El Erian on how to prepare for a post-covid world.
Plus: Enterprise poll sees CBE leaving rates on hold.

It’s a big news day at home and abroad as we grind through the days until Eid El Fitr starts at the end of next week.

On the home front:

MUST READ OF THE DAY- The always-on-point Mohamed El Erian on how think about a post-covid world is our Spotlight this morning as we report on his lecture to Nile University. The story appears immediately after this morning’s Speed Round.

Egypt looks set to get approval on USD 2.7 bn from the IMF when the institution’s executive board meets later today. The Sisi administration has asked for a USD 2.7 bn rapid financing instrument and another, unspecified sum in the form of a stand-by arrangement. Only the RFI is on the table at the IMF board’s meeting today.

The administration is sending a clear message that both new austerity measures and a lockdown are on the table as Egypt levels-up in its fight against covid-19.

AUSTERITY: The state is committed to increased spending on health and welfare, but could cut spending in other areas (and, presumably, reconsider taxes?) if the covid-induced revenue shortfall extends into the new fiscal year, Ittihadiya said in a statement after a sit-down between President Abdel Fattah El Sisi, Prime Minister Moustafa Madbouly and Finance Minister Mohamed Maait. We have the full rundown in this morning’s Speed Round, below.

LOCKDOWN: The Medical Syndicate is lobbying the government to go into a full lockdown until the end of Ramadan, the syndicate’s Cairo president, Sherine Ghaleb, tells Al Shorouk. The syndicate sees the holy month as Egypt’s “last chance” to use a lockdown to curb the spread of the virus, saying doing it at the tail end of Ramadan would have the least impact on the economy. All options are on the table, including a 24-hour curfew, presidential health advisor and former health minister Mohamed Awad Tageldin said on television last night (watch, runtime: 8:29).

The news comes as the Madbouly government is actively taking the pulse this week of top business leaders on how to reopen the economy after Eid while still containing the spread of covid-19. Cabinet is set to make an announcement by the end of next week on what restrictions will remain in place after the holiday. The consultations come as some in the business community are calling for bailout funding to be made available to companies in the service sector. The government’s stimulus spending has so far prioritized the tourism industry, manufacturers and exporters.

It’s interest rate week, and 10 of the 12 analysts in our regular poll expect the central bank to leave rates on hold when its monetary policy committee meets this coming Thursday. The poll leads this morning’s Speed Round, below.

You need to put on a face mask if you’re heading to CIB today after the bank took the (eminently sensible) step of making it mandatory for clients visiting its branches to wear masks starting yesterday, CIB said on its website. State-owned Banque Misr said it will follow suit starting Sunday, 17 May.

Why are masks so important? They protect the people around you, as the Philadelphia public health office put it in terms that should be immediately understandable to anyone who’s ever been peed on by an infant on a changing table.

So, when do we eat? Maghrib prayers are at 6:39pm and you’ll have until 3:25am to finish caffeinating. Fajr is coming one minute earlier every day through the end of the Holy Month.

TAKE OUR POLL- How is covid-19 impacting your business? We do an annual reader poll asking what you expect of business conditions and the economy in the year ahead. Covid-19 has us thinking that the results of this year’s survey need updating. Take a minute and tell us how covid-19 has impacted your business, whether it’s changed your outlook on the economy, and what you think of WFH. You can take the survey here.

ON THE GLOBAL FRONT-

There’s plenty of competition for your attention on the global front this morning:

Policymakers are worried that we’re looking at a second wave of infections. A spike in cases in Germany and new clusters in China and South Korea were reported yesterday in a demonstration of the difficult road ahead for governments trying to loosen lockdown restrictions without fuelling a second wave of infections. The FT and the Guardian have more.

Across the pond: The US administration is reportedly mulling another round of coronavirus aid amid fears that as many as one in five Americans could soon find themselves jobless.

The coronavirus is working its way through the White House, the New York Times reports, but Vice President Mike Pence is not going into self-isolation despite earlier stories suggesting he would do so.

Closer to home: Saudi Arabia is axing its cost-of-living allowance and will triple its VAT as it scrambles to respond to both covid-19 and the collapse of oil prices in the wake of its price war with Russia. “The cost of living allowance will be suspended as of June first, and the value added tax will be increased to 15% from 5% as of July first,” Reuters quotes Saudi’s state news agency as saying.

Dubai is looking at a long recovery from covid-19 as the economic fallout hits at the heart of its economy as the sectors that underpinned its growth strengths — aviation, shipping, real estate — have been exposed as vulnerable by the pandemic. Officials may have to resort to a program of damage control involving a mass labor exodus, bailouts and a series of restructurings, the Financial Times argues.

COVID-19 IN EGYPT-

Egypt has now disclosed a total of 9,400 confirmed cases of covid-19 after the Health Ministry reported 436 new infections yesterday. The ministry also said that another 11 people had died from the virus, taking the death toll to 525. We now have a total of 2,556 confirmed cases that have since tested negative for the virus after being hospitalized or isolated, of whom 2,075 have fully recovered.

Even with the pandemic, Egypt’s total deaths in April are apparently 2.8% lower than they were during the same month last year, dipping to 42.1k from 43.3k in 2019, according to the cabinet’s Information and Decision Support Center.

Thirty-eight medical personnel at the Al Azhar-affiliated Al Zahra University Hospital have been infected with covid-19, Al Azhar University Vice President Mahmoud Sedik told Sada El Balad (watch, runtime 5:29).

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

In today’s issue: What shape could back-to-school take in the fall? As the debate on whether we should ease the lockdown on schools next academic year intensifies, Egypt’s private schools explain to us why they prefer a hybrid of online and classroom work.

It was another quiet Ramadan night on the airwaves. Check back tomorrow, folks.

ENTERPRISE POLL- CBE to leave interest rates unchanged when it meets this week: The Central Bank of Egypt will likely leave rates on hold for the second consecutive month when its monetary policy committee meets later this week, according to a poll of analysts conducted by Enterprise. Ten of 12 analysts surveyed expect the central bank to hold off on making further adjustments to rates after its record 300 bps emergency cut in March.

Where rates stand now: The CBE’s overnight deposit rate is at 9.25% and the lending rate is at 10.25%. The main operation and discount rates are both at 9.75%.

Not enough has changed since March to justify further intervention, Mohamed Abu Basha, head of macroeconomic research at EFG Hermes, told us. “There have been no significant changes” since March and “there is no need for any action,” he said.

A cut risks putting pressure on the EGP by turning off the carry trade. Renaissance Capital’s Ahmed Hafez believes that the CBE will not risk placing further downward pressure on the EGP as the pandemic has hit tourism revenues where it hurts. Sigma Capital’s head of research, Abou Bakr Imam, echoed Hafez, noting that the bank will prioritize maintaining currency stability, especially after last month’s sell-off of government debt.

Expectations for higher inflation to squeeze real rates: Holding off on a rate cut will keep the real return on government treasury bills just a notch over 1%, HC Securities’ Monette Doss told us. While inflation is still within the central bank’s target of 9% (+/- 3%), Doss expects it to tick up to average 9.6% over the coming 12 months.

Further monetary stimulus would deliver little benefit due to demand slump: “Current monetary policy is already accommodative, and the space to add further stimulus is limited,” said Prime Holding’s Mona Bedeir. “The effect of a further cut in policy rates to boost demand and support sentiment and market functioning will be limited” amid a demand slump caused by the government’s lockdown measures and an uptick in unemployment, she said.

The dissident voice: Ahmed Abdel Naby, head of research at Shuaa Securities, sees the bank making a 50 bps cut to support economic activity through the slowdown. The small cut is unlikely to negatively affect foreign portfolio investments, he said.

BUDGET WATCH- Austerity measures in the cards if crisis continues into FY2020-2021 -Maait: The government could cut back on spending in its FY2020-2021 budget if the covid-19 outbreak persists after July, Finance Minister Mohamed Maait said in a meeting with President Abdel Fattah El Sisi and Prime Minister Moustafa Madbouly yesterday. Public spending is on track to rise by 9% in the coming fiscal year, including substantial budget increases for health, education and welfare. But the finance minister yesterday raised the prospect of new austerity measures should the outbreak continue into the new fiscal year, telling the president that the ministry would move to review or freeze some of its outgoings to protect its financial position.

The public purse is yet to be seriously impacted by the virus: Maait told El Sisi that public finances have so far been able to withstand pressures caused by the downturn, despite the government seeing a EGP 75 bn revenue shortfall during the second half of the fiscal year ending 30 June.

The Health Ministry wants its budget allocation raised by EGP 8.5 bn: The Health Ministry has asked parliament to sign-off on a EGP 8.5 bn increase to its FY2020-2021 budget allocation to help it face covid-19, House Planning and Budget Committee deputy chair Yasser Omar tells the local press. The government has earmarked EGP 254.5 bn for health spending — a 45% increase from the current fiscal year — but ministry wants to direct EGP 4 bn of the extra funding to the government’s health insurance scheme, EGP 3 bn to public health services, and a further EGP 1.5 bn as new funding for preventive medicine.

The collapse in oil prices is giving public finances a massive leg-up right now: The government spent just EGP 21 bn on fuel subsidies during the first nine months of FY2019-2020, less than half of the EGP 53 bn allocated for the entire year, Reuters reports, citing an unnamed Oil Ministry official. This is a 65% drop in spending compared to the EGP 60.1 bn shelled out during the first nine months of FY2018-2019. The collapse in oil prices — which fell by as much as 74% during the first four months of the year — has helped.

Also from Maait yesterday- Gov’t still on track to beat debt-to-GDP targets: The government is expecting public debt to GDP to reach 85% by the end of the ongoing fiscal year, Maait said yesterday. This is a downward revision from the 83% projected before the covid-19 outbreak, but still beats the 89% target in the budget.

Primary surplus expected to fall below expectations: Forecasts for the primary budget surplus have also been revised downward to 1.5% by the end of the fiscal year, from a previous forecast 2%, Maait said. More pressure on the primary surplus could drive it down to 0.6% in FY 2020-2021 if the crisis continues to December, Maait warned last week.

The ministry is also considering a less favorable scenario for debt, which could see debt scale up to 88% of GDP and the budget deficit widening to 7.8% or 7.9% by the end of FY 2019-2020. We had more on last Wednesday.

Annual urban inflation in April outpaced analyst expectations, rising to 5.9% from 5.1% in March, according to data out on Sunday from state statistics agency Capmas. Inflation came in at 1.6% on a monthly basis compared to 0.4% during the same month last year, and 0.6% in March. This uptick comes on the heels of a steady price deflation over the two previous months.

Food and beverage prices were the main drivers: The prices for food and beverages rose 4.4 percentage points in April to register an overall increase of 0.9% on an annual basis. Prices are typically driven up by high demand in the run-up to Ramadan. Alcoholic beverages and tobacco products saw their prices increase by 1.1%, to record an annual increase of 8.3%. Transport costs dropped 1.0%, good for an annual rate of 12.2%.

Inflation higher than expected? “We expected a surge in Ramadan but the rate of increase is higher than we had anticipated. In the two weeks preceding the holy month, there was a lot of buying activity and a demand push across the board,” head of research at Naeem Brokerage Allen Sandeep told Reuters. “We could possibly see some easing in May.”

Covid effect? Ramadan demand pushed costs up, but we expect covid-induced hoarding of food and other necessities could also have played a role.

Core inflation also rose: Annual core inflation increased to 2.5% in April, while monthly core prices rose 0.6% from the month before, according to figures released by the Central Bank of Egypt (pdf).

CBE may extend subsidized loan program to contractors: CBE Governor Tarek Amer will propose allowing contractors to access subsidized loans under the bank’s EGP 100 bn industry stimulus initiative at the next board meeting, he said in an interview with MENA picked up by the local press. Amer stressed the importance of the industry, saying it should receive support alongside finance, industry and agriculture.

Background: Launched in December by the central bank the initiative provides subsidized loans with a declining 8% interest rate to medium-sized factories. The program was expanded in March to include agricultural companies. The news comes just days contractors met with Prime Minister Moustafa Madbouly to request access to subsidized loans and receive faster payment for work done on public contracts.

INVESTMENT WATCH- CDC closing in on USD 100 mn investment in unnamed healthcare player: The UK’s CDC Group is planning to invest north of USD 100 mn in an unnamed player in Egypt’s healthcare sector, the local press reports, citing sources in the know. The investment is reportedly expected to happen within the next few weeks. To date, CDC has made 22 investments in Egypt, including as a limited partner in funds managed by emerging markets private equity firm Actis that took stakes in Edita and Integrated Diagnostics Holdings. CDC has also provided tier-2 capital to banks including CIB and made commitments to a venture capital fund managed by Sawari Ventures and and a small- and midcap fund managed by Ezdehar.

STARTUP WATCH- Source Beauty raises pre-seed funding from 500 Startups: Source Beauty, an Egyptian e-commerce startup focused on beauty products, has raised an undisclosed amount from venture capital firm 500 Startups in a pre-seed funding round, according to a company press release (pdf). Source Beauty is looking to use the funds to expand its platform and team with an eye on tapping into regional markets.

M&A WATCH- FAB completes due diligence on Bank Audi Egypt: First Abu Dhabi Bank (FAB) has completed due diligence on Bank Audi’s Egypt arm and now finalizing its offer, a banking official with knowledge of the matter told Al Shorouk. FAB has persevered with the acquisition process despite the covid-19 outbreak after receiving the greenlight from the Central Bank of Egypt in January. A senior executive said in February that the bank will make a final decision on whether to proceed with the acquisition after completing due diligence.

Advisors: Lebanon’s Bank Audi appointed EFG Hermes as a financial advisor for the transaction, while FAB has tapped UBS.

M&A WATCH- FRA approves Pioneers Holding’s acquisition of five of its subsidiaries shares: The Financial Regulatory Authority has approved Pioneers Holding non-cash mandatory tender offers to increase its share to 90% in five of its EGX-listed subsidiary companies, according to an EGX disclosure. The five companies include two real estate developers, two contracting arms, and one electric cables manufacturer: El Giza General Co. For Contracting & Real Estate, El Motaheda For Housing & Reconstruction, El Saeed For Contracting & Real Estate Investment, Cairo Housing and Development, and Electro Cable Egypt.

Egypt, World Bank discuss potential USD 200 mn loan for El Manashy railway line: The Transport Ministry is in talks with the World Bank for a USD 200 mn facility to build the new railway line linking Sixth of October to El Manashy village in Giza, Al Mal reports, citing unnamed sources. The 65-km line will link Alexandria Port to the Sixth of October dry port, which is slated for completion at the end of next year. The ministry is expected to present updated feasibility studies on the line within the coming period.

Funding for public bus system, too? The World Bank is also reportedly among a number of international lenders looking to offer funding and technical support to help Egypt develop its public bus system, the newspaper reports, citing sources at the Public Transport Authority.

The Financial Regulatory Authority is cutting service fees for securities traded on the EGX to 0.005% on transactions to a maximum of EGP 250 to spur trading volumes, Hapi Journal reports. The fee was originally set at 0.00625%. Fees for bonds, debt instruments, and sukuk will fall to 0.0025% of the total transaction value.

MOVES- Abdel Khalik Ibrahim has been appointed as an assistant housing minister, according to Youm7. Ibrahim was most recently an assistant professor at the Faculty of Regional and Urban Planning at Cairo University.

On our podcast this week: Amro Abouesh, CEO and Managing Director of Tanmeyah, who left a comfortable position with Banque du Caire to roll the dice as a founder of Tanmeyah, which has grown from a scrappy startup into the nation’s leading private-sector microfinance player — and prompted just about everyone else in the finance industry to look at how to make money serving the ‘bottom of the pyramid’ in the nation’s economy. Tanmeyah grew as a portfolio company of investment company Qalaa Holdings before being acquired by frontier and emerging markets financial services player EFG Hermes.

You can listen to the episode (listen, runtime: 38:37) on: Our website | Apple Podcast | Google Podcast | Omny. We’re also available on Spotify, but only for non-MENA accounts. Subscribe to Making It on your podcatcher of choice here.

El Erian on how to set ourselves up for the post-covid world — and why that world will be particularly challenging to navigate: In a lecture for Nile University, Allianz economic advisor Mohamed El Erian offered his take on how the global economy came face-to-face with the worst (and most synchronized) downturn in history and the lessons we can all learn as individuals, businesses, and policymakers for the road ahead. Among the highlights:

The world entered the current crisis in a “very weak” position because we never effectively secured sustainable and inclusive growth after the financial crisis, we dismissed the importance of climate action, and we didn’t properly resolve global inequality. Now, major economies are expected to see their GDPs contract by 10%+ and supply chains are breaking down.

Developing countries, including Egypt, can’t decouple themselves from these global realities. With the contractions knocking on developed markets’ doors, Egypt and other developing markets can expect to feel the pinch because of lower export volumes, commodity prices, foreign direct investment (FDI), remittances, and tourism. “This is not a pleasant neighborhood to be in, but unfortunately it is the neighborhood we have.”

But that’s not to say we’re all in the same boat. Unlike Egypt, some developing countries are already buckling under the pressure from spillover effects from developed markets. And most of these developing countries haven’t even had a significant outbreak of covid-19, El Erian notes.

Non-traditional int’l players are taking the lead in an otherwise “disappointing” global effort: On the policy side, individual governments and policymakers are stepping up to the plate with a “whatever it takes” attitude, but the international response thus far has been “disappointing,” particularly when considering that this outbreak is an international problem and responsibility, El Erian says. This vacuum left by traditional players, such as the G7, has pushed African countries (Egypt involved), the United Nations, and the G20, among others, to take the lead in coordinating response measures.

Speaking of which: Why hasn’t the pandemic ravaged Africa the way it has, say, Italy and New York? The “great puzzle” of the outbreak is that there hasn’t been a massive outbreak of cases in sub-Saharan Africa, where healthcare systems wouldn’t be up to the challenge, El Erian stressed. However, nobody is really certain of whether the subdued spread of covid-19 in the continent, including Egypt, is because of the “positive” answers — young populations that are able to withstand the disease without showing symptoms, and a warm climate — or if it’s actually the worst case answer — that it’s just going to take more time.

So what does the road ahead look like?

#1- Everyone will have more debt — and debt levels in advanced economies are going to start catching up with their EM counterparts. Policymakers’ short-term priority is to stop short-term problems (a temporary job loss, a business temporarily losing its sales revenues, etc) from becoming long-term impediments (bankruptcy). And the way to go about that is to “borrow, and borrow, and borrow.” While a wall of debt sounds less than appealing to say the least, El Erian stresses that this is a far better outcome than failing to give support where it is needed.

#2- We’re going to enter an era of deglobalization. The geopolitical element of the pandemic-induced shock to the global system suggests that a wave of “political anger” (previous iterations of which yielded “unlikely outcomes” such as Brexit and Donald Trump’s election) will make continued globalization difficult, El Erian says. Changing company behavior will also be a key driver of deglobalization: Businesses will move away from relying on “just-in-time” models as resilience and sustainability become watchwords. That means they will begin localizing supply chains, and that also means there will be an increased intertwining of the public and private sectors in developed markets.

#3- The world will likely have to learn to “live with the disease.” Until a vaccine and treatment are available, we need to learn two things: The first is to reduce the damage it creates, including properly equipping countries’ healthcare infrastructure with sufficient hospital beds, ventilators, and other necessary supplies. The second is that the global economy will continue to be a “massive headwind” but it can be offset by investing in human capital, institutions, and improving business climates that will together form a tailwind for economic growth.

#4- Countries, companies, and households need to adopt a combination of defensive and offensive measures. Defensive policies should be designed with resilience and optionality in mind, while offensive measures should ensure agility, El Erian says. The defense phase is what we’re experiencing now — it’s how we’re acting as individuals, households, businesses, governments, and the global order. To be best positioned for the next phase, we need to avoid certain traps, such as looking for certainty in an uncertain environment, rather than embracing optionality and scenarios, he says.

You can watch the full lecture here (runtime: 1:30:07).

It’s a pleasantly quiet morning for Egypt in the international press.