AM — What the implosion of Silicon Valley Bank means for Egyptian startups

Good morning, friends, and welcome to an unexpectedly busy news morning, with the big story of the day being what the meltdown of Silicon Valley Bank could mean for dozens of Egyptian startups with deposits at the bank. We have the full rundown in this morning’s news well, below.

SMART POLICY- You’ll soon be able to transfer larger sums of money through InstaPay: The Central Bank of Egypt (CBE) will this week raise the limits on electronic transfers made through its digital payment app InstaPay, saying in a statement (pdf) it was doing so thanks to market demand. The new limits, which will come into effect on 15 March, will allow transfers of up to EGP 70k per transaction, up from EGP 50k currently. Users will be able to transfer a total of EGP 120k per day and EGP 400k per month — up from EGP 60k and EGP 200k currently. The decision was rooted in customer requests, opinion polls, and growing demand for the app, the statement adds.

WATCH THIS SPACE #1- The government will unveil its largest-ever export subsidy program next week, Trade and Industry Minister Ahmed Samir said last week, without providing further details, according to Al Shorouk.

WATCH THIS SPACE #2- One index out, a new index in. The EGX is planning to launch a shariah-compliant index this summer and terminate one of its less significant indexes over the next month, EGX head Rami El Dokany told CNBC Arabia (watch, runtime: 2:09). The bourse has conducted surveys to see which of its indices are among the least used, he added. El Dokany provided no information about which index the EGX will terminate and didn’t elaborate on the planned sharia-compliant index.

WATCH THIS SPACE #3- Two weeks until the draft FY 2023-24 budget is tabled in the House. The Finance Ministry expects to send a draft over to the House of Representatives for discussion during the week of 26 March.

What’s next? Debate kicks off in committee for a two-month period, at the end of which the House Planning and Budget Committee will prepare a budget report to be discussed and voted on by the House. President Abdel Fattah El Sisi would then typically sign off on the budget before the start of the fiscal year on 1 July.

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Zulficar and Partners won the legal community’s sixth annual football tournament yesterday, beating Zaki Hashem, Dreny and Partners and Jurisera on their way to their second consecutive title (and their fourth in six years). The tournament is a yearly one-day tournament that hosts some of the nation’s most prominent law firms. The net proceeds from the event are earmarked for charities that promote education and advance the legal profession. Fifteen teams played this year.

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PSA- You may want to break out jackets and umbrellas — it’s about to cool down again, and depending on where you live, you may see rain or a sand storm (or both). Daytime highs will fall to 20-22°C from Tuesday through the end of the week, with an overnight low of 12°C on Tuesday, according to the Egyptian Meteorological Authority forecast. We’re in for moderate rain Monday through Wednesday on the country’s coasts, while Greater Cairo will windy periods off and on throughout the week, according to our favourite weather app.

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WHAT’S HAPPENING TODAY-

It’s the second and final day of the Techne Summit at the National Museum of Egyptian Civilization.

The SCZone is in Vietnam: Representatives from the Suez Canal Economic Zone (SCZone) starts a roadshow in Hanoi where they will meet with local businesses and investors in a bid to attract investment. The roadshow lasts through to Friday, 17 March.

Hajj registration goes live: Registration for this year’s Hajj through tourism companies will be open from 12 March to 19 April, the Tourism Ministry said Thursday.

HAPPENING TOMORROW-

Italian FM in Egypt: Italian Foreign Minister Antonio Tajani is heading to Egypt after visiting the West Bank and Israel, Italian news agency ANSA said last week.

El Molla speaks at BEBA: Oil Minister Tarek El Molla will be guest of honor at a dinner organized by the British Egyptian Business Association (BEBA Egypt) at Cairo Marriott Hotel.

THIS WEEK-

Ahlan Ramadan: The government’s Nasr City Ahlan Ramadan discount supermarket expo will kick off on 15 March and will run through to 21 March.

We are delighted to share with you that the Enterprise Exports & FDI Forum will be taking place on Monday, 15 May at the Four Seasons Hotel at Nile Plaza.

DO YOU WANT TO ATTEND? The first wave of invites is going out soon. If you’re a C-suite exec, exporter, investor, official, banker, or someone who should be part of the conversation, please TAP OR CLICK HERE to request a spot at this exclusive event.

WANT TO SHARE YOUR STORY ON STAGE? Drop a note to Patrick here and let’s talk.

WANT TO BECOME A COMMERCIAL PARTNER? Ping a note to Moustafa, our head of commercial, here.

CIRCLE YOUR CALENDAR-

The Finance Ministry will host the Public-Private Partnerships MENA Forum on 19-20 March at the Nile Ritz-Carlton, according to a Finance Ministry statement.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

Silicon Valley Bank collapse could squeeze dozens of high-profile local startups: The implosion of Silicon Valley Bank (SVB) last week has likely left scores of Egyptian startups without access to deposits they parked at the bank, according to industry players we spoke with yesterday. The collapse of the bank — the second-largest in US history (see sidebar, below) — has left companies across the world, most of them tech startups, scrambling to find the means of meeting payroll and other operational expenses while US regulators try sort out the mess.

SVB was one of the world’s most popular banks for startups and served businesses and venture capital firms across the world, including in Egypt and the MENA region. With some USD 209 bn in total assets and USD 175.4 bn in total deposits, it was the sixteenth-largest bank in the US until last week when a frantic two-day bank run triggered by concerns about its solvency caused it to collapse.

Almost 50 local companies are said to be affected: A list is circulating among local players that includes the names of 46 startups and two VC firms (one of them global) that were banked with SVB, one industry source told us yesterday, on condition they not be named. C-suite officers at four startups declined to comment or did not respond to requests for interviews when we approached them over the weekend.

“I don't have a way to speculate on the number of local startups affected, but I would say it's definitely in the tens. I know of a handful,” Nclude General Partner Basil Moftah tells us, adding that one of eight Egyptian firms in the fintech fund’s portfolio is affected. Acasia Ventures Managing Partner Aly El Shalakany estimates that two or three of the 10 companies in Acasia’s portfolio — which spans startups across the MEA region — banked with SVB, noting that the fund is still in conversations with its startups to assess their exposure to the bank.

Aren’t deposits at SVB insured? Not really. Under US law, the first USD 250k of a client’s deposit with any given bank is insured by the Federal Deposit Ins. Corporation (FDIC), which said it will pay out by Monday morning at the latest. This, though, will come as little consolation for companies that had mns of USD in deposits at the bank who are now unable to access their money and don’t know whether they will get it back. That means north of 85% of the deposits held by SVB are effectively uninsured, according to estimates circulating over the weekend.

JUST HOW BAD IS ALL THIS FOR LOCAL STARTUPS?

If the Fed finds a suitor for SVB fast, this could all go away: The VC players with whom we spoke over the weekend think SVB is most likely to be bailed out through an acquisition by another US bank. “If somebody bails out the bank this weekend, then everything’s back to normal by Monday,” Nclude’s Moftah tells us. “In the history of US bailouts, deposits have always been returned to depositors,” he adds.

The alternative is a lengthier liquidation process — meaning startups could wait months to see their funds. “If they sell the assets, it takes six to 12 months to go through that process,” Moftah tells us. “We will be supporting the one firm in our portfolio that is affected with a bridge round in the event that it is not able to access its deposits,” he adds.

Some are optimistic they’ll get their money back (eventually): “SVB’s assets can potentially cover a big chunk of the depositors’ money in case of liquidation,” Moneyfellows Founder and CEO Ahmed Wadi told us yesterday.

The silver lining: Egyptian firms don’t have credit exposure to SVB. Egypt was never a target market for the bank as far as loans, Moftah said. That means Egyptian firms won’t find lines of credit suddenly put on ice as is the case with startups elsewhere.

A SHORT-TERM CRUNCH-

Right now, startups need to find short-term liquidity — and somewhere else to bank. “The most pressing questions now are for how long startups will have to wait in order to receive their deposits in full — and whether they will be able to pay their employees and keep the lights on until then,” Sylndr co-founder and CEO Omar El Defrawy told Enterprise. Shalakany agrees: “Our expectation is that this will be resolved, but startups need to have a short-term plan to cover expenses, which really means employees first and foremost and making sure that they have either liquidity elsewhere or a line of credit to cover that,” he told us.

For some startups, SVB is likely to have been their sole bank: “The assumption that most startups work with multiple banks and multiple contingencies is completely unrealistic,” Shalakany says, noting that SVB may have been the only bank that would accept some startups as clients because of the risk level and regulatory requirements.

The next weeks will be crucial: “Most of the startups who bank with SVB probably have their operational money and their March payroll or maybe even more to hand,” Moftah says, predicting that liquidity problems could start to become a bigger issue for startups as we enter 2Q.

Layoffs aren’t an immediate threat: “I don’t see layoffs as a big threat at this stage, particularly in Egypt,” Shalakany says. “For those startups who are well capitalized, they may have already made that transfer to meet payroll this month.”

Investors are on hand to help startups find new banks: Acasia is working with its portfolio companies to help them “quickly open alternative banking relationships and get access to short term credit lines to get them through the next few weeks and the end of the month,” Shalakany said.

Egyptian firms may face more challenges than those in other emerging markets to quickly open another bank account or line of credit, Shalakany tells us. “The problem is you’ve got perhaps tens of thousands of customers in exactly the same situation, coming from exactly the same industry, that are all scrambling to do that at the same time. For a lot of non-US-based startups, they don't really have a lot of banking alternatives. From an Egyptian perspective, people offshore because the local banking system does not provide enough support and quality products for SMEs and startups.”

“In the short-to-medium term, there's a lot of uncertainty and fear, but it’s not a doomsday scenario,” Shalakany says. “Our main concern is to work with our portfolio companies as we have always done in times of crisis and to say: Look, it's going to be okay.” Moftah agrees: “It’s a temporary blow — one more thing in a year that’s been pretty challenging overall.”

LESSONS TO LEARN-

SVBs collapse could make MENA firms think twice about banking in the US: “The SVB situation is enough to move the needle a hundred percent for people to say we're not doing US banking anymore,” Shalakany tells us. “I hope it leads to more guidance for startups on how they bank and more sophistication in their banking strategies,” Moftah says..

That presents a chance for the Gulf: “People may want to consider jurisdictions where the regulator or the government has deeper pockets to insure the banking industry,” Moftah adds, noting that 100% of bank deposits are insured in the UAE. “People are definitely thinking twice about being banked in the US now, and that's one of the things that we're thinking about when we're talking to our portfolio,” Shalakany says. “This is a really good opportunity for banks in other markets, including Saudi and the UAE, to get a lot of that business.”

Silicon Valley Bank just became the second-largest bank failure in US history: Silicon Valley Bank (SVB) last week became the biggest casualty so far of surging interest rates, collapsing on Friday following a frantic two-day bank run. The bank — one of the most popular banks for startups in the world — was shuttered by US regulators on Friday, triggering panic not just in Palo Alto, but in the UK and China, Canada and India as startups worldwide faced the prospect of losing bns of USD in deposits.

The story’s Egypt angle: Scores of local startups are believed to have deposits at SVB, as we note above.

How did this happen? Fundamentally, it looks a lot like this:

#1- Startups raised tons of money amid the flood of cheap cash in 2019-early 2022. Hardly a day went by in any market around the world without a tech company touting its latest raise. Most threw the money in the bank, and SVB was the bank of choice.

#2- That means SVB had tons of deposits and wasn’t going to make a ton of money putting it to work in the form of productive loans. That’s fundamentally how banks make money: Take on low-cost deposits, give out more-expensive loans (and tack on a bunch of fees). So SVB engaged in what we in Egypt like to call “treasury operations”: It used those deposits to buy long-dated asset-backed securities and corporate paper — securities it bought when interest rates were at historic lows.

#3- Then the Fed started drawing the era of cheap money to a close, shrinking its balance sheet and (critically) raising interest rates. SVB had tons of cash tied up in long-term, fixed-rate securities — illiquid securities that, if it sold today, would see it losing money: The value of long-term, fixed-rate securities goes down as interest rates go up.

#4- The slowdown in fundraising on Planet Finance prompted plenty of companies to start drawing down their deposits. In simple terms: Less VC cash coming in meant more startups were pulling more money from SVB to finance their daily operations.

#5- SVB decided to raise fresh cash — and announced it before it was completed. Their equity partner pulled out, word spread the bank was in danger, and startups started pulling their deposits, starting a good, old-fashioned bank run. One downgrade from Moody’s on Wednesday (it had previously rated the bank A1) added fuel to the fire, precipitating the collapse of the country’s sixteenth-largest lender in just 48 hours.

The financial markets didn’t react well to the news: Stocks fell worldwide on Friday as investors headed for safe havens amid talk of contagion and further weak links in the US banking system. The S&P 500 came close to turning negative YTD after falling 1.5%, while yields on two-year treasuries plunged 28 bps and gold rose more than 2.0%. Meanwhile, more than USD 70 bn was erased from the crypto markets on Friday, pushing BTC to dip below the USD 20k mark for the first time since January.

Investors are begging for government intervention: Investor Bill Ackman, Y Combinator’s Garry Tan and entrepreneur David Sacks are among those warning of systemic contagion and are calling on the government to act to guarantee deposits immediately.

Must read: Startup bank had a startup bank run, by Bloomberg’s Matt Levine.

The news is dominating the international business press this morning: FT | Reuters | Wall Street Journal | Washington Post | Bloomberg | CNBC | New York Times.

Inflation surged to a fresh high in February on the back of a record increase in food prices amid the ongoing depreciation of the EGP and higher demand going into Ramadan. Figures released on Thursday by state statistics agency Capmas showed that annual urban inflation jumped 31.9% y-o-y in February, up from 25.8% the month before. Inflation is now at its highest since July 2017, when it was running at almost 33%.

This was much faster than expected: Goldman Sachs and Naeem Holding had predicted inflation to come in at around 28%, according to Bloomberg, while the median forecast in a Reuters poll of 14 economists had inflation accelerating to 26.7%.

Monthly inflation at 16-year high: Monthly headline inflation accelerated to 6.5% from 4.7% in January — its sharpest incline since March 2007, according to Bloomberg.

And record core inflation: Core inflation — which strips out volatile items such as food and fuel — stood at 40.3% y-o-y in February, according to central bank data (pdf). That’s the highest core inflation figure since the central bank began releasing the data in 2009, per Reuters. Monthly core inflation jumped to 8.1% from 6.3% in January.

Food price inflation hits record high for second month running: Annual inflation for food and beverages — a key component of the basket used to measure the headline rate — rose further to 61.8%, shooting past the previous record high of 48.0% the month before. Food prices were 14.4% higher compared with the month before, after rising 10.1% m-o-m in January.

Not just the weakening EGP: “Supply disruptions and speculative behavior are clearly playing a bigger role in pushing prices higher rather than a pure reflection of a weakening EGP,” Mohamed Abu Basha, EFG Hermes Holding’s head of macroeconomic research, said in a note. Egypt has already devalued its currency three times over the past year, causing it to lose almost half of its value against the greenback.

The data will add to calls for the central bank to hike rates: The central bank’s Monetary Policy Committee (MPC) is now widely expected to hike rates when it meets on Thursday, 30 March. The MPC kept rates on hold in a surprise move at its last meeting in January, saying it would wait to see the full impact of the 800 bps of hikes it made in 2022 to counter high inflation.

Some analysts are calling a huge rate-hike — possibly in an unscheduled meeting: Goldman Sachs is expecting the CBE to increase interest rates by as much as 300 bps this month in response to the inflation data, according to Bloomberg. “Containing inflation expectations and, in particular, improving domestic FX liquidity to ease chronic pressure on the EGP will require the Central Bank of Egypt to pursue tighter monetary policy in the coming months,” Goldman MENA economist Farouk Soussa said in a report. Meanwhile, Naeem Brokerage thinks the central bank may call an “emergency meeting” ahead of raising rates by 200-300 bps.

REFRESHER- Fresh social support measures land next month. The government will from April raise public-sector wages and pensions and provide tax relief by raising the income tax exemption threshold, part of a fresh round of support to help households handle rising bills. The support program is expected to cost the public purse some EGP 190 bn.

CBE wants advisors for United Bank sale: The Central Bank of Egypt (CBE) has sent investment banks — including “several big Western banks” — a request to pitch for an advisory role in the sale of United Bank of Egypt, Reuters reports, citing two sources it says are in the know. The bank is one of 32 companies in which the state plans to sell stakes in as part of a rebooted privatization program announced last month.

REMEMBER- The CBE — which owns 99.99% of United Bank — was negotiating to sell the lender to Saudi Arabia’s sovereign wealth fund PIF before talks stalled, apparently due to a dispute over valuation. The PIF opened talks to purchase United Bank last year. Bloomberg reported in December that the wealth fund could acquire the lender for USD 600 mn, but the two sides were reportedly not able to agree on how to value the bank following the devaluation of the EGP.

MD says bank is making strides: The lender has recorded nearly EGP 11 bn in profits since it was established in 2006, Chairman and Managing Director Ashraf El Kady told Enterprise. Profits were largely driven by its Shari’ah-compliant products, El Kady says.

Egypt to exit UN grain treaty by end of June: Egypt will withdraw from the multinational Grains Trade Convention (GTC) in less than four months, sparking concern amongst member countries, Reuters reports. Cairo last month gave notice that from 30 June 2023 it will no longer be part of the convention, which came into effect almost 30 years ago to improve cooperation between grain exporters and importers.

Is it about saving FX? The government decided to leave the convention to stop paying the USD-denominated membership fees, especially because it was felt that no benefits have been garnered from membership, a government source with knowledge of the matter told Enterprise on condition of anonymity. Officials from the Foreign Ministry said something similar to Reuters, which reported that the trade and supply ministries reviewed Egypt’s membership in the convention and found it to be of no “added value.”

Egypt apparently owes money to the International Grains Council: Two sources reportedly told the newswire that Egypt owed membership fees to the International Grains Council (IGC), which oversees the convention.

Other members aren’t happy: “This came without prior information. Several delegations within the IGC are surprised and sad about the decision,” Arnaud Petit, executive director of the IGC, told Reuters. Petit thinks that several members are going to ask Egypt to reconsider its decision. Thirty-four grain exporters and importers are currently party to the convention, including some of Egypt’s biggest suppliers.

Egypt was among the earliest entrants to the convention, signing it when it first came into effect in 1995. The country is also a member of the IGC.

REMEMBER- War in Ukraine sent international grain prices soaring last year, forcing Egypt — the world’s largest importer of wheat — to rely more on the local harvest, diversify the source of its imports, and pivot from international tenders to direct purchases on the global markets.

DFIs are lending a hand: Money from the World Bank is helping to fund a series of international wheat purchases while the government is in talks with the European Investment Bank to secure investment to establish a large silo as part of efforts to improve the country’s food security.

Lamees El Hadidi was the only person worth listening to on the airwaves last night, thanks to her recap of the biggest stories over the weekend.

First up, inflation: Kelma Akhira was the only show to spotlight last month’s terrible inflation figures, which saw prices accelerate at their quickest rate in more than five-and-a-half years. El Hadidi discussed what the data might mean for interest rates later this month, noting expectations among some for a huge 300-bps hike. Others believe that an increase won’t be needed, she said, without providing further information (watch, runtime: 5:36).

Egypt’s decision to exit the global grain pact also got some airtime: “According to analyses, we decided to exit the multinational Grains Trade Convention (GTC) seeing that it doesn’t really add much to the Egyptian state,” Assistant Supply Minister Ibrahim Ashmawy told Kelma Akhira (watch, runtime: 9:09). He pointed to a number of other countries who also decided to exit the convention, including those in Latin America and the Far East, without disclosing any countries. Ashmawy also joined Ala Mas’ouleety (watch, runtime: 6:56)

^^ We have the details of both stories in the news well, above.

The anti-crypto messaging is in full effect: One person has been arrested for running an internet scam, where he promised people that they can earn money through the mining of digital currency. This comes hot on the heels of the Hoggpool scam, which stole a combined EGP 6 bn from thousands of Egyptians. The Interior Ministry has arrested some 29 of those involved in the scam, Kelma Akhira reported (watch, runtime: 2:38).

It’s business as usual for Vodafone Cash e-wallets: Vodafone had temporarily terminated operations of a few hundred of its e-wallets due to their direct involvement in the Hoggpool scam, but the rest of its e-wallets are working just fine, Vodafone Egypt’s external relations director, Ayman Essam, told Kelma Akhira (watch, runtime:11:10). “Last week we received a decision to temporarily pause operations on a number of Vodafone Cash e-wallets … as authorities worked to investigate the Hoggpool scam,” he said. Banking expert Mohamed Abdel Aal also joined Kelma Akhira to talk about internet scams and how they spread (watch, runtime: 6:42)

This morning in the foreign press: Markets are concerned about the pace of reform here in Egypt. Concerns over our progress in selling assets, including stakes in United Bank and Vodafone Egypt, coupled with fears of devaluation have pushed Egypt’s debt back into distressed territory, Bloomberg reports. “The market feels that progress on IMF commitments is not at the threshold it needs to be,” said one strategist. “In weak markets, weaker credits suffer more.” Meanwhile, Bank of America says that delays in implementing the IMF program will raise the country’s credit risk, describing its current situation as “tenuous.”

Also making headlines: PEN America is calling on the state to release poet Galal El Behairy, the Associated Press reports, while The National thinks UAE residents looking for an affordable spring getaway should put Alexandria on their list.

TOURISM-

EgyptAir to increase flights to China: EgyptAir will soon start operating 10 flights a week to Chinese cities including Beijing, Hangzhou, and Guangzhou, Liu Yuxuan, the company’s China business development and marketing head, told Xinhua. The flag carrier resumed flights to China on Thursday following a three-year hiatus due to Beijing’s recently relaxed covid-19 travel curbs.

ENERGY-

#1- Another Chinese player wants in on our green hydrogen ambitions: China International Energy wants to establish a USD 5-8 bn green hydrogen facility in Egypt, the company’s CEO told President El Sisi in a meeting over the weekend, according to an Ittihadiya statement. This comes only days after China Energy said it could start working on a USD 5.1 bn green hydrogen facility in May.

#2- US-focused oil and gas company EOG Resources is considering exploring for hydrocarbons in Egypt, company representatives told Oil Minister Tarek El Molla on the sidelines of the CERAWeek energy conference in Houston last week, the Oil Ministry said Thursday. El Molla also met with the heads of several prominent oil companies including Chevron, Apache, Schlumberger, TotalEnergies and Falco Energy Transportation.

STARTUPS-

Investors plan USD 10 mn startup fund: A group of investors with entrepreneurship expertise, including Techne Summit founder Tarek El Kady, plans to launch Alex Fund, a new USD 10 mn startup investment fund soon, Al Mal reports. The fund will invest in companies in various sectors, with a special focus on tech, and will operate for five years.

DEVELOPMENT FINANCE-

UN-Japan grant to support water security: The UN Food and Agriculture Organization (FAO) and the Japanese Embassy signed a USD 3.8 mn grant agreement to increase agricultural productivity and enhance water security, the International Cooperation Ministry said Friday.

Riyadh + Tehran to normalize ties in landmark China-brokered pact: Bitter regional foes Saudi Arabia and Iran have agreed to restore diplomatic ties in a landmark agreement brokered by China. The pact will see the two countries reopen embassies within two months and reactivate a security cooperation agreement, according to a joint statement. The agreement came following four days of talks in Beijing between the three countries. Saudi Arabia and Iran ended ties in 2016 after Iranian protesters stormed the Saudi embassy in Tehran after Riyadh executed a popular Shi’te cleric.

The US was nowhere to be seen: The agreement is another sign of a shifting geopolitical climate in the Middle East, marking China’s emergence as a major player in the region and the US entirely absent from the conversation.

Egypt gives its backing: Egypt’s Foreign Ministry voiced its support for the move and expressed hope that it would improve regional stability.

ALSO WORTH KNOWING THIS MORNING- Bowing to US pressure, Turkey blocks sanctioned goods en route to Russia: Turkey began blocking the transit of US and EU-sanctioned goods to Russia from the beginning of the month without a prior warning. (Bloomberg)