Policy change could see banks paying billions more in taxes

** NEW SECTION: What’s driving the conversation for the government today? We’re launching this morning a new section appearing just before Egypt in the News that dissects the front pages of the nation’s three major state-owned dailies (Al Ahram, Al Akhbar and Al Gomhuria) for cues on the messages being pushed out by the government each day.

Saudi Crown Prince Mohammed bin Salman is scheduled to arrive in Cairo today for meetings with President Abdel Fattah El Sisi, Rep. Mostafa Bakry tweeted yesterday.

The Cairo ICT expo runs today through Wednesday at the Egypt International Exhibition Center. More than 500 companies from 16 countries are set to participate.

Oil prices plunged on Friday, dragging equities lower in a short, low-volume trading day in the US after Thursday’s Thanksgiving holiday. The Dow, Nasdaq and S&P 500 all closed down more than 3% last week. Reuters has more here and here

MbS and Russia’s Putin are expected to reach an agreement on oil prices on the sidelines of the G20 summit in Buenos Aires this week, setting the stage OPEC’s 6 December meeting in Vienna, Bloomberg notes.

Sign of the times #1: October was the worst month for active fund managers in two years, at least as measured by outflows. “Active funds saw USD 46 bn in outflows in October, their worst month since December 2016,” Business Insider reports, citing Morningstar data, while passive funds brought in USD 16.9 bn.

Sign of the times #2: Black Friday pulled in a record USD 6.22 bn in online sales in the United States, CNBC reports, citing data from Adobe Analytics.

Wait, you mean a cashless society isn’t the answer? “Cash is disappearing in [Sweden] faster than anyone thought it would. Now, officials are trying to slow its demise as they determine the societal costs.” At issue: What a cashless society means for young people and oldsters — and how to access money when there’s a power outage or natural disaster. Oh, and then there’s the small question of how the central bank can maintain control through an e-currency. Read more in the New York Times or catch this speech in which Sweden’s central bank governor makes the case for why a state-issued e-currency is necessary (pdf).

Climate change will shave 10% off the size of the US economy by the end of this century: The climate is “changing faster than at any point in the history of modern civilisation” according to a landmark assessment released by the White House. Climate change will result in crop failure, more wildfires, drought and crumbling infrastructure unless drastic action is taken today, the report suggests. Read more in the New York Times or the Financial Times or peruse the report yourself here.

Online shopping is generally better for the environment than driving your mall-crawler to crash sales at your local big box store. But next-day delivery? Not so much, writes Canada’s CBC.

In miscellany this morning:

We’re more fascinated than we should be with the story of an isolated tribe killing a foreign missionary with bows and arrows. The killing took place on a remote island in the Andaman Sea controlled by India as the American tried to land and meet with members of a tribe with which there has been little-to-no contact for centuries, perhaps millennia. Start here with the initial news report and then learn about the islanders’ “history of guarding their isolation.” Explore excerpts from the dead missionary’s last letters as he shuttled back and forth to the island, looking for a way on shore. Then meet the last scholar to really interact (for mere hours) with the tribe, one T.N. Pandit. Should they be left alone? Is it arrogance to bring them, against their will, into the modern age? Paternalistic to guard their isolation?

Regular exercise may keep your body 30 years ‘younger’ –study: “The muscles of older men and women who have exercised for decades are indistinguishable in many ways from those of healthy 25-year-olds,” the New York Times writes.

Disney released the first trailer for its remake of 1994’s The Lion King. You can watch it here (runtime: 1:30).

News circulating over the weekend that Egypt is exporting stray cats and dogs caused a ruckus on the airwaves last night. For context: House Rep. Maria Azer had proposed several weeks ago that Egypt should export stray animals to Asian countries where these animals are consumed as food. A spokesman from the Agriculture Ministry’s General Organization for Veterinary Services denied that the ministry’s role in these exports extends beyond issuing health certificates for the animals, according to Youm7.

The latest (unconfirmed) reports suggest that ‘independent exporters’ are indeed exporting the animals, with the debate now being over whether they’re being sold as pets or for food. Please don’t get us started on whether there’s a country out there interested in importing stray animals from us, let alone whether this is a good idea. That way lies madness.

The alleged export of the animals will have a negative impact on Egypt’s image abroad and ultimately pinch the nation’s tourism inflows, Rep. Mona Mounir said. According to Mounir, the government has already begun receiving messages from foreigners seeking to take legal action to end the practice, which she said is unconstitutional. Animal rights activist Mona Khalil, meanwhile, slammed the discrepancy in reports on whether or not the Agriculture Ministry is spearheading the exports (watch, runtime: 17:24).

Masaa DMC’s Eman El Hosary took the time to encourage better treatment of stray and domesticated animals (watch, runtime: 7:48).

Education Minister Tarek Shawki discussed the launch of a new EGP 200 mn education fund (we have the details in Health + Education, below) on Hona Al Asema, where he noted that the CBE and Religious Endowments Ministry have each pledged EGP 100 mn per annum for the fund. The fund was included in the Madbouly Cabinet’s policy program, which Prime Minister Moustafa Madbouly presented to the House of Representatives, Shawki said (watch, runtime: 7:06 and runtime: 4:06). Former Financial Regulatory Authority Sherif Samy and journalist Ahmed Al Gamal also phoned in to list the various benefits of the fund (watch, runtime: 56:30).

The one-year anniversary of the El Rawda Mosque attack was on Amr Adib’s mind last night. The El Hekaya host tipped his hat to officials who are currently overseeing the development of the town after the incident (watch, runtime: 10:26).

Speculation that Turkey has bugged several countries’ embassies in Ankara in the wake of the Khashoggi murder also had Adib concerned that Egypt’s embassy is under Turkish surveillance (watch, runtime: 3:25).

Banks will pay significantly more taxes under gov’t proposal that they account separately for their investments in state debt: The state treasury expects to net as much as EGP 10 bn in additional taxes from a proposed change to how banks account for their income from government debt, unnamed sources in the Finance Ministry told the domestic press over the weekend. The news comes after the Madbouly cabinet signed off last week on proposed amendments to the Income Tax Act that would force banks and financial institutions to separately account on their income statements for returns from their investments in government.

What’s at stake? A double-digit increase in the effective tax rate for some institutions. Shuaa Securities Egypt ran the numbers on a hypothetical bank (pdf) with income of EGP 33 bn, split as EGP 14.5 bn from investments in treasuries and EGP 18.5 bn from all other activities. If the change is implemented, the bank would have an effective tax rate of nearly 37% against 24% under the system now in effect.

How does this work? In brief: “The proposed new tax method will require accounting for income from Treasuries as part of taxable income, which would result in banks having to reallocate costs to match revenues. The process of reallocation will cause banks’ other operating costs to shrink (theoretically), further amplifying banks’ income from operations (other than Treasuries) and resulting in a higher effective tax rate for banks.”

Is there still room to talk, or is it done? In a research note out overnight (pdf), CI Capital reports that after talks with key bank officials, “we understand that discussions are still ongoing between the MoF and the Federation of Egyptian Banks regarding the mechanism of applying the amendments.” CI Capital says “market chatter” suggests it is unlikely the change in accounting standards would be applied retroactively, meaning “this would not affect current profitability, and make the implementation more feasible, in our view.”

The Federation of Egyptian Banks has made a counter proposal, it said in a statement picked up by Al Mal. According to CI Capital, bankers are suggesting breaking down costs on the income statement in a way that could “render a lower impact, particularly for the more efficient [banks], in terms of an additional tax burden, as opposed to the MoF’s initial proposal, where banks’ total expense-to-income ratios are to be used to calculate treasury costs.”

Maait says this is not a tax increase: Finance Minister Mohamed Maait insists the move is not a tax hike, but rather is fairer (to society and the wider economy, if we’re reading this right) way to go. Semantics aside, Maait added that the amendments were proposed after consultation with banks and the CBE.

Market reaction: Six-month and one-year treasury bill auctions saw low turnout and high yields on Thursday, CBE data showed, signaling a loss of appetite among banks and financial institutions after the cabinet decision. The CBE was looking to raise EGP 9.5 bn at the auction, but accepted bids for just EGP 1.3 bn in one-year T-bills at an average yield of 19.920%, up from 19.778% at the last similar auction. The central bank also accepted bids of for c. EGP 757 mn worth of six-month T-bills at an average yield of 19.893%, up from 19.676% at the last similar auction.

Egypt is on track to record a 2% primary budget surplus in FY2018-19 as state revenues rose more than 35% y-o-y during the first quarter of the fiscal year, outpacing nearly 29% growth in state expenditures in the same period, Finance Minister Mohamed Maait said in a statement (pdf). Tax collection rose nearly 40% in 1Q18-19, with the largest increases coming from VAT and wage taxes. Egypt’s budget deficit narrowed slightly to 1.9% during the quarter, down from 2% during the same period in the last fiscal year, which Maait said last week indicates that Egypt is on track to meet its budget deficit target of 8.4% for FY2018-19. Reuters also has the story.

Smart policy: Giving incentives for birth control: China’s (flagging?) two-child policy could never fly in Egypt for cultural and religious reasons, so the government is turning to economic incentives: Starting January 2019, families enrolled in the Takaful and Karama welfare programs will be able to claim cash benefits for a maximum of just two children, Prime Minister Moustafa Madbouly said on Thursday. This will allow the government to expand access to the program to more families, he added. “It is unfair that larger families take the lion’s share of cash subsidies,” Madbouly stressed, noting that the move would make the subsidies program more efficient. The government had allocated funding to population control programs, including its “Two is enough” campaign to incentivize people to practice birth control.

The one subsidy the government won’t touch? Bread. One day after Madbouly’s remarks on the future of the Takaful and Karama programs, Finance Minister Mohamed Maait told Al Ahram that the government has no intention of cutting back on bread subsidies, “regardless of the cost.” The Supply Ministry is reportedly looking to begin switching to a cash subsidy system for subsidized bread as early as 1Q2019, ministry sources said earlier this month. Social Solidarity Minister Ali El Moselhy had met previously with bakers of subsidized bread to look into a new system whereby subsidy recipients would receive cash handouts, rather than points on their ration cards with which to purchase bread.

IPO WATCH – No Eastern Tobacco stake sale until the market stabilizes, says EFG: The state will not proceed with the sale of an additional 4.5% stake in the Eastern Tobacco Company on the EGX until the market stabilizes, EFG Hermes’ Investment Banking Co-Head Moustafa Gad told Masrawy. Gad acknowledged that the company’s share price has improved from its October plunge, but stressed that the investment bank — which is managing the transaction — has advised the government against moving ahead with the sale until market conditions ensure a successful offering. Public Enterprises Minister Hisham Tawfik had said last week that the transaction is “in the offing” but that his ministry would discuss the matter with EFG. Regulations for the state privatization program bar any company from proceeding with a stake sale if its shares rise or fall beyond a threshold of 10% of its average value in the month preceding the transaction.

Background: The government had announced last month that the transaction — which is expected to pilot the privatization program — had been put on ice “indefinitely” after Eastern’s share price plunged 11.5% in one week, pressured by the wider emerging market selloff, a high interest rate environment, a looming trade war, and the introduction of protectionist measures in various countries.

IPO WATCH- Giza Systems to list 35% of shares next year as it looks to Africa expansion: B Investments portfolio company Giza Systems is planning to list 35% of its shares on the EGX at the end of 2019, an unnamed source told the domestic press on Thursday. The move would see B Investments partially exit some of its 68.04% stake in the company, the source added. Giza will use some of the proceeds from the IPO to fund its expansion into Africa, which will begin next year with the earmarking of USD 5-7 mn for acquisitions in West Africa. The company has yet to tap an advisor for the transaction, but the unnamed source said CI Capital was the frontrunner for the mandate.

INVESTMENT WATCH- Swvl valued at USD 100 mn in series ‘B’ funding round? Mass transit app Swvl raised “tens of mns of USD” in Series ‘B’ funding from new and existing investors, CEO and co-founder Mostafa Kandil told Reuters on Thursday. While he did not disclose size of the round or name investors, Kandil said it brought the company’s valuation close to USD 100 mn. Swvl had set a record for a series ‘A’ round in Egypt back in April when it raised USD 8 mn.

Company eyes expansion in Southeast Asia in 2019: The startup is looking to expand into Southeast Asia next year following the Series B, said Kandil. Swvl is planning to launch in Manila in 1Q2019 followed by the Philippines, Vietnam, and Thailand, Kandil said. The company is targeting seven “mega cities” in emerging markets by the end of 2019, he added. “We are seeing ourselves as more of an emerging markets play and hence we want to expand beyond the Middle East,” he said.

EARNINGS WATCH- Integrated Diagnostics Holdings (IDH) reported a 26% y-o-y increase in net profits to EGP 356 mn in 9M2018, according a regulatory filing (pdf). The consumer healthcare company’s 9M2018 revenues were up 25% y-o-y to EGP 1.38 bn. IDH’s focus on marketing efforts and test mix has “seen us extract higher value from increasing patient and test volumes,” which has allowed the company to deliver “outstanding profitability” despite of operating challenges, including double-digit inflation, devaluation in Sudan, and investment costs associated with growing and integrating its newly acquired Nigerian operation the company’s platform, said IDH CEO Hend El Sherbini.

Suez Canal Authority pulls land from “non-serious” investors: The Suez Canal Authority has amended several previously agreed contracts with companies operating in the Suez Canal Economic Zone (SCZone), withdrawing land from “non-serious investors,” authority head Mohab Mamish said in a statement picked by Ahram Gate. The statement singled out two companies by name, including one that lost some 260k sqm of land and another that will pay nearly 7x more for land than previously agreed.

MOVES- Maait appoints new assistant ministers for fiscal policy, economic justice: Finance Minister Mohamed Maait tapped yesterday Yomna Akram Khattab (bio) as assistant minister of finance for fiscal policy and Mai Farid (bio) as assistant minister of finance for economic justice, Al Mal reports. Khattab was previously senior economist and deputy director of the macro-fiscal policy division at the ministry, while Farid was the executive director of the ministry’s economic justice division.

FRA to look into Beltone’s appeal tomorrow: The Financial Regulatory Authority (FRA) will hold tomorrow a hearing to look into an appeal by Beltone Financial against the FRA’s six-month suspension of its investment banking arm, sources said, according to Al Mal. The hearing was postponed from last week the request of Beltone’s legal advisors, who wish to further review the documents. Beltone filed the appeal earlier this month, and has also taken to an administrative court a request to stay proceedings until the case is resolved. The court rejected the latter request, and had instead scheduled an ‘urgent hearing’ on Saturday, 1 December in which the parties will each present documents pertaining to the suspension.

House discussion of zero tariffs on EU car imports: The House Industry Committee will discuss this week Egypt’s agreement with the EU to cut to 0% import duties on EU-assembled cars as of 1 January, 2019, Rep. Farag Amer tells Al Masry Al Youm.

Also in the pipeline:

• Amendments to the Real Estate Registry Act will be introduced in the House this week;
• Egypt and Ethiopia will start talks within two weeks on “unresolved” issues stemming from the Grand Ethiopian Renaissance Dam (GERD);
• The government is due to announce “soon” the date of its first auction of up to 10 mn sqm of ‘unused’ state land;
• Cabinet is set to “soon” unveil a comprehensive development and infrastructure strategy for Sinai.
• Consumer finance event: The French Chamber of Commerce and Industry is hosting a panel discussion on consumer finance on Monday, 3 December from 6-8pm at the Fairmont Hotel Nile City

The front pages of the country’s three state-run newspapers this morning feature stories relating to Egypt’s reform program and improving economic conditions. Al Gomhuria’s lead story is Prime Minister Moustafa Madbouly’s speech yesterday reassuring foreign business figures and diplomats that the economy has weathered the storm, while Al Ahram hits on the Supply Ministry’s attempted reform of the subsidy system and the financing of the new administrative capital. Al Akhbar is running with a feature on the challenge population growth poses to Egypt’s economic recovery.

Topping coverage of Egypt in the foreign press this morning is the discovery of a 3,000-year-old tomb in Luxor.  Egyptian and French archaeologists unearthed a pharaonic tomb in the Theban necropolis of Al-Assasif housing mummies of a priest and his wife dating back to the 13th century, Antiquities Minister Khaled El Enany announced yesterday at an unveiling ceremony. The tomb contained five colored masks, some 1,000 ushabti statutes, as well as mummies, skeletons and skulls dating back to the middle-kingdom period. Reuters, AP, DW and AFP followed the story.

Are we about to witness a slowdown in US Fed rate hikes? The Federal Reserve’s top two officials said slower global growth is posing risks to the US economy, according to Bloomberg, prompting traders to expect fewer rate hikes in 2019. Many still believe a hike will take place in December, but expect the Fed to give global markets a breather or two in the coming year (watch, runtime: 1:13). Rising US rates throughout 2018 took their toll on not only emerging markets, but the entire global economy. A slower pace of rate hikes may just be what is needed to revive global markets.

Egypt and China agree to step up military cooperation: Armed Forces Chief of Staff Mohamed Farid and China’s State Councilor and Defense Minister Wei Fenghe agreed during a meeting in Beijing on Thursday to hold more frequent joint training, drills, and security visits between Egypt and China, Xinhua said on Thursday.

Nasr proposes joint Arab investment council in Beirut forum: Investment and International Cooperation Minister Sahar Nasr discussed a plan to establish a joint Arab investment authorities council with Investment Development Authority of Lebanon (IDAL) head Nabil Itani during a meeting in Beirut on Friday, according to a ministry statement. The council would include the General Authority for Freezones and Investment, IDAL, Kuwait’s Arab Investment and Export Credit Guarantee, and Dubai FDI.

Several US oil companies have expressed their interested in developing Egypt’s offshore oil and natural gas resources and are expected to bid in the sale of exploration blocks in the Red Sea, Oil Minister Tarek El Molla said yesterday, without naming specific companies, according to Reuters. An exploration and production tender for oil and gas in offshore concession blocks in the Mediterranean is due to close on 29 November, while a second bidding round for concession areas in the Red Sea is scheduled to open before the end of year.

The Industrial Development Authority (IDA) has postponed its tender of 11 mn meters of industrial land to investors to 2019 due to conflicts with the New Urban Communities Authority over the jurisdiction of the land, an unnamed source told Youm7. The IDA had planned to tender 11 mn meters in each of 2018 and 2019, but now expects to offer 21 mn meters next year.

The General Authority for Supply Commodities (GASC) purchased 240k tonnes of wheat in an international tender on Thursday for delivery between 10-20 January, according to Reuters. The lowest offer came from US-based Cargill, at USD 221 per tonne FOB. GASC purchased 120k tonnes from US suppliers and 60k tonnes each from Russian and Romanian suppliers. Separately, the authority has yet to decide on a winning bid in Egypt’s first international rice tender, despite a 20 November due date, according to Reuters India.

The military production and public enterprises ministers met on Friday with representatives from China National Tire & Rubber Corporation (CNRC) to discuss establishing a factory to locally manufacture tires, according to a Public Enterprises Ministry statement (pdf). The factory would manufacture tires for tractors, passenger vehicles, buses, and trucks for domestic and export markets.

The government is planning to launch a EGP 200 mn education fund that will be used to finance upgrades and development to Egypt’s education system, Planning Minister Hala El Said said on Wednesday, according to AMAY. The fund will focus on hiring new teachers, expanding the number of classrooms and making upgrades to existing facilities, she said. The government plans to raise the capital of the fund to EGP 1 bn before the end of the fiscal year in June, she noted. The move comes as Egypt rolls out a newly reformed K-12 education system this school year.

Construction and Design (CONSTEC) was awarded contracts worth EGP 430 mn for construction works on SODIC’s projects in the North Coast and New Cairo, which includes SODIC’s Caesar compound in the North Coast, CONSTEC General Manager Ashraf Abdel Hakam told Al Masry Al Youm.

Egypt and Serbia are in talks to schedule additional flights from Belgrade to Hurghada, Al Shorouk reports. Red Sea Governor Ahmed Abdallah and representatives from local tourism companies are set to visit Serbia soon to promote tourism and launch new charter flights between Belgrade, Hurghada and Marsa Alam.

Vodafone Egypt is planning to invest EGP 4.5 bn in fiber optics infrastructure by March 2019, Vodafone Egypt CEO Alexander Froman said, according to Al Masry Al Youm. We had noted in December that the company is planning to increase its investments by 10% over the following three years to meet rising demand in the market and to spend on building up infrastructure.

House Economic Committee member Amr El Gohary is not happy at the prospect of taking on more loans to finance the Alamein-Ain Sokhna high-speed electric rail project, the construction of which he tells Al Mal should be funded through local and foreign investments. China had pledged USD 1.2 bn to help finance the EGP 70 bn project back in July.

EFG Hermes Leasing is planning to make a EGP 300 mn securitized bond issuance “in the coming days,” EFG Hermes Finance CEO Walid Hassouna tells Al Mal. CIB and Banque Misr will sign on as guarantors of the issuance, he added. The move is part of a securitized bond issuance plan that would see EFG Hermes Leasing issue bonds every six months at various amounts. EFG Hermes subsidiary Tanmeyah Microfinance is also planning to make a securitized bond issuance some time in 1H2019, noted Hassouna.

The General Court of the European Union upheld a Council of the European Union ruling on Thursday to freeze the assets of family members of former Egyptian President Hosni Mubarak. "The General Court upholds the Council’s decision to freeze the assets of members of the Hosni Mubarak family, on the basis of judicial proceedings relating to misappropriation of Egyptian State funds," the court said in a statement (pdf). Gamal and Alaa had been briefly arrested in September over allegations of stock market manipulation, causing the EGX30 to drop by 3.6%.

Amnesty International’s allegations on the torture of children in Egypt is not based on "tangible evidence and lacks accuracy," the State Information Service (SIS) said in a statement on Thursday. The organization had published a statement on Wednesday accusing Egypt of disregarding basic children’s rights for subjecting six children “to horrific violations including torture, prolonged solitary confinement and enforced disappearance.”

The Finance Ministry has settled 65 tax disputes with QNB Al Ahli worth EGP 100 mn, which the bank has paid, Al Mal reports. The disputes primarily involved stamp tax payments dating back 20 years. The ministry waived 90% of delay penalties and additional fines for QNB as part of the agreement, reducing the bank’s settlement amount to EGP 100 mn from EGP 192 mn.

Egypt, Greece, and Cyprus will be holding a multi-day joint naval and air force exercise in Crete, according to an Armed Forces statement. The joint exercise, Medusa 7, will include trainings on naval and air combat maneuvers, as well as drills focusing on the security of offshore natural gas platforms.

Greco-Roman wrestler Mohamed El Sayed brought home a gold medal from last week’s Senior U23 World Championships in Bucharest, according to the tournament’s website. El Sayed is the first since 2006 to win a wrestling gold across all age, weight, and style groups. Wrestler Ahmed Hassan also snatched a bronze medal at the event.

National football team coach Javier Aguirre has said it “may be better” for Mohamed Salah to leave Liverpool sooner rather than later if the Premier League club does not start winning trophies, ESPN reports. Liverpool boss Jurgen Klopp shrugged off the comment, saying at a presser that he “obviously” doesn’t agree, and suggested that Aguirre is in more dire need of scoring a title. “I don’t know why people say things like that,” “obviously I don’t agree,” Liverpool’s boss Jurgen Klopp said at a presser, commenting on Aguirre’s statement.

Egyptian two-time Olympian Reem Abdalazem has been tapped by USA Synchro as an assistant coach for the US’ national swimming team, according to Swimming World Magazine.

Hip-hop singer-songwriter Jason Derulo was in town over the weekend to perform at a concert and did not miss the chance to take some pictures at the pyramids. This was Derulo’s first time performing live in Omm El Donia.