Pressure on the EGP is easing as tourism picks up, world adjusts to covid

It’s an unusually heavy news day for a Monday, and on the whole the news is generally good as we speed toward the end of summer and the start of fall budget / planning season.

The EGX outperformed its regional peers yesterday on optimism tourism may be staging a comeback, with the benchmark EGX30 up 2.1% at the closing bell. The market picked up on signs tourism is gaining ground despite covid-19 and traders welcomed the notion that the central bank seems set on renewing relief measures for the companies hardest-hit by the pandemic. Trading was heavy, with EGP 1.4 bn-worth of shares changing hands — around 36% above the trailing 90-day average.

Safety precautions at Egyptian tourism sites got a thumbs-up from UNWTO Secretary-General Zurab Pololikashvili, who lauded covid-19 precautions Egypt is implementing at its hotels. Pololikashvili is currently on an inspection tour in Hurghada, which he said in a tweet is “ready to welcome tourists.” The WTO boss’ visit to Egypt is his first trip outside Europe since the onset of the pandemic.

Today could be the last day of the House of Representatives’ current legislative cycle, leaving just one more get-together before MPs reconvene for a brief session this fall ahead of elections in October or November. Our elected representatives have some 60 agenda items before them, from committee reports to bills, according to the House’s schedule. House Secretary-General Mahmoud Fawzy had said earlier this week that Parliament would only break for summer recess if it completes its entire agenda. We had a rundown yesterday on what’s still pending, ranging from a waste management bill to new capital requirements for SME lenders.

President Abdel Fattah El Sisi will be in Amman sometime this week to take trade, and investment cooperation and regional developments with Jordan’s King Abdullah and Iraqi Prime Minister Mustafa Al Kadhimi, according to the Jordan News Agency.

More covid loans? The government is now seeking to double the size of the USD 1 bn loan it was planning on requesting this year from UAE banks, Al Mal reports citing a House Legislative Committee report (pdf) approving the move. The government will be looking to obtain a USD 2 bn covid-19 loan to be used for covid stimulus from a consortium led by Emirates NBD and First Abu Dhabi Bank and that also includes Mashreq and Citibank. This would be the third major loan in the pipeline for Egypt after the IMF last month disbursed a USD 2.8 bn rapid financing instrument, and green-lit a USD 5.2 bn standby loan.

The Madbouly government has 10 new mining exploration tenders in the works for late 2020 or early 2021, including iron, copper, phosphate, and lithium, Tamer Abu Bakr, head of the Federation of Egyptian Industries’ petroleum and mining division, told Al Mal yesterday. The first tender will be issued after the government awards licenses in a gold exploration tender that’s been ongoing since earlier this year.

The Health Ministry reported 103 new covid-19 infections yesterday, up from 89 the day before. Egypt has now disclosed a total of 97,340 confirmed cases of covid-19. The ministry also reported 19 new deaths, bringing the country’s total death toll to 5,262. We now have a total of 65,927 confirmed cases that have fully recovered.

The Coptic Orthodox Church will resume holding weekly mass every Friday starting 11 September, its spokesperson said yesterday. Egypt’s churches opened their doors earlier this month for the first time in since March, and announced a gradual plan to resume the weekly mass. Worshippers will need to practice social distancing and wear masks, among other precautions. Muslims are also getting ready to return to Friday prayers this week at “major” mosques with health and safety precautions stipulated, cabinet said last week.

Major companies across the US are rethinking plans to return staffers to the office next month, aiming instead to go back next year, the Wall Street Journal reports. The survey included 15 major firms employing 2.6 mn workers. Some 57% cited recent spikes in covid-19 cases as the reason for postponing a resumption of full-time office life, adding that they would introduce additional safety measures, like temperature checks and redesigned workspaces, when they reopen.

US presidential hopeful Joe Biden is willing to “shut down” the country to stop covid if scientists say doing so would stop the spread of the virus and save lives, according to the Financial Times. The Democratic candidate had previously said that he would take the “muzzle” off medical experts to ensure that the public had accurate information about the pandemic.

The Donald is reportedly looking to “fast-track” authorization of a vaccine Oxford University and AstraZeneca are currently developing, the Financial Times reports, citing three sources with knowledge of the matter. The plan comes as the November presidential election is fast-approaching, and the Trump administration looks to shift the narrative on its highly criticized handling of the pandemic — which Biden said last week was “the worst performance of any nation.”

Will Apple retain its position as the world’s most valuable company when markets open across the pond today? Apple’s market capitalization topped USD 2 tn on Wednesday, when shares briefly touched USD 468.65, allowing the iPhone maker to take over Saudi Aramco’s position as the world’s most valuable listed company, according to Reuters. Apple’s share price is up around 57% YTD, propelled by investor confidence in its service-based future strategy. This recent rally, however, might have left Apple’s shares overvalued as they’re currently trading at above 30x analysts’ expected earnings, according to Refinitiv data.

Apple’s rally is part of a historic surge in tech stocks as people are relying more on digital services and as investors believe tech will emerge even stronger post-covid. Microsoft, Amazon, and Google parent Alphabet — the three most valuable traded US stocks following Apple — are now joined by other tech heavyweights whose values have hit record highs, notes the newswire.

Here at home, Fawry just became the first fintech company in Egypt to be worth more than USD 1 bn as its shares have gained more than 300% since it debuted on the EGX last year. Fawry’s share price closed in the green at the closing bell again yesterday.

*** It’s Blackboard day: We have our weekly look at the business of education in Egypt, from pre-K through the highest reaches of higher ed. Blackboard appears every Monday in Enterprise in the place of our traditional industry news roundups.

In today’s issue: After looking earlier this month at how education stocks have weathered the covid-19 storm in equity markets, we dive into how education was also able to prove itself as a defensive sector on the capital expenditure side.

The nation’s airwaves didn’t have much to give us as a welcome-back offering last night, with only Ala Mas’ouleety’s Ahmed Moussa serving up any content.

Negotiations with Ethiopia and Sudan on GERD continue today as the three countries are working on a report to submit to South Africa this Friday with their proposals and points of contention, Irrigation Ministry spokesman Mohamed El Sebai told Moussa (watch, runtime: 5:53). We recapped the latest updates on the talks yesterday.

We’ve just about contained the first wave of covid-19 infections and could even start seeing days with zero new cases or deaths, but a second wave is all but certain come wintertime, Hossam Hosny, the head of the scientific committee of the state’s anti-covid task force told Moussa. Hosny also discussed Egypt’s plans to secure a vaccine, pointing to China and the UK as the most promising sources at the moment, while Russia’s Sputnik V is still in the clinical trial stage (watch, runtime: 20:05).

SMART POLICY- FRA wants private sector to own a chunk (and possibly a majority stake) of the futures exchange: It appears that the Financial Regulatory Authority (FRA) wants the private sector to hold a stake in the long-awaited futures exchange, FRA Vice President Khaled El Nashar told Hapi Journal on Sunday. The move is part of the regulator’s plan to tap the expertise of private-sector financial institutions and is meant to privatize the market from the get go, staving off any future calls for privatization, as is the case today with the EGX, El Nashar added. El Nashar also suggested that Misr Clearing and Depository Company (MCDR) should be opened to private-sector ownership. The FRA could go so far as to sell the private sector a majority stake, he suggested.

Keep an eye on a meeting tomorrow with top players in the finance industry: Plans for the futures exchange will be on the agenda tomorrow when the FRA meets a with number of Egypt’s leading financial institutions. Private-sector commercial and investment banks as well as insurance companies will be at the table along with representatives from the EBRD and the International Finance Corporation. Joining from the government side: FRA, MCDR, and the EGX, El Nashar said.

This is the first high-level public discussion of the futures exchange since EGX boss Mohamed Farid said pre-covid that Egypt could launch derivatives trading in 1H2020. We had also heard last year that MCDR and the EGX were finalizing the regulations and infrastructure needed to launch derivatives trading, which would see derivatives trades settled through a new electronic platform, but no updates on that have come out.

Pressure on the EGP is easing now that the worst of the balance of payments crunch is over, Capital Economics says in a new report. Winds at Egypt’s back include the lifting of the worst covid-related restrictions, signs of a recovery in the tourism sector (even with Egypt still not on the European Union’s “safe list”) and an anticipated pick-up in LNG prices. The research firm, which has consistently called for the EGP to weaken, is nevertheless suggesting the currency could ease about 12% to EGP 18 to the greenback by the end of 2021.

Covid’s toll on the BoP: While noting that the country’s account position had steadily improved in the years prior to the pandemic, narrowing from 6.6% of GDP at the end of 2016 to just 2.4% in 1Q2020, exports have fallen since the crisis, causing the trade deficit to widen again. This was exacerbated by weaker natural gas sales, a decline in Suez Canal receipts, and a significant drop in tourism, which it noted fell by 11.4% y-o-y in 1Q2020 — thanks, covid.

Capital flight during the pandemic also hurt, as the share of treasury bills held by foreigners fell from 22% in February to less than 10% in May, the firm suggested.

But was it really all that bad in hindsight? CBE data last month showed that the current account deficit actually narrowed in 3Q FY2019-2020 (which corresponds to 1Q2020) to USD 2.8 bn from USD 4.5 bn a year earlier. While Capital Economics noted that a decline in remittances following an exodus of Gulf-based workers didn’t help, CBE data showed that remittances increased by USD 1.7 bn to USD 7.9 bn during 3Q2019-2020 despite the global headwinds in March. Meanwhile, non-oil trade deficit fell by USD 2.2 bn to USD 27.3 bn during the first three quarters of FY2019-2020, a trend that continued in the last quarter with a rise in exports and a decline in import – particularly for fuel.

Road to recovery paved by the return of the carry trade: The government securing fresh funding from the IMF — coupled with investors’ search for yield in a bad environment — has seen foreign capital return to Egypt. Foreign holdings of government debt rose by USD 4 bn over the course of June and the first two weeks of July, writes economist James Swanston, citing government officials.

The EGP has strengthened by 2% against the USD since July, with the CBE keeping interest rates unchanged to encourage capital inflows, the report notes.

But Capital Economics thinks we’re looking at EGP 18 to the greenback by the end of next year, a drop of 12%, adding that the IMF will likely encourage authorities to let the EGP weaken so a larger adjustment is not simply kicked down the line. While inflation is much lower than it has been over the past decade, it is still higher than in Egypt’s trading partners, meaning the currency needs to weaken in nominal terms to prevent the real exchange rate from appreciating and further eroding competitiveness, the report notes.

FRA stress test shows “strength” of NBFS institutions, says Omran: The FRA put out a statement yesterday on the results of its first stress test on the impact of covid-19 on the non-banking financial services sector. The test, which was conducted earlier this year to gauge the impact of macroeconomic crises — such as a liquidity crunch, changing interest rates or debt default — triggered by covid-19 demonstrated the “strength in the financial position” of the sector, said FRA head Mohamed Omran.

Who was tested: The FRA applied the test to companies in the insurance, financial services and asset management, leasing, mortgages and factoring, and SME funding sectors. While the number of companies was not disclosed, the statement said that the companies held a combined 60-97% market share in their respective fields.

The results showed that most of these sectors were able to withstand some of the riskiest scenarios. It broke it down as follows:

• Insurance: The sector showed very limited risk of insolvency during the crisis and a moderate risk to any liquidity crunch that may arise. Companies in the sector are also in good shape to handle any dips in profitability.
• Financial services and asset management: 20% of companies would face “mild stress” if interest rates fall by 100 bps, while another 20% would suffer “moderate stress.” Meanwhile, only 10% of companies would be at “moderate stress” if interest rates were to rise by 100 bps. The sector is currently at a moderate risk to any liquidity crunch.
• Mortgage financing, leasing, and factoring: This segment is only at a moderate risk of financial insolvency during covid, while it is at a mild risk of collapse in the event of a recession or a liquidity crunch.
• SME financing: There is a moderate risk for the sector to face financial insolvency during the covid crisis, while showing an “appropriate” risk to a liquidity crunch or a recession.

The FRA’s recommendations: Companies in the sector need to build up their digital capabilities during the covid-19 crisis, according to the statement. The FRA will release the official report of its findings at a later date.

INVESTMENT WATCH- SFE to set up USD 300 mn healthcare fund JV with Concord in October: The Sovereign Fund of Egypt (SFE) will complete setting up its USD 300 mn healthcare fund JV with Concord International Investments by October, President of Concord Group Mohamed Younes told the local press. He suggested that the fund’s first transactions would be signed by the end of the year, without delving into details. The SFE and Concord signed an MoU in May to set up the healthcare fund, which is primarily mandated with supporting and expanding both public and private healthcare infrastructure projects in Egypt and the Middle East.

The fund aims to invest USD 300 mn in regional healthcare over a year and a half to two years, with an expectation that the fund’s investment period will run from five to 10 years, depending on its level of activity, according to Younes. The fund is actively looking for other investors and is kicking the tires on five potential investments.

Renewed focus on healthcare: Covid-19 has meant refocusing on healthcare, food and food security, logistics, and infrastructure during the crisis period, the SFE’s Chief Investment Officer Abdalla ElEbiary said in an interview with Enterprise in June. The fund is currently targeting EGP 60 bn of assets to add to its portfolio, and is planning to quickly grow to EGP 1 tn.

INVESTMENT WATCH- Private equity outfit Ezdehar is looking to raise as much as USD 200 mn from institutional investors to invest in mid-sized enterprises, founding partner Emad Barsoum told the domestic press. The firm expects to reach a first close of about USD 100 mn before the end of this year and is targeting another USD 100 mn in a second close in 2021. The fund will invest in medium-sized companies in Egypt with single-transaction ticket sizes of USD 10-30 mn in sectors including manufacturing, services, education, healthcare, non-banking financial services, Barsoum said.

Potential limited partners in the new fund: The European Bank for Reconstruction and Development, the European Investment Bank, the UK's CDC and the Netherlands’ FMO. Celebrity businessman Naguib Sawiris is also said to be a potential LP; Barsoum has a long track record of working with Sawiris-owned businesses. The press also suggests the International Finance Corporation could be interested in the fund.

Ezdehar Egypt Mid-Cap, launched in 2016, has already drawn down most of its funds and should be fully invested by the end of October. The firm will likely make its final investment in the coming months, Barsoum is quoted as saying; its portfolio is online here.

PHD to write off its LSE-listed GDRs: Palm Hills Development’s (PHD) extraordinary general assembly has approved canceling its London Stock Exchange-listed global depository receipts (GDRs) program, the company said in filings to the EGX (pdf) and LSE on Wednesday. Data on the GDRs show an unchanged 52-week range, implying the GDRs are thinly traded. PHD had launched the program on the LSE in tandem with its IPO on the EGX in 2008. At the time, the company said it would sell 63.4 mn shares as GDRs.

The cancellation is largely because of low trading volumes and it makes little sense to continue paying fees to maintain the GDR program amid low liquidity, Mamdouh Abdel Wahab, PHD’s investor relations and investments associate vice president, told Enterprise. The number of GDRs traded on the LSE represent less than 1% of the company’s 3.1 bn total shares, Abdel Wahab noted. Maintaining a GDR listing also requires IFRS compliance, which means appointing auditors in several jurisdictions, and potentially overloading the finance team, added Abdel Wahab.

PHD’s decision to scrap its GDRs comes one month after the Arab African International Bank purchased a 12.25% stake in the company. Since the bank’s arrival at the shareholders’ table, PHD’s share price has risen nearly 8%. This includes a 2% uptick yesterday following the announcement that the company is canceling its GDRs.

What are GDRs anyway? Think of them as a way for investors to indirectly invest abroad — without having to actually touch a foreign stock exchange. They’re fundamentally bank certificates representing shares in a company outside the jurisdiction in which they’re issued and sold. Investors can simply go to a financial institution in their home country and purchase GDRs without needing to directly buy the shares on the (usually emerging market) exchange on which the shares normally trade. Over a dozen EGX-listed companies have GDR programs — including CIB, Edita, Telecom Egypt, GB Auto, and Orascom Investment Holding. London has been the most popular destination for such programs.

Nissan reportedly walks away from converting microbuses to run on natgas as Toyota eyes incentives: Japan’s Nissan has withdrawn from participating in the Egyptian government’s plans to convert microbuses to run on dual-fuel engines, saying it currently lacks the technical know-how to participate, Hapi Journal reports, citing an unnamed government source. The government has reportedly tried to convince Nissan otherwise, but to no avail. It remains unclear why Nissan dropped out of the program entirely, rather than follow in the footsteps of other auto firms — including Toyota, Al Amal, and Modern Motors — which requested a grace period of 3-4 months to adequately prepare for the conversion program.

Toyota, meanwhile, wants to be courted a little bit more: The Japanese automaker, which had previously expressed interest in the project, has asked the government for incentives to participate, including customs and VAT exemptions. The source suggests these requests will be difficult to meet, and could lead to Toyota following Nissan’s lead and also dropping out from the program.

That leaves two other companies in the program: Al Amal, the local distributor of King Long-branded microbuses, and Modern Motors, which distributes Foton microbuses, are now the two main participants in the conversion plan that the Sisi administration announced earlier this year. These firms are currently in talks for supply agreements for the imported car parts required to outfit cars with the dual-fuel engines, we noted previously.

Public buses running on natgas to hit the streets soon: The Mass Transit Authority (MTA) is set to work with the Military Production Ministry to convert 300 buses to run on natural gas as a first phase, MTA Chairman Rezk Aly told Al Mal. Each bus is expected to cost EGP 500k to convert, meaning the first phase will cost EGP 150 mn. The MTA plans to convert the engines on its entire 3,500-bus fleet within two years. Each converted bus will cut costs by EGP 100k per year, according to Aly.

Take a deep dive into the plan with our three-part series in Hardhat: Part 1, part 2, and part 3.

Beirut explosion prompts new guidelines for disposal of hazardous materials at ports: The Egyptian Authority for Maritime Safety has reportedly issued new guidelines for the storage and disposal of hazardous waste, Al Mal reports, citing sources from the authority. The new regs classify paint, varnish, ink, glue or soldering materials — among others — as hazardous and requiring safe disposal. The restrictions also include a ban on the storage of coal in closed containers.

Sultanate of Turkey emerging as a regional gas rival? Turkey’s announcement last Friday of a major gas discovery on the Black Sea prompted analysts to declare that Turkey could potentially be on the verge of transforming from mere consumer and cross-border conduit for gas trade to a sizable regional producer, Bloomberg reports. “Turkey is a premium gas market, which has never been significant on a global scale. The discovery really reinforces the country’s potential role as an energy producer in the region,” Ashley Sherman, an analyst at Wood Mackenzie, said. The discovery is already the largest of its kind in the Black Sea and proved the existence of sizable deposits deep under the seabed, according to Bloomberg. The “Sakarya” field is said to hold 320 bcm in potential reserves. By way of comparison, Egypt’s supergiant Zohr field has around 850 bcm of reserves.

More discoveries to come (we won’t hear the end of it)? The natural gas discovery in the Black Sea is “just the beginning,” an optimistic spokesman for President Reccep Tayyip Erdogan said on Friday. Ankara’s state-oil arm TPAO will continue offshore exploration near the field where officials see “much greater potential” for hydrocarbons, the spokesperson said on Saturday.

The discovery is the latest in a series of moves by Turkey to stake a position as a regional energy player, following repeated contentious energy exploration excursions into Cyriot territorial waters in the eastern Mediterranean. The latest was Oruc Reis, an exploration vessel Ankara deployed near Cyprus earlier this month. The vessel will push on with seismic scans in the area until Thursday, Turkey said yesterday, according to Reuters. Turkish provocation has continued to draw the ire of Egypt, Cyprus, Greece, France, and the UAE — who inked a joint statement condemning Ankara’s repeated attempts to drill for natural gas in Cyprus' disputed maritime zone.

This would add impetus to Egypt and Greece to strengthen their hand by ratifying the maritime boundaries accord this week. Greece’s parliament is planning on ratifying an accord signed with Egypt earlier this month defining maritime border zones in the East Mediterranean Sea this Wednesday, 26 August. The move to formally determine maritime zones is a step towards both countries maximizing their utilization of the resources available in the region, and marks a step towards more natural gas exploration and extraction for Egypt.

EARNINGS WATCH- Elsewedy Electric reports 2Q2020 net profits falling 44.8% y-o-y: Elsewedy Electric reported a 44.8% y-o-y decline in net profits to EGP 514.17 mn in 2Q2020, largely as a result of covid-induced disruptions in the broader economy that has slowed operations, the company said yesterday in an earnings release (pdf). Revenues during the second quarter saw a 9.6% y-o-y decline to EGP 9.34 bn. Despite the covid disruptions, however, the company’s top line was largely supported by growth in turnkey projects, which rose 27% y‐o‐y to reach EGP 4.5 bn in 2Q2020.

Outlook: As social distancing measures ease in Egypt and globally, “we look forward to maximizing our revenues through the ramp up of our business development activities, with a focus on turnkey projects in new promising markets and regions [and] … look forward to executing our projects as scheduled,” CEO Ahmed El Sewedy said. El Sewedy also signaled that the company is on the lookout for M&A, noting that it is screening “accretive M&A opportunities with the objective to enhance our footprint as well as our portfolio of products and services.”

Dice reported a consolidated net loss of EGP 92.76 mn in 1H2020, compared with net profits of EGP 73.01 mn during the same period last year, according to an EGX disclosure.

MOVES- Karim Mohamed Samy (LinkedIn) is stepping down as director of operations management at Egyptian Resorts Company, according to a company statement (pdf). The statement does not name a replacement.