The Fed’s emergency rate cut landed with a thud, but it’s good news for Egypt

It was a return to normalcy on the EGX yesterday following Sunday’s tumultuous trading session and Monday’s half-hearted rebound. The same could not be said for the markets across the Atlantic though (more on this below).

But first, your daily dose of news on El Corona:

CORONAWATCH- Health Minister Hala Zayed announced that 1,832 individuals tested for covid-19 had all come back negative. The announcement came during a press conference at the Egyptian embassy in China, Al Masry Al Youm reports. The majority of those tested were at Khalda Petroleum, where an oil engineer had tested positive for the virus. She added that no further cases in Egypt have yet come to her ministry’s attention.

We’ve received 1k covid-19 detection kits as a gift from China, Zayed said. Zayed on Sunday flew to China with medical supplies as a gesture of goodwill.

Keep an eye on the Health Ministry’s Facebook Page, where Zayed has suggested she and officials on her team will provide video updates on the coronavirus situation in Egypt.

The cabinet economic committee met yesterday to discuss the impact of the virus on the economy. The statement from the cabinet does not go into detail, but notes the government discussed preparedness measures and received reports on how covid-19 is impacting markets and economies the world over.

The government is kicking off awareness workshops tomorrow for educators to teach them about how to prevent the spread of infection and what to do with a suspected case. The workshops will be organized by the education and health ministries and Al Azhar, according to a cabinet statement.

Covid-19 fears have been shrinking exports from Egypt’s freezones and investors are calling on the government to offer incentives for them to enter alternative markets, the local press reports, citing remarks by an industry group saying export sales had dipped in the past two months thanks to the virus and that it expects further contraction in the “coming period.”

The Trade Ministry will be authenticating certificates of origin for Chinese goods held in Egyptinan ports since the outbreak of covid-19, in place of the Egyprian embassy in China, the local press reports.

Kuwait has not stopped issuing visas to Egyptians, but it is denying entry to Egyptian nationals who do not have a certificate verified by the Kuwaiti embassy in Cairo certifying that they have tested negative for covid-19 on polymerase chain reaction (PCR) test, Kuwait’s aviation authority said on social media yesterday. People travelling from nine other countries — including India, Turkey and Lebanon — will also be required to produce the certificate, it said.

Yields crash, stocks fall as Fed’s emergency rate cut lands with a thud: Yields on US 10-year treasuries crashed through the 1% barrier for the first time ever and the sell-off in the US equity markets resumed yesterday, despite the Federal Reserve announcing an emergency 50 bps interest rate cut — ironically an effort to stem the bleeding in the markets. The yield on the benchmark 10-year bonds fell as low as 0.9043% before recovering to near 1% at the close of play, and the rate on inflation-linked 30-year notes entered negative territory for the first time ever, Bloomberg says. Stocks also gave up most of the gains made yesterday, with all three major indices closing almost 3% in the red.

This all occurred in the hours after the Fed deployed its bazooka: The Fed made its most dramatic intervention since the 2008 financial crisis yesterday, announcing an emergency 50 bps rate cut in response to what it called the “evolving risks” of covid-19. In an effort to assuage investors, the central bank reiterated that the US economic fundamentals “remain strong” and pledged to “use its tools and act as appropriate to support the economy.”

To put this in context, this is only the third time in the past 25 years the Fed has made an emergency cut and is the largest since October 2008.

Nothing says ‘strong economy’ like an emergency rate cut: Investors ignored the Fed’s ‘the economy is fine, move along’ messaging and interpreted it more along the lines of ‘the house is on fire.’ “The market reaction now is negative because the Fed sent the wrong message to the market,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “All of a sudden the Fed is really worried about the economy and this is the reason why we are having this volatility.”

No signs that investors are buying the corona dip: “The worsening economic / corporate outlook and direct evidence of the risk of ineffective central bank policies” is challenging investors’ buy-the-dip mentality, Allianz economic advisor Mohamed El Erian wrote on social media.

What ever happened to a coordinated response? A statement released following yesterday’s discussion among G7 finance ministers and central bank governors contained little evidence of a coordinated policy response to the crisis by global financial chiefs. Markets had hoped that the talks would produce an agreement for a set of monetary and fiscal stimulus measures aimed at arresting the turbulence in the markets. Instead, the statement contained references to “actions” and “appropriate policy tools” without providing specific policy proposals.

** THE KEY TAKEAWAY FOR US HERE IN EGYPT from yesterday’s move by the Fed: The Fed just took (some of the) pressure off Egypt to hike interest rates. Central banks in developed economies are under pressure to cut rates to stimulate their economies in the face of slowdowns. In Egypt, we face the opposite pressure: To maintain or even hike interest rates to maintain our attractiveness to the carry trade as investors look to safe haven assets instead of emerging markets. From that perspective, the Fed’s cut has, in many ways, the same effect as an interest rate hike in Egypt by widening the differential between rates here and those in the US.

That’s good news for the Central Bank of Egypt on the carry trade and at least … neutral news for banks in Egypt, which came into 2020 expecting that rate cuts would stimulate renewed appetite from companies to borrow in support of capex spending. Any further cuts in developed economies (particularly by the Fed — see below) would similarly be good for Egyptian policymakers.

Oh, and you may want to brace yourselves for a busy day on the EGX: The Fed’s snap interest rate cut came after the EGX closed, so we may yet feel the impact of the selloff that US markets went through yesterday. That said: Futures point to European markets opening in the green.

Troubling for US policymakers: The Fed just wasted valuable ammunition only to see its credibility take a serious hit. Not only have some interpreted the move as a kowtow to a White House hungry for easing and left others wondering whether Fed officials know something everyone else doesn’t, it reveals the impotence of monetary policymakers when it comes to defending against the impact of a health scare. Added to this, the Fed just used one of the few bullets it has left to guard against an actual recession. With the Fed Funds Rate now at just 1-1.25%, it has even less room for manoeuvre in the event that the crisis tips the economy into recession.

And what is going to be the likely response to this? More cuts. Goldman Sachs is forecasting the Fed to make another two 25 bps cuts during its meetings in March and April, bringing its benchmark rate down to just 0.5-0.75%, according to a research note picked up Zerohedge.

The Finance MInistry is working toward publicizing its final EGX tax plan next week, including whether it will reintroduce the 10% capital gains tax on EGX transactions, the local press reports, citing unnamed government sources. The capital gains tax was shelved for three years in 2017 in favor of a provisional stamp tax. The three-year period is officially set to elapse in May 2020.

The Egyptian Capital Markets Association has been lobbying for Egyptian and resident foreign investors to be exempted from capital gains tax through May 2023, suggesting that the Finance Ministry postpone the introduction of the tax for another three years as part of a package of measures designed to attract investment and boost trading.

Gov’t to relax visa rules in bid to encourage tourism: The cabinet’s tourism committee has agreed to relax visa rules from June in an effort to attract more tourists to the country, it said in a statement this week. These will include expanding the countries eligible for entry visas, an extension of the duration of the 90-day renewable visas to five years, and a USD 10 discount on visas for those arriving to the country through ports in Luxor and Aswan as part of the “Summer in Upper Egypt” initiative.

Our friends at AmCham will host Planning and Economic Development Minister Hala El Said for its monthly luncheon on Thursday, 12 March. El Said will discuss the future of Egypt’s economic development agenda. Members can register for the event here.

Other events coming up this month:

• The two-day Women Economic Forum (pdf) wraps up tomorrow.
• The Union of Arab Banks will hold a three-day forum for risk officers on 6-8 March in Hurghada.
• A one-day investment conference for the Suez Canal Economic Zone will take place on Saturday, 21 March.

PSA- Our friends at TAM Gallery and Furniture design firm Eklego are holding a flash sale this Friday and Saturday at TAM, where over 2k works of art and 500 pieces of furniture will be on offer. The gallery will open its doors from 12pm until 10pm on Friday, and from 11am until 9pm on Saturday. You can check out the full catalogue here.

The Biden surge is real: Former Vice President Joe Biden is likely to snatch Bernie Sanders’ status as the frontrunner for the Democratic nomination after sweeping Southern states during Super Tuesday yesterday. At the time of dispatch, Biden was on course to win Alabama, Arkansas, North Carolina, Oklahoma, Tennessee and Virginia, while Sanders had secured first place in his home state of Vermont, Colorado and Utah. The delegate-rich state of Texas and Maine were leaning towards Bernie, while Biden could take Minnesota and Elizabeth Warren’s home state of Massachusetts, but these results remain too close to call.

Polls were still open in California, which will award more than 400 delegates. Importantly, it is likely to be at least a few days before we get the final tally due to the state allowing mail-in ballots on polling day. The New York Times and Washington Post have live coverage of the results as they come in.

Israeli PM Benjamin Netanyahu looks to have finally secured a third term in office: Netanyahu has declared victory against rival Benny Gantz after projections showed his right-wing Likud party winning 59 seats in parliament with 90% of the votes counted. This was the third election in Israel in less than a year after two previous polls handed neither candidate a decisive victory. The BBC has more.

*** It’s Hardhat day — your weekly briefing of all things infrastructure in Egypt: Enterprise’s industry vertical focuses each Wednesday on infrastructure, covering everything from energy, water, transportation, urban development and even social infrastructure such as health and education.

In today’s issue: We continue our look into covid-19 by exploring how the panic is impacting Egypt’s infrastructure sector. Thankfully, we see no signs that it will derail anything anytime soon.

Headlining the talk shows last night — you guessed it — GERD and covid-19. Al Hayah Al Youm's Lobna Assal spoke by phone with presidential spokesman Bassem Rady about the current Egypt-Ethiopia dispute over the Grand Ethiopian Renaissance Dam. Asked whether Ethiopia’s announcement that it will commence with filling the dam’s reservoir in July negated negotiations mediator US Treasury Chairman Steven Mnuchin’s previous claim that the dam’s reservoir would not be filled until all sides had reached a final agreement, Rady said that the legally-binding 2015 Declaration of Principles stipulated what Mnuchin had stated, and that he couldn’t speak on the Ethiopian leadership’s statements (watch, runtime: 4:41).

All the latest on covid-19 in Egypt: Min Masr’s Reham Ibrahim and Amr Khalil dedicated the program to reviewing the covid-19 developments over the past week, including the various updates the prime minister had received, the precautionary measures taken across the country’s ports, the Health Minister’s assurances that potential in-country cases had all tested negative, as well as the website, Care.gov.eg, that the government launched to provide information on the virus (watch, runtime: 27:51).

Madbouly reviews economic outlook in light of covid-19 outbreak: Masaa DMC’s Ramy Radwan wrapped up the covid-19 segment of the program by reviewing the meeting of the cabinet’s economic committee, headed by Prime Minister Moustafa Madbouly. They discussed expected global growth rates in light of the virus’ outbreak, likely impacts on Egypt and the region, and potential precautionary measures (watch, runtime: 2:06).

Kuwaiti-Arab development delegation visits Port Said: Assal also covered a visit by a delegation from the Kuwait-based Arab Fund for Economic and Social Development to various Sinai development projects in east Port Said, with International Cooperation Minister Rania Al Mashat as their host. The tour was centered around a trip to the area’s seawater desalination plant (watch, runtime: 3:16).

Non-oil private sector continues to shrink on falling output, export orders: Business activity in Egypt's non-oil private sector remained in contraction in February as export orders continued to fall and output dropped, according to the IHS Markit purchasing managers’ index (PMI) (pdf). The rate of contraction improved marginally from January, inching up to 47.1 from January’s three-year low of 46.0, but the data continues to show “broad-based weakness across output, new orders and employment,” said Phil Smith, principal economist at IHS Markit. Activity in the non-oil private sector has now shrunk for seven months in a row.

Macro conditions are weighing heavily on the private sector, which is already grappling with a “vicious cycle” of domestic market challenges, says Smith wrote. Domestically, firms are pointing to low domestic market demand underpinned by weak labor market conditions, while external demand is also weak.

Declines across output and new orders, pushing firms to cut prices: Companies have been addressing the “soft” demand and cost pressures by reducing average output prices, which Smith says is “encouraging” as firms look to break the cycle of market conditions leading to low sales and staff cuts.

Demand for raw materials dipped, reflecting in a stabilization of supplier delivery times. Prices for purchases, on the other hand, rose marginally in February for the fourth month in a row.

Recruiting fell at the fastest rate since September 2017 and the drop in buying levels was the most marked in almost three years. Overall operating expenses inched up at a modest rate that may be the slowest since April 2011.

Businesses are relatively upbeat but their enthusiasm about the next 12 months has been curbed somewhat, with the degree of optimism hitting its lowest level since last September. Respondents signaled they are concerned about how the covid-19 outbreak will impact the Chinese economy and that sentiment will take a hit. Reuters also has the story.

PRIVATIZATION WATCH- Uncertainty over BdC April IPO as covid-19 roils markets: State-owned Banque du Caire (BdC) plans to make its EGX debut in April with a USD 500 mn sale, provided that covid-19’s impact on the markets doesn’t stunt demand among investors, Chairman Tarek Fayed told Reuters. “Our plan is to go with the IPO by mid-April, but it depends on the market conditions. For us, if you’re talking about the readiness of the bank, we are very ready,” he said. “The appetite is still strong. But nobody knows what could happen in the next 10 to 15 days.” An April IPO was first telegraphed last month after the bank reported strong demand among Gulf and UK investors.

A final decision will reportedly be made in the next two weeks: Unnamed sources told Masrawy that the bank and its advisors are monitoring the impact of the virus outbreak and will decide on the timing within two weeks.

The bank will likely offer a 20-30% stake to investors: “The programme allows us to go up to 45%. But the main objective is to raise funds in the vicinity of USD 500 million. So if we translate the USD 500 million into a percentage this could leave us in the range of 20% to 30% of the float of the banks ownership,” Fayed said. Mohamed Eletreby, chairman of BdC’s parent bank Banque Misr, said last month that it would offer 45% of the company in the IPO.

The bank is in talks with a couple of anchor investors who would be allocated USD 50-70 mn in shares, Fayed said.

Is the privatization program stalling? Government sources said earlier this week that the IPO of state-owned payments company E-Finance would be postponed to the fourth quarter due to delays surrounding the valuation. Like BdC, the company was also slated to go public in April. Since being announced back in 2018, the state privatization program has seen one delay after another thanks to turbulent global market conditions, with Eastern Tobacco being the only company to go to market over the past two years.

GB Auto, Arabia Investments, Palm Hills plan stock buybacks: GB Auto, Palm Hills, and Arabia Investments are all looking to buy back stock over the next few weeks in a bid to hedge against the current market volatility caused by the covid-19 outbreak. GB Auto is set to purchase 10 mn treasury shares by 2 April (pdf), while Arabia Investments Holding plans to purchase up to 134.9 mn treasury shares by 3 June (pdf). Palm Hills Development (PHD) said earlier this week that its board of directors has signed off on the purchase of 62.3 mn treasury stocks after its share price suffered what it called an “unjustified” drop.

The buybacks come after the Financial Regulatory Authority introduced a new temporary rule that enables listed companies to purchase treasury stocks on the same day, rather than providing the EGX with three days’ notice. The move is designed to boost trading and hedge against turbulence in equity markets, the market regulator said.

PRIVATIZATION WATCH- HHD scraps share sale plans after management tender flops: State-owned Heliopolis for Housing and Development (HHD) has scrapped its plans to offer a stake of up to 25% as part of the state privatization program, Hesham Aboul Atta, the chairman of HHD’s parent company, the Holding Company for Construction and Development, told Hapi Journal. The offering was initially set to include the sale of a 10% stake to a strategic investor, along with management rights, and another 15% on the bourse. The tender for the 10% stake + management rights failed to attract any bids last month despite expectations that at least four companies would submit offers.

What’s the contingency plan? With the secondary offering on the EGX now scrapped, the company could simply decide to increase its joint projects with private sector players. Aboul Atta previously said that HHD is looking to set a new development plan from within the company. HHD is currently working on drafting a plan to capitalize on and develop its land portfolio within two months, Public Enterprises Minister Hisham Tawfik said, according to Al Mal.

Speaking of the land portfolio — HHD is auctioning off six land plots in Heliopolis tomorrow, Mubasher reports. The plots can be used for residential, administrative, or commercial purposes.

This doesn’t mean the private sector is being shunned: Tawfik noted that the company is open to signing separate partnership contracts with the private sector, as it once did with SODIC. According to the minister, “all options” for partnership with the private sector will be reviewed once a masterplan for HHD’s land portfolio is ready.

Another route towards more private-sector involvement could be through amendments to the Public Enterprises Act, which is expected to enter the House in the coming weeks. The amendments would remove listed companies in which the government owns a 75% stake from the legislation and bring them within the scope of the Companies Act instead. The law, in its current form, only applies that stipulation to companies the government holds a 50% stake in. “The whole point of the secondary offering was to cut the government’s current 72% stake in HHD to below 50%” so that the company would be governed by the Companies Act, HHD Managing Director Sahar El Damaty had told us. The amendments were greenlit by the cabinet at the end of February and will now be sent to the Council of State before entering the House for a final vote.

M&A WATCH- Pioneers Holding approves fair value study for its five-way MTO: Pioneers Holding has approved a fair value study by the recently hired Financial Advice Corporate Transactions (FACT) as a prelude to acquiring new stakes in five of its subsidiaries, according to a regulatory filing (pdf). Pioneers will make non-cash mandatory tender offers to increase its shares to 90% in five companies, including two real estate developers, two contracting arms, and one electric cables manufacturer.

Advisors: The company had hired UHY United as a financial advisor and Baker McKenzie as legal advisor for the potential transaction. CEO Walid Zaki had said that the company intends to complete the process by the end of the year.

M&A WATCH- Speed Medical to finalize Safwa labs acquisition by 3Q2020: Speed Medical is planning to finalize its acquisition of Ismailia-based medical labs chain Safwa at the beginning of 3Q2020, Chairman Mahmoud Lasheen told Al Mal. The acquisition could coincide with Speed’s transition from the Nile Stock Exchange to the EGX, which is expected to take place between June and July this year, Lasheen said. Lasheen’s statements come a few weeks after Speed signed an agreement with Safwa that will see it manage the company’s five branches on a trial basis lasting six months.

M&A WATCH- German prosthetics company Ottobock is looking to purchase 20% of local producer Orthomedics Egypt, the local press reports. Orthomedics Chairman Khaled El Deeb said negotiations are on track and an agreement will likely be reached before the end of the year. El Deeb noted that the company’s capital is around EGP 200 mn pounds, with annual sales of around 50 mn. Orthomedics Egypt is planning to offer 49% of its shares in an IPO by 2022, the proceeds of which would be used to finance a planned EGP 20 mn factory in Katameya.

BUDGET WATCH- Gov’t mulls increasing subsidy allocations next fiscal year: The government is in talks with the House of Representative to discuss raising allocations for commodity subsidies to at least EGP 96 bn in the FY2020-2021 budget, from EGP 89 bn in the current fiscal year, Supply Minister Ali El Moselhy tells Al Mal. The increase will be necessary to cover the newborns that will be added to the country’s subsidy rolls and to raise each beneficiary’s monthly allowance, El Moselhy said. The government is considering increasing monthly allowances to EGP 200, from EGP 140 currently.

Over five mn newborns born between 2006 and 2015 will be added to the subsidy rolls soon, after being registered last year, El Moselhy said. The addition was projected to increase government spending on subsidies to EGP 91 bn in FY2019-2020, so it’s likely that the ministry will wait to finish purging Kramers from the subsidy rolls first. The purge has so far seen the removal of 8 mn beneficiaries, of whom 1.8 mn were brought back on.

What does this mean for the anticipated switch to cash subsidies? El Moselhy had been working to gauge opinions on the proposed system of doling out cash for food subsidy recipients in place of the current system of in-kind subsidies using ration cards. At the time, he noted that he would first meet with MPs to discuss how to make the move. El Moselhy hasn’t given any signal on when the change would happen but Giza Chamber of Commerce board member Osama El Rifai had said in January it may happen within two months. The Cash Subsidies Act, which would govern this new system, had been sent to the House of Representatives back in July 2019.

The new system would save state coffers some EGP 26.5 bn, or 30-35% of the subsidies bill in its first year, with that figure expected to rise to 40% in the second year of its implementation, sources had suggested.

Ethiopia rebukes US, Egypt on GERD talks: Ethiopia’s foreign minister has criticized the US for taking a “totally unacceptable” position on the Grand Ethiopian Renaissance Dam (GERD) but pledged to continue with the ongoing negotiations, the BBC reports. Speaking during a joint press conference with the country’s irrigation minister yesterday, minister Gedu Andargachew said that Washington had taken an “undiplomatic” stance during the recent talks and urged it to play a “constructive role.”

The minister was referring to a statement put out by the US Treasury last weekend that claimed that an agreement had been reached and called on Ethiopia to sign “at the earliest possible time.” "The recent statement by the US we believe is undiplomatic and does not reflect a great nation like this," Andargachew said yesterday. "We want Americans to play a constructive role. Any other role is unacceptable."

Tensions have risen over Ethiopia’s megaproject in recent days after Ethiopia skipped talks in Washington last weekend, saying that it needed more time to consider the agreement. Egypt, which initialled the accord in Ethiopia’s absence, expressed “deep dissatisfaction and rejection” with Addis Ababa’s position on the talks after the meeting, and warned that it would use “all available means” to defend its interests if the talks fell through. Andargachew rejected the statement yesterday, calling it “not beneficial for everyone, except ruining relations.”

US reiterates commitment for negotiated solution: Washington will continue with its “tireless efforts” to find a solution to the dispute, Trump told President Abdel Fattah El Sisi in a phone call yesterday, Ittihadiya said. The US president also expressed his appreciation for the “constructive political goodwill” Egypt had demonstrated by signing on to the draft agreement over the dam’s filing and operating schedule. The Foreign Ministry also said yesterday that minister Sameh Shoukry had spoken with US Secretary of State Mike Pompeo, but provided little detail on their discussion.

The real problem with Africa’s pile of eurobond debt is the repayment terms, not just the amount of debt, African Development Bank President Akinwumi Adesini tells Bloomberg. Africa currently isn’t facing a debt crisis, but governments seem to be avoiding negotiating more favorable terms for eurobond issuance and commercial loans. “The short-term maturity of some of these debts do not match the long-term revenue streams,” he tells the business information service. “You are going to have to pay back when you are not earning money.”

There have been a lot of eurobonds coming out of Africa, and investors are biting because of high yields: In the past two years alone, African countries have issued USD 53 bn-worth of sovereign eurobonds, according to Bloomberg data. And over the past decade, a borrowing frenzy has pushed up African countries’ FX-denominated debt pile to USD 115 bn, the Financial Times said last month. USD-denominated African sovereign debt instruments have yielded 21% in 2019, which Bloomberg says outpaces all other emerging market regions. A lot of eurobond issuances from African countries are oversubscribed “because people see [a chance] to make a killing,” Adesini says.

Some countries — including Egypt — have been moving to extend the maturity of their eurobonds in a bid to make their repayment feasible. Egypt’s last USD 2 bn triple-tranche eurobond issuance in November included a USD 500 mn tranche of 40-year bonds carrying a yield of 8.15%. The Finance Ministry said at the time that these are the longest-maturity bonds in the Middle East and North Africa. Ghana also reached the same milestone for sub-Saharan Africa when it issued USD 3 bn-worth of eurobonds last month that included a 40-year tranche, according to Bloomberg.

The latest developments in the GERD negotiations are leading the conversation in the foreign press this morning: AFP | Reuters | BBC |The National | RTE.

Kuwaiti Development Fund officials are in town and touring development projects in Sinai: International Cooperation Minister Rania Al Mashat and a delegation from the Kuwaiti Development Fund have visited the USD 182 mn desalination plant in East Port Said and the USD 127 mn water treatment facility in Bahr El Baqer, according to a ministry press release. The fund, which signed USD 1.9 bn in financing agreements with Egypt last year, will continue their site visits in Sinai through 9 March.