The Effect of Epidemics/Pandemics on Economic Growth
Over the last centuries, medicine witnessed a remarkable progress in various diseases. However, certain infectious diseases including influenza and malaria stood as obstacles before medicine even in developed countries. Some of these diseases have been contained successfully and are only found within a few geographical areas (endemics). Unlike other diseases, which have the ability to spread quickly from an initially limited outbreak, are regarded as epidemics or pandemics (European Union, 2020).
The spread of a virus not only affects the health of human beings but it also has negative economic implications. Multiple studies focusing were conducted to investigate the impact of epidemics and pandemics on the economy (European Union, 2020).
The European Union published former articles, in which it provided and estimation of the total value of losses (including lost income1918 pandemic), could reach about US$500 billion per year; about 0.6 % of global income. It also mentions the estimated proportion of annual national income represented by these losses varies according to income groupings, with lower-middle-income countries being more severely impacted (1.6 %) than high-income countries (0.3 %). In 2019, WHO published a report along with the World Bank presenting the impact of a pandemic, and mentioning the total cost to 2.2 %-4.8 % of global GDP (US$3 trillion).
Studies that aimed to examine the macroeconomic impact in the past of pandemics and of other infectious diseases such as SARS and HIV/AIDS, estimated the results regarding lost output and growth. The strange thing is that some studies contradicting the majority of studies and claims that pandemics or epidemics can affect economy positively (Lars Jonung & Werner Roeger, 2006). Brainerd and Siegler (2003) studied the economic effects of the Spanish influenza, claimed that the 1918-19 pandemic in the US actually increased economic growth in the 1920s. Young (2004) also agreed that the AIDS epidemic in South Africa will increase net future per capita consumption using a theoretical economic model.
On the contrary, Bell and Gersbach (2004) explained strong negative effects that will occur as consequences. Thus, studies of the past help people figure out valuable information about the proper assumptions to make when ‘guesstimating’ the macroeconomic impact of future pandemics (Lars Jonung & Werner Roeger, 2006).
Estimating the economic effects, it is easier to differentiate between supply and demand effects. The supply effects increase from a loss in hours worked, however the demand effects or psychological effects result mainly from precautionary measures taken by the population to avoid infection. Certain activities namely travelling and meeting and socializing with other people in restaurants, bars, cinemas, etc. are going to be reduced normally (Lars Jonung & Werner Roeger, 2006).
According to Siu and Wong (2004), the spread of Hong Kong’s SARS epidemic along with its economic outcomes suggests that the real serious negative impacts were actually presented on the consumer side, besides on the short-term local consumption and the export of tourism and air travel-related services is seriously affected. Lee and McKibbin (2004) applied the G-Cubed (Asia Pacific) model on the global economic impacts of the severe acute respiratory syndrome (SARS). They both agreed that the effect of the SARS epidemic is not only severe as a disease but it also negatively affects the financial integration and globalization; any economic shock to one country spreads rapidly to others. Further, the 2014 Ebola outbreak has affected US asset prices (Marinˇc, 2016). The results reflected the general negative effect on stock prices, a significant impact on local trading, and less stable industries.
DeLisle (2003) investigated the impact of the SARS virus on stock markets and how resulted in losses as high as in the financial crisis of Asia, estimated at $3 trillion value in GDP 19 and $2 trillion value in financial markets equity. Whereas, Nippani and Washer (2004) examined the outcome of the spread of SARS on several countries; Canada, China, the particular administrative region of Hong Kong, Indonesia, China, Singapore, the Philippines and Vietnam and Thailand. The results of their study showed that SARS only affected the stock markets of China and Vietnam.
Another study examined the 78 mutual equity funds geographically based in African countries with observed monthly flows (Del and Paltrinieri, 2017). The study found out that during 2006 to 2015 that Ebola and the Arab Spring had a severe impact on the funds flows, resulting in a control in the performance of the funds, spending, and returns of the market.
In addition, Chen, Shawn, and Gon (2012) examined the consequences of spread of the SARS on the efficiency of Taiwanese hotel stocks. They applied an event study approach and the results showed that seven publicly traded hotel companies faced severe declines in income and stock price. Taiwanese hotel stocks were significantly affected especially the abnormal returns on and after the day of the SARS outbreak on the performance in hotel stock.
Chen et al (2018) analyzed epidemic of SARS and its outcome on China’s long-term relationship with four Asian stock markets. The results showed the existence of a time-varying co-integration relationship in aggregate stock price index. The findings also presented how the SARS epidemic has weakened China’s long-term relationship with these four markets. Bai (2014) and Baker, Wurgler, and Yuan (2015) agreed that investors according to the recent circumstances may feel afraid to invest in a given market and may feel afraid to also sell market’s stocks under communicable disease outbreak.
Stocks markets are not regarded as individuals but rather connected and interdependent. Further, Chiang, Nam, and Li (2007) tackled the daily stock return for nine Asian markets since 1996 to 2003 and found that there was a high correlation among sample Asian countries during the period of crises. Besides, the global stock markets were becoming more interdependent and crisis in one country would soon spread to another. Stock market movements become increasingly correlated (Morales and Andreosso, 2012). Thus, infectious disease outbreaks can lead to negative changes in investors’ which highly affects their investment decisions and by default affects the stock market prices. (Lars Jonung & Werner Roeger, 2006)
The Effect of Covid-19 on the Egyptian Economy
OECD (2020) reported “the main index of the Egyptian Stock Exchange (EGX30) has declined by 39% since the peak on 9 February, reaching EGP 10 154 on 16 April 2020”. The government announced certain measurement for the citizens and firms. For the purpose of industrial usage, the price of natural gas and electricity declined. Natural gas for industrial use will be priced at USD 4.50 for MMBtu, down from USD 5.50. Whereas electricity for heavy industry will be priced at 0.10 EGP (USD 0.0064) per kilowatt hour, down from 1.10 EGP. Regarding the price of electricity for other industries, it will be kept stable for three to five years. Further, the government offered a certain delay for repayment of loans for SMEs. The Central Bank also introduced credit lines for tourism enterprises in order to make it easier for paying of salaries and financial dues for suppliers. To illustrate, these credit lines can be paid over a maximum of two years with a six-month grace period. Moreover, the National Bank of Egypt and Bank Misr offered a one-year deposit program with a 15% interest rate. The Export Subsidy Fund will pay out the entire EGP 1 billion in arrears in March and April 2020, plus 10% in cash payments to exporters in June 2020. Regarding property tax, companies in the industrial and tourism are offered three months extension for the payment of property taxes for sector. The property taxes shall be payable in monthly installments over the following six months. Therefore, the Egyptian Center for Economic Studies estimated that the impact of Covid-19 on the Egyptian economy till June 2021 shows a decline in travel and tourism, lower domestic consumption, capital outflows, and reduced remittances. They also predict a weaker global trade which will reduce Egypt`s exports and earnings from the Suez Canal. Further, foreign direct investment is expected to decline and will solemnly increase gradually by June 2021. (OECD, 2020)
The Consequences on Egyptian Firms Trading in Stock Market
The American Chamber of Commerce in Egypt published a research note about the current state of Egyptian companies trading in stock market. Covid-19 literally affected all global markets in a negative manner, estimated by double-digit retractions since the beginning of February. However, global equity markets sensed some recovery in the third week of March after the U.S. Senate approved a USD 2.2 trillion stimulus package as a result of weeks of negotiations. The Egyptian exchange suffered as a result of the full effects of the global turbulence in the first week of March, despite all the gains it made since the beginning of 2020. March 1 marked the huge trading loss since 2012 with the benchmark EGX 30 tumbling north of 6%, triggering the circuit breaker to pause trading for the first time since September 2019. Circuit breakers reported for five times this month, and by March 19, the EGX 30 was regarded as the MENA region’s worst performing index, falling by about 22% between March 15 and 19, and by 37% since the beginning of the year. A number of companies, in an attempt to support falling shares, are filed for buybacks of treasury stocks such as Palm Hills Developments, GB Auto, Orascom Development Egypt, Madinet Nasr Housing & Development, Eastern Company and Sidi Kerir Petrochemicals Company (SIDPEC), among others. As a result of the significant losses, state-owned NBE and Banque Misr injected a combined EGP 3 billion in the market on March 19. On March 23, the CBE got EGP 20 billion worth of equities — about 5% of the EGX 100’s market capitalization so that it could to support asset prices amid uncontained market volatility (Amcham, 2020).
Conclusion
Corona Virus has spread vigorously in about 176 countries. This outbreak led to a significant decline in the economy of these countries. Egypt, first, reported a case of Covid-19 on March 8, when a 60-years old German tourist tested positive. By March 30, the Ministry of Health has reported 609 confirmed cases of Covid-19. As reports about the Covid-19 outbreak severity hit global media, February witnessed delays in Chinese imports at Egyptian ports, companies started to feel the decline and the losses.
This paper attempted to illustrate the effect of the virus on the companies trading in stock market in Egypt. The EGX 30 was regarded as the MENA region’s worst performing index, falling by about 22% between March 15 and 19, and by 37% since the beginning of the year. Several firms tried to support falling shares by filling for buybacks of treasury stocks such as Palm Hills Developments, GB Auto, Orascom Development Egypt, Madinet Nasr Housing & Development, Eastern Company and Sidi Kerir Petrochemicals Company (SIDPEC), among others. The Virus actually not only cost Egypt several lives and many others are infected, but it also cost multiple losses in the economic sector and in the stock market.
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