Don’t expect capex spending to pick up this year, no matter what happens on Thursday

As many as 17 people were injured yesterday after an explosive device hit a touristbus near the Grand Egyptian Museum, the Associated Press reports. Security sources speaking to Reuters placed the figure at 12. Most of those hurt were South African tourists. No deaths have yet been reported. It was the second time this year a tourist bus has been targeted near the Giza Pyramids; an attack in January left three Vietnamese tourists and an Egyptian tour guide dead.

The story is dominating coverage of Egypt in the foreign press this morning: Bloomberg | BBC | CNN | RT | Deutsche Welle | Wall Street Journal | New York Times.

We’re not the only ones set to leave interest rates on hold this week. Israel, South Africa, Nigeria and Zambia are all expected to do the same, Bloomberg suggests. All 12 analysts we surveyed in our rate poll (out yesterday) expect the Central Bank of Egypt to leave interest rates on hold thanks to expected inflationary pressure from Ramadan and cuts to energy subsidies expected by July. Look for the central bank to resume easing in the fourth quarter.

Franklin Templeton’s Bassel Khatoun has nice things to say about us… “We remain positive on Egypt. The country has been reaping the benefits of having implemented a significant reform agenda and a massive currency devaluation,” the fund’s MD of portfolio management for frontier and MENA told Zawya. “Fiscal consolidation, supported by subsidy cuts and more comprehensive tax revenues, have restored confidence in its medium-term outlook,” he said.

…but don’t expect EM investors to rush in and buy the dip, Bloomberg warns, even though the MSCI emerging markets stock index was down 3.6% last week: “‘Some interesting opportunities are beginning to present themselves in some spots of the EM universe, but over the coming weeks it feels like caution is warranted,’ said Paul Greer, a London-based money manager at Fidelity International, whose emerging-market debt fund has outperformed 98 percent of peers this year after reducing risk in recent months.”

Outflows of capital from emerging markets spiked last week to their highest level since the EM Zombie Apocalypse last October, the Institute of International Finance (IIF) warned in one of its occasional “flows alerts” (pdf), which drills into estimated daily capital flows. EM equities were particularly hard hit, with China (daily outflows of about USD 600 mn daily heading into 15 May) and other Asian markets taking the brunt.

There could be something for us in Trump’s embryonic Mideast peace plan. The US will convene an “economic workshop” in Bahrain next month “to produce strategies to invest in the Palestinians and other Arabs,” the New York Times writes. The basic concept: Get Gulf, European and Asian powers to use economic incentives to “induce the Palestinians and their allies to make political concessions” to secure peace between Palestine and Israel. The kicker: “Diplomats and lawmakers have been told the goal is [to secure pledges of] about USD 68 bn for the Palestinians, Egypt, Jordan and Lebanon.”

We might be the HQ for the pan-African trade agreement: Egypt has submitted a bid to host the executive office of the African Continental Trade Agreement, according to African Union legal adviser Nameerah Najm, Ahram Online reports. The accord has been signed by 22 African countries and will come into force later this month.

ESG investing is going mainstream because fund managers say their clients want it, and “more than a third of an audience of asset managers and pension funds attending MSCI’s annual investing conference in London last week said they expected to see the share of global assets operating on ESG principles to more than double from about 25 per cent today to between 50 and 65 per cent in the next five years,” the Financial Times notes.

Also worth knowing about this morning:

• “If Iran wants to fight, that will be the official end of Iran. Never threaten the United States again,” The Donald tweeted overnight. The US president’s warning came as Saudi Arabia ratcheted up the rhetoric and as a rocked fired into Baghdad’s so-called Green Zone landed not far from the (largely evacuated) US embassy. (Reuters)
• Brent crude edged up 1.3% overnight after KSA’s oil minister suggested global supplies are “plentiful” and inventories need to shrink. (FT | Reuters)

What We’re Tracking Today, the Ramadan edition:

The olds among us may now bemoan the decline of civilization as we know it: Top ‘live-streamers’ get USD 50k an hour to play new videogames online, the Wall Street Journal reports in a story that can hardly qualify as newsworthy if you (a) are under the age of 40 or (b) have a kid older than age six.

A pre-iftar reading list to kill time between your post-workout shower and the breaking of the fast:

• Guess what, dads? We’re not as “involved” as we think we are. Listen to the Weekend Edition Sunday audio story (runtime: 6:37) and read the companion piece on NPR.com (both linked here) and then head over to the NY Times for the op-ed What good dads get away with.
• The global internet is disintegrating. What comes next? from the BBC is worth a read even if you’re not the type who lives on the interwebs. Bottom line: Countries who a decade ago didn’t want an open internet have had more than a little success figuring out how to “put a wall around their corner of cyberspace.”
• It’s not easy to grow a certain substance that has been legalized in Canada, a middle-aged journalist found when he borrowed a state-of-the-art weed machine. It’s a piece worth reading not just because it’s entertaining, but because it underscores just how mainstream pot has become even for non-potheads. (Globe and Mail)

Tired of Gouna? Not ready to open your place in Sahel? Head to a new corner of Europe for Eid vacation. We have very, very fond memories of Zagreb (here and here in the NYT) and Prague (here in the WSJ).

The NPS cult sweeping corporate America: US execs are becoming obsessed with their net promoter score (NPS) with 50 S&P companies mentioning the metric more than 150 times during earnings conference calls, the Wall Street Journal says. Use of NPS has grown rapidly over the past decade; it measures customer experience and is assessed through a one-question survey: How likely is it that you would recommend [brand] to a friend or colleague? Many CEOs are now holding up NPS as a key performance indicator and use it to calculate bonuses, much to the chagrin of its creator Fred Reichheld, who describes the practice as “bogus.”

RAMADAN PSA- Bank hours are at 9am-2pm for employees; doors are open from 9:30am until 1:30pm for customers. The trading day at the EGX runs 10:00am until 1:30pm.

So, when do we eat? Maghrib is at 6:44pm CLT today in Cairo. You’ll have until 3:18am tomorrow morning to caffeinate / finish your sohour.

WEATHER- The mercury starts to rise today. Look for a daytime high of 37°C rising to 45°C on Thursday.

EXCLUSIVE- With interest rates likely to be left on hold this week, don’t expect a pickup in capex spending this year. The central bank’s 100 bps cut in February was a step in the right direction, but was nowhere near enough to spur capex spending by a business community stuck in a high interest rate environment since late 2016. The business community (pdf) and 12 top analysts in our recent rate poll (pdf) all see the CBE as unlikely to resume cutting before the end of the year.

Still too soon to see a capex lending uptick: “It is still too early; for business borrowing to pick up we need at least a 1% or 2% cut so we can start to see this happen,”said Allen Sandeep, head of research at Naeem Brokerage. “And when it happens, it will be gradual because there are other factors for businesses to consider, like the coming elevation of fuel subsidies, which will impact demand that is already slow. I expect business activity to be slow-growing until the end of 2019.”

It will take significant cuts to encourage a sustained capex lending cycle: “We believe it won’t be before further meaningful cuts in interest rates for lending activity to show significant growth again,” said Monsef Morsy, co-head of research at CI Capital. “This would give the market an indication that we have passed the current bottleneck period and that we have a direction and continuation, and thus erase concerns over volatility,” Morsy said.

Utilization levels across the board need to rise as well: “We don’t expect capex lending to significantly rise this year, but what we would see is a pick-up in working capital lending,” Morsy added. Many plants aren’t at 100% utilization and won’t think about expansion until they get closer, he said. “However, we can see maintenance capex lending because a lot of companies have been underspending on capex since 2011,”

So is it right to leave rates on hold in anticipation of an inflationary bump? No, says Sandeep. “Egypt still has a big trade deficit because imports are high and there is little import substitution. Business needs to pick up to fill in this gap, but the high interest rates and opportunity cost for foreign and local investors is still a barrier and that’s why non-oil FDI is still low. Cutting interest rates will encourage more investment, which will help bridge this gap,” Sandeep said. “The government’s reforms have built a good base for businesses; now easing the monetary cycle is the awaited step to conclude this reform program. It is a gradual process that takes time.”

EXCLUSIVE- FinMin expects subsidy spending to come in EGP 13 bn below budget this fiscal year thanks to lower oil prices: The Finance Ministry has revised downwards to EGP 315 bn from EGP 328 bn its total subsidy expenditure forecast for the current fiscal year, two senior officials told Enterprise. The downward revision comes as the average price of crude in the first six months of the current fiscal year fell below the USD 67 / bbl set in the budget.

The drop in oil prices bolstered government finances, allowing the Finance Ministry to offset higher wage costs — which have been revised upward by EGP 4 bn to EGP 270 bn for 2H2018-2019 — and rising food prices. The need for additional borrowing has been reduced and the target for interest payments by the end of the fiscal year remains unchanged at EGP 541 bn. Lower oil prices also allowed the government to allocate EGP 88 bn for commodity spending during 2H2018-2019, or about EGP 1 bn more than originally budgeted.

FinMin sets aside EGP 68.2 bn for ‘rainy day’ fund in FY2019-2020: The ministry has for the first time set aside EGP 68.2 bn in contingency funds to hedge against the effect of any sudden upticks in global commodity prices or average interest rates in the FY2019-2020 budget, according to a document seen by Enterprise. The move comes as Egypt faces a substantial debt service burden. The funds include EGP 32.2 bn for energy subsidies and EGP 21.2 bn for public wages, with the remainder reserved for unexpected goods, services, or investment needs. “The provision [for a contingency fund of this size] is brand new,” a government official told us, pointing out that the government only set aside EGP 11 bn in the current fiscal year.

Ghabbour says gov’t lacks vision for the automotive industry: The Madbouly Cabinet’s economic group has made it clear that it wants to come up with a strategy to encourage automotive manufacturing in Egypt, but it’s being held back by a lack of vision for the sector, GB Auto Chairman Raouf Ghabbour tells Al Masry Al Youm in a high-profile interview. Ghabbour suggests the industry is being held back by policymakers who need to understand what goes into building an industry from the ground up.

Any successful program for the industry must begin with protecting the investments we already have. That entails amending existing laws to make auto assemblers and manufacturers able to compete with products imported under trade agreements, Ghabbour says. This protection should then be offered in exchange for domestic players meeting certain requirements, including increasing the percentage of domestic components they use, exporting more, and investing in research and development to continuously improve quality. Locally produced vehicles must be given a significant price advantage and domestic manufacturers should be granted a package of incentives such as those offered in countries whose auto industries have flourished, such as Turkey and Morocco.

What does Egypt have to gain from building up its auto industry? By Ghabbour’s calculations, if locally produced cars hit a 50% domestic component requirement within 10 years’ time, Egypt could save some USD 11.25 bn per annum. That figure is based on the assumption that our spending on imported components would reach around USD 22.5 bn in 10 years without the industry strategy. Using the same math, Ghabbour says the industry could also generate USD 5.6 bn in hard currency flows per year if around half of the industry’s output of manufactured vehicles is exported by that time. That’s to say nothing of the jobs that would be created in the process of building up the industry, he notes.

INVESTMENT WATCH- UAE’s Al Fahim, Zurich Capital to invest USD 500 mn in Egypt: The UAE’s Al Fahim Group will partner with Zurich Capital Funds Holding to invest USD 500 mn in Egypt, according to the local press. The two are looking at opportunities in tourism, real estate and finance sectors, among others. No further details on the planned investment or the structure of the partnership were provided. Al Fahim Group currently operates in the automotive, hospitality, industrial, property investment, and tourism industries in the UAE.

M&A WATCH- Bank Audi, NBG seeking central bank signoff on sale: Bank Audi and the National Bank of Greece (NBG) plan will seek Central Bank of Egypt signoff within two weeks on a transaction that would see Audi acquire NBG’s operations in Egypt, Al Shorouk reported. Bank Audi announced earlier this month that it would acquire National Bank of Greece’s Egypt arm, including a book of “mostly of Egyptian-risk loans, deposits and securities (total assets of c. EUR 110 mn), a branch network of 17 branches and c. 250 employees.” NBG decided to exit the market last year as part of a wider plan to reduce its overseas presence under an EU-supervised restructuring.

Industrial output rises by more than a quarter in 3Q2018: Egypt’s non-oil industrial output jumped 27.6% in 3Q2018 to EGP 185.3 bn, up from EGP 145.3 bn in the same quarter last year, according to a CAPMAS release. Steel products accounted for 20.8% of overall output. Food manufacturing came in second at 16.1%, followed by chemicals, fertilizers, and synthetic fibers at 15.5%.

EARNINGS WATCH- SODIC profits dip in 1Q2019: SODIC’s 1Q2019 net profits fell 24% y-o-y to EGP 161 mn from EGP 211 mn, the real estate developer said in its earnings release (pdf). Revenues rose 84% to EGP 941 mn from EGP 512 mn last year. The company’s net contracted sales fell 26.5% to EGP 881 mn from EGP 1.2 bn in 1Q2018 on the back of limited new launches. A large amount of cancellations in January pushed the cancellation rate to 12% of gross contracted sales during the quarter.

SODIC is targeting EGP 7.2 bn of contracted sales this year as Al Yosr plot in West Cairo is comes into the company’s pipeline. The high-profile developer plans to deliver some 1,151 units across 10 projects with an estimated value of EGP 5.1 bn which is expected to boost revenue growth by 38% this year, driven by deliveries at Vilette.

The foreign press is squarely focused this morning on the attack on a tourist bus near the Grand Egyptian Museum, as we note in What We’re Tracking Today, above.

Diplomacy is the order of the day in Egypt’s state-owned dailies: A meeting between President Abdel Fattah El Sisi and Canadian Senate Speaker George Furey yesterday tops the front pages of Al Ahram, Al Gomhuria, and Al Akhbar this morning. Furey and El Sisi discussed Canada’s support for Egypt’s economic and social development, according to an Ittihadiya statement. Furey also met House Speaker Ali Abdel Aal, Ahram Online reports.

Shameless Canadian plug on the occasion of Victoria Day: Canada’s abstract, distant and remarkably successful monarchy.

A deep dive into the state of fintech in Egypt: Egypt’s burgeoning fintech scene could spur growth by helping bring more people and businesses into the formal economy, writes Yasmeen Nabil in Wamda. Earlier this year, the government set up a EGP 1 bn (USD 57 mn) fund via the Central Bank of Egypt (CBE) and the International Finance Corporation launched a two-year program for fintech startups. Incubators including Algebra and Flat6Labs consciously target the fintech sector, and EFGEV — a dedicated fintech investment incubator run by EFG Hermes and Egypt Ventures — plans to invest in more than 30 fintech-focused startups in the coming five years. The CBE is also reportedly working on a three-year strategy that includes connecting investors with entrepreneurs and establishing a regulatory sandbox to test the environment for regulations, in alignment with regional best practice.

Driven by need and opportunity: Financial inclusion helps to reduce poverty and spurs growth, but according to the World Bank Global Findex database, only 14% of adults in the Middle East had a bank account as of 2014. The mobile penetration rate in Egypt, however, is an estimated 102% and the country has some 28 mn smartphone users, not to mention a population of 100 mn (and growing). The IMF has estimated that boosting financial inclusion could add 1% to GDP in the MENA region, with fintech offering the most significant growth avenue.

But the young sector faces challenges: Fintech Middle East has identified around 40 players working in the sector in Egypt, including 16 startups, 10 of which they regard as highly promising. But while e-payment provider Fawry has some 20 mn customers, other fintech startups continue to struggle. Challenges include the high transaction fees imposed on e-payments by banks and payment gateways, regulatory and infrastructure problems (including poor network coverage), and a lack of fintech awareness on the part of both SMEs and individuals. Some of these challenges are being addressed: the CBE issued new regulations for cashless payments using smartphones in 2016 to enable customers to transfer money and pay bills, and in 2017 a National Payment Council was established to encourage the move to cashless payments. However, it has been suggested that a clearer and more accessible regulatory structure is needed to encourage widespread adoption. Raising awareness of fintech is also critical to counter the cultural preference for cash payments.

3D-printed town to house 50 families in South America: The world’s first 3D printed town will be constructed this summer in Latin America to house 50 farmer and palm weaver families living on less than USD 200 a month,this Bloomberg video tells us (watch, runtime: 0:52). The structures will be built using a portable machine able to print and complete homes in under 24 hours using locally-sourced materials. H/t Haitham A.

Egypt has bought 2.2 mn tonnes of local wheat since the start of the season in April, Supply Minister Ali El Moselhy said, according to Reuters’ Arabic service. Moselhy previously said that he expects to procure 3.6 mn tonnes of wheat from local sources this year.

Suez Cement has decided to temporarily suspend the operations of Tourah Portland Cement Company, of which it owns 66.12%, on the back of “deteriorating financial results and the accumulated losses” at the subsidiary, the company said in a statement (pdf). Suez did not say when operations would resume, but said losses were “exceeded the value of the shareholders' equity.”

The Arab Organization for Industrialization (AOI) has signed an MoU with India’s Vehant Technologies to cooperate in improving security and surveillance systems in Egypt, according to a statement. The agreement will see Vehant transfer its technical know-how and help increase domestic production of security systems.

Dubai-based e-marketing platform ArabClicks has expanded into Egypt, according to a company press release published by Zawya. The Dubai-based company works with e-commerce companies, online content publishers, and social media personalities to bring in “revenue through online links without disturbing the website users,” said CEO Mauro Romano. Egypt is home to some 48 mn internet users, the largest market in the MENA region.

Online ticket-booking company Tazkarti has launched a platform for fans to secure seats at the upcoming Africa Cup of Nations matches, Ahram Online reports. Football enthusiasts will have to sign up for a fan ID to attend the tournament, which is slated to kick off this June. This will be the fifth time Egypt has hosted the tournament.

We have a next-gen leader in our midst: Egyptian musician Dina El Wedidi has made it onto Time Magazine’s list of next generation leaders for her experimental compositions and socially-conscious lyrics.

Former Al Jazeera English Cairo bureau chief Mohamed Fahmy has been tapped as the CEO of London-based The Investigative Journal, an online publication that launched last year, according to Vancouver’s City News. Since its creation, the publication has “exposed evidence of cyber-espionage in Qatar, as well as collusion between ISIS and the Turkish government,” and currently employs several journalists who “have been either kidnapped, prosecuted or jailed while doing their job,” Fahmy says.