Sunday, 27 December 2015
Central bank raises interest rates 50 bps, outlines four-point “macroeconomic framework” it will implement with Cabinet (Speed Round)
Israel green lights gas sales to Egypt. “Not so fast,” says PM Ismail. (Speed Round)
Domty shares to begin trading on Tuesday. (Speed Round)
El Sisi appoints high-profile task force to investigate corruption claims (Speed Round)
Year in review, part 1: What shaped 2015?
Year in review, part 1: What we’re tracking in 2016.
WHAT AM I READING?
Enterprise is on something of a break this week — as we mentioned on Wednesday, it’s a chance for us to get caught up on sleep, spend time with family, and lay the ground for a new product we’re aiming to launch early in the new year.
As we do so, we’re looking back this week on the year that was — in business, economics and politics. Throughout this week, we’ll have brief issues of Enterprise at the usual time including both our first “year in review” (in five installments) and a brief recap of what happened yesterday. We hope you find them useful as you prepare your 2015 reports and / or your 2016 strategy.
It’s our first time doing this exercise, so if you have feedback, questions, ideas or criticism that would help us create more meaningful content at the end of 2016, we’d love to hear from you on email@example.com.
The Central Bank of Egypt hiked interest rates by 50 basis points after its Monetary Policy Committee met Thursday, the bank said, signaling it is concerned about inflation. The overnight deposit rate rose to 9.25%, while the overnight lending rate now stands at 10.25%. The central bank’s statement noted that the CBE and the Ismail government agreed at a meeting of the coordination committee a week ago that they would “collaborate on designing a macroeconomic framework, aimed at achieving macroeconomic stability that will contribute positively to economic growth and job creation.” The four-point framework includes:
Why you should read the CBE’s statement: Worth reading are the central bank’s brief discussion of why it thinks domestic inflation will only partially be counter-balanced by low global commodity prices — and the downside risk to growth forecasts presented by softening emerging markets. The coordinating committee is due to meet next on 10 January.
Reaction to the meeting was muted, but tending toward negative, with the decision coming on Christmas Eve, one week to the day after the central bank postponed its earlier meeting of the MPC. Bloomberg’s Ahmed Namatalla has a straightforward recap of the decision, while Reuters’ Asma Alsharif quotes CI Capital’s Hany Farahat as saying, “A hike was not what we expected. This is not good news. It is going to increase the cost of lending for the private sector, which is not going to help fragile growth.” Pharos’ Hany Genena noted that with the rate hike signaling a broad-based defense of the EGP, “The impact on growth and investment will only be negative if the defence is long-lived and if it is not promptly leveraged to execute long-awaited fiscal and foreign currency policy reforms.” Coverage in the domestic press was largely confined to recaps of the statement (here, here, here and here)
Tarek Amer spoke with reporters on Thursday, revealing that the central bank injected USD 8.3 bn into the market between 29 October and 24 December — and denying that Egypt has had problems paying for energy imports, Reuters reports. The central bank governor noted that the CBE had allocated USD 400 mn in liquidity to the petroleum sector on Tuesday, a day before the newswire claimed that sources had told it the Petroleum Ministry was struggling to pay for imports.
The back-and-forth over imports of Israeli natural gas continues: Israel gave the green light to partners in the Tamar field to export 5 bcm of natural gas to Egypt over the next seven years on Wednesday, but Prime Minister Sherif Ismail promptly banned the imports pending resolution on the Israel Electric arbitration award EGAS and EGPC lost earlier this month.
Shares of dairy products company Domty are due to start trading on the EGX on Tuesday, Amwal Al Ghad reports. Domty said in June that it plans to expand into yoghurt and packaged milk alongside its existing cheese and juice lines. EFG Hermes is advising on the listing.
El Sisi appoints high-profile taskforce to investigate corruption claims: President Abdel ordered late yesterday that the ministers of planning, finance, interior and justice form a committee to investigate “corruption allegations recently in the media,” according to a brief report in Al Masry Al Youm. Notably, the committee will also include as a member Hisham Badawi, the deputy chief of the Central Auditing Organization. His boss, embattled CAO chief Hisham Genena, was quoted last Wednesday by Youm7 as saying corruption cost the Egyptian state the equivalent of EGP 600 bn in 2015, among other charges. El Sisi directed that the investigation be completed without delay and that the report be made public.
We have 11 new governors and five new deputy ministers, all of them having been sworn-in yesterday by President Abdel Fattah El Sisi. Notable changes: New governors in Giza and Alexandria, while Cairo remains unchanged. Deputy ministers were appointed in housing, CIT, health, education, and higher education. Al-Ahram has the list in Arabic, Ahram Online has the English. Ten of the 11 new governors come from military or police backgrounds.
Al-Nour denies it’s planning to boycott the opening session of the House of Representatives because the first speaker of the House will, under the constitution, be a woman. No, we’ve not become progressive overnight — it’s because 67-year-old Amina Nosseir is the eldest MP, and as such she’s constitutionally required to call parliament into session and preside over the election of a permanent speaker. Ahram Online has the story of the Salafist denial.
Also making the rounds of the domestic press:
While it may be light on emerging markets content, fastFT has a nice roundup of some of the biggest winners and losers in global financial markets in 2015. Among the highlights:
Finally: Trust us — from painful, first-hand experience — this is a thing: “Dads Failing At Riding Hoverboards Are Ruining Christmas For Everyone.“
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THE YEAR IN REVIEW
The Economy in 2015 — The year of gas, greenbacks, and grand promises
It started off as year of cautious optimism, and ended up riddled with challenges, but Egypt managed to muddle through 2015.
2015 was a mixed bag economically. It was Egypt’s first calendar year with the exchange rate sustained at over EGP 7 per USD 1. We got a new prime minister, a new central bank governor, and held elections for a new parliament for the first time since 2012. In March, the Egypt Economic Development Conference (EEDC) defied expectations with its meticulous organization and international fanfare — and included pledges of billions in financial support and investment. It also failed to deliver on many promises. As time marched on, plans to turn Egypt into a regional energy hub inched closer to become reality with greater investment plans by international oil companies as well as the discovery of what could be the largest gas field in the East Mediterranean.
Tourism did not fare as well: Plans for recovery were derailed by violence during the summer months (including the assassination of the prosecutor general) and then ultimately crushed by what is now generally held to have been a terrorist attack in Sharm El Sheikh that downed a Russian passenger plane. The sector foundered as tourists flocked away from Egypt, and bankers were urged by the government and the central bank alike to ease repayment terms for hard-hit operators.
By that time, the EGX had already positioned itself to close the year as one of the worst performing stock markets in the world, after coming into 2015 on the back of being the world’s best performer a year earlier. Take heart, though: While the EGX was down 24% at dispatch time, Ukraine (off 37%) and Greece (down 34%) still had us beat.
A national mega-project agenda, a legislative overhaul, a fresh inflow of GCC and international aid and investment investment in late December, and a year-end rate-hike have laid the seeds for 2016.
WHAT SHAPED 2015?
Two people had the biggest impact on Egypt’s economy in 2015: former CBE Governor Hisham Ramez and Eni’s CEO Claudio Descalzi. The two were integral players in the three main events that shaped the year: the discovery of the Zohr gas field; the foreign currency shortage and the CBE’s steps to counter it; and the inaugural Egypt Economic Development Conference. All three events have implications that carry through to 2016 and beyond.
Hisham Ramez antagonized the industrial sector when he moved to curb the parallel market for foreign exchange and ended up starving importers of liquidity. The fate of the EGP hung in the balance as speculation intensified on where the exchange rate was heading as greenbacks became scarcer and more expensive. News was confirmed that Ramez was not going to stay the CBE’s helm beyond the year and Tarek Amer, the former National Bank of Egypt Chairman, was named as his successor.
On a strikingly different note, the promise of future wealth made Eni’s CEO Claudio Descalzi Egypt’s best friend in 2015. Descalzi topped Eni’s discovery of what is poised to become the largest gas discovery in the East Mediterranean with plans to turn Egypt into a regional energy hub. Getting multiple one-on-one meetings with President Abdel Fattah El Sisi, Descalzi’s vision is to tie-in gas production from Cyprus and Israel and use Egypt’s existing liquefaction plants to export LNG globally — something we are keeping a very close eye on in 2016.
The biggest successes in 2015 came in the energy sector. El Sisi ceremoniously declared victory over the power crisis in 18 months. On the first of November, as industrial consumers reported they were receiving their full allocation of natural gas and electricity for the first time in more than two years, he said, “We now have enough for investment and industrial activities, as we added six thousand megawatts to the national electricity network. By December 2016, we will be adding four thousand megawatts and another 10 thousand megawatts by May 2017.”
The other bright spot in 2015 was the revival of oil and gas investment in Egypt. That includes Eni’s discovery of the Zohr field, yes, but also with investments from other global oil and gas majors after the administration made good on promises to begin paying down overdue receivables. As an indicator of his success, Oil Minister Sherif Ismail was named prime minister in September.
Less bright: The government’s bid to embark on serious policy reform. A fuel subsidy smart card system is yet to be implemented, despite numerous promises, and the targeted shift to a value added tax system before the end of the year also fell short of the mark even though a number of other tax reform measures were accomplished. Those reform measures are now issues we would be tracking in 2016.
The macroeconomic environment in 2015
The year started off with a whimper, as the IMF noted in its 2014 Article IV consultation with Egypt, saying prospects for growth, employment, and macroeconomic stability will improve as the authorities implement policy initiatives. GDP in FY2014-15 grew by 4.2% and the government set a more ambitious target of 5.5% for FY2015-16, an upward revision from 5% initially. The outlook for the next fiscal year is in question, though, with recent government statements suggesting 4.5% might be a reasonable target.
In the first 11 months of the year inflation averaged 10.3% and was on an upward trajectory heading into the new year. As of the end of 3Q2015, the unemployment rate was 12.8% and youth unemployment was 27.4%.
The statistics, not far from where they were at the start of the year, prompted the government to target inflation directly (cf: the central bank’s rate interest rate announcement last week) and indirectly (a new drive to ensure subsidized commodities are available to the working poor and lower-middle class.). It’s also been a factor in the state’s emphasis on job creation through investment in megaprojects ranging from the New Suez Canal to highway improvement and Cairo’s mass transport infrastructure.
Throughout, the state’s efforts and business confidence alike have been challenged by currency and energy shortages and terrorism.
Manufacturing and industry alike were dealt two significant blows in 2015: The FX crunch and the natural gas shortages. Manufacturers were hobbled as critically low FX liquidity saw production inputs languishing, while energy shortages saw the state redirect electricity and gas to residential and commercial needs. Industrial producers had miserable years as it was estimated the government had cut natural gas supplies to 60% of factories in May. The government countered with its ongoing emphasis diversifying Egypt’s energy mix to include not just renewable energy and alternatives such as refuse-derived fuel, but to allow cement plants and a handful of others to start building infrastructure for coal imports.
Reduced energy consumption in the winter, falling oil prices, and a promise of action by the president led supplies to be fully restored in November as a second FSRU came online. These were then unexpectedly cut by 15% in December. Naturally, exports trended down, with non-petroleum exports dropping 18.7% year-on-year in November to USD 1.4 bn.
Industry Minister Tarek Kabil intervened, establishing a relief fund for smaller factories, expanding the Export Subsidy Fund to EGP 3.7 bn and establishing manufacturing zones and cities (such as the ‘factory city’ for furniture exports in Damietta) across the country with incentives for investments. Moving into 2016, the Industry Ministry will try and pass the Industry Law, in addition to legislation allowing it to issue land tenders.
Terrorism hobbled the tourism industry for much of 2015, culminating in its near-collapse in the wake of November’s Metrojet disaster. The industry was beginning to see some green shoots after having suffered from a decline since the instability of 2011. Sharm El Sheikh and Hurghada have been hit the hardest.In response, the CBE enacted measures to support the industry including postponing utility bills incurred by hotels and tourism companies; rescheduling loan repayments; providing sector operators with emergency medium-term loans to cover operating expenses. The Tourism Ministry cancelled an international promotional campaign with JWT and shifted focus towards attracting domestic and regional tourists. It also increased subsidies for chartered flights. The outlook for 2016 in a word: Struggle.
WHAT WE’RE TRACKING IN 2016
We’ll be keeping an eye on four things in the House of Representatives as its first legislative season gets underway. After sorting out the party alliances in parliament, we will be looking at who will be elected as speaker — something that should not have a big impact on the economy.
A slightly bigger challenge awaits the House in it having to approve all legislation decreed by President Abdel Fattah El Sisi, as well as interim President Adly Mansour, within 15 (working) days after the first session. This will most likely come through a single vote on an omnibus bill incorporating all legislation enacted — unless there is some form of dissent, in which case we’re opening the gates of hell.
Next, the parliament will have to approve the composition of the government — who’s in cabinet as well as the Council of Ministers’ collective program for the year.
Arguably, the most contentious issue that will face the legislative body in its first year in session is approving the budget for FY2016-17, not an easy task given that the government missed some reform targets in the current calendar year, including the implementation of the value-added tax (an issue the Ismail government is tabling to parliament) and fuel subsidy reform.
The Sisi administration will need to take a political decision to move forward with policy reform in 2016, and an assistance package led by the International Monetary Fund could give that a measure of new urgency given potential conditionality. A VAT law is probably already drafted, but its implementation hinges on a number of political considerations, given its potential to drive inflation — a concern for the central bank, cabinet, Ittihadiya and the military alike.
Fuel subsidy reform has gone through yet another year without a meaningful implementation of smart card system, and odds are it will be scrapped altogether if it is not in place by the end of 2016. Regardless, the delay will affect the process of creating the budget for FY2016-17. The Ismail government already suggested this fall it is recalibrating the pledge to eliminate fuel subsidies, taking heart from persistently low oil prices and the discovery of massive offshore natural gas reserves.
There will be plenty of calls from various sectors — particularly tourism and manufacturing — for government support. The government will have to pick winners and losers. Much broader, we will also be tracking the promise of holding another Egypt Economic Development Conference (EEDC) in Sharm El Sheikh and whether it is up to the standard of 2015’s. We’re not holding our breath for an extravaganza and would instead expect the planned hosting of the World Economic Forum in Egypt to be accompanied by a more modest EEDC.
The Central Bank of Egypt:
Organizationally, we expect to see a central bank that is more open and communicative, a view that is reinforced by the announcement last week that the CBE will appoint a dedicated spokesperson.
Is a devaluation at the start of the year in the offing? It could be. If the CBE does not move in the last week of 2015 and the first of 2016, as it usually does when it is targeting a major change, pressure will pile up very early on. The CBE goes into 2016 required to pay out a total of USD 1.7 bn owed to Qatar and the Paris Club, meaning the health of the reserves will be a major issue in 1Q2016. While a devaluation might not be the best option, as one of our readers suggested in an op-ed, it could be reduced to being the only option if sufficient foreign funding is not secured to defend the national currency.
Will USD deposit restrictions be relaxed? At the last CBE Monetary Policy Committee meeting of the year, interest rates were raised following the lead of the U.S. Fed and central banks across the region, sucking out more liquidity from the market coming into 2016 compared to 2015. This, contingent on the arrival of foreign aid and loan packages, could make relaxing the restrictions on USD deposits likely in early 2016 unless we want to see the private sector grind to a halt.
The private sector:
Egypt’s private sector will be operating in a world where emerging markets in particular are starved of liquidity, following the Fed’s rate hike and the CBE’s similar move. Emerging markets generally are increasingly out of favour on lower growth forecasts, and the rise of Daesh left the MENA region painted as increasingly unstable in the global press.
In tourism, we’ll be looking for signs of recovery from 3Q2016 onwards. It is, sadly, safe to write the sector off in the first half of the year. Its performance will depend partly on when travel bans on the South Sinai governorate by tourist-exporting nations including the U.K. and Russia will be lifted, if at all, the government’s ability to control the security situation, and how any regional developments spill over into Egypt.
Less certain is the situation with domestic manufacturers, particularly those in energy-intensive industries. With a third FSRU expected to be commissioned, a steadier supply of fuel to factories should be in store. The start of generation at new power plants due to come online will also help, as could Trade and Industry Minister Tarek Kabil’s advocacy of both export subsidies and the slashing of red tape for industry.
New oil and gas production will depend on BG Group’s decision to move forward with developing its Phase 9B wells during the year or not. It is a project that has been delayed twice already, most recently until mid-2016. On the development side, we’re going to be tracking works to prepare production from Eni’s Zohr and BP’s West Nile Delta fields to see if the 2017 production targets are feasible or not. Surprises could come from smaller producers including Petroceltic and Edison, who are exploring sites near Zohr and could add to an already remarkable find. On a bigger scale, the efforts to make Egypt a regional energy hub and link production from Israel and Cyprus should also begin to bud in 2016, with the latest development being the green light from Tel Aviv for exports to Egypt just last week — it’s a development we expect could pave the way for settlement talks on the Israel Electric verdict.
The outlook for both M&A dealflow and capital markets is less clear. On the capital markets front, appetite at global funds will depend largely on how the FX question plays out. No ability to repatriate gains will mean no new interest, however bargain-priced equities may be — and regardless of how the economy performs. Globally, at least one high-profile strategist is convinced we’re looking at double-digit gains for equities markets, seeing 2015 as a cyclical bear year in a secular bull run that began in 2009.
At home and abroad, the year just ended was packed with M&A activity as both domestic and global players positioned themselves for the future. With valuations at a ‘sweet spot’ for buyers and sellers alike, the downside risk would be for valuations to trend lower, opening a gulf between pricing expectations on the two sides of the equation.
We’ll also be keeping an eye on debt markets and non-bank financial services. Four factors are going to drive change here. The Egyptian Financial Supervisory Authority is pushing forward with its drive to launch covered and un-rated bonds (which could help open debt markets to corporations). A glut of renewable energy projects operating under the feed-in-tariff program will be looking for debt financing to cover an equity gap. The market for leasing and other non-bank financial services, which roared to life in 2015, will see players looking to introduce new products to differentiate themselves as competition stiffens. And new regulations on movable assets as well as recent steps to define what, exactly, an SME is could open new borrowing horizons for small and mid-sized businesses in the long term — if banks ever get over their tryptophan-induced slumber after gorging on easy gains from government paper.
USD CBE auction (Thursday, 24 December): 7.7301 (unchanged since Wednesday, 11 November)
USD parallel market (Thursday, 24 December): 8.58 (unchanged from Sunday, 13 December, Reuters)
EGX30 (Thursday): 6,812.65 (+0.64%)
Turnover: EGP 599.0 mn (38% above the 90-day average)
EGX 30 year-to-date: -23.68%
THE MARKET ON THURSDAY: The EGX30 closed Thursday after a 0.6% rise after taking Wednesday off for the Prophet’s Birthday. Thursday’s gains extended the index’s winning streak to an eighth day, and while the rally may be semi-attributed to seasonality, fundamentals largely explain the rebound observed, especially among battered stocks. OTMT closed up for the week, rising 15.3% last week and 27.8% since its offer to acquire CI Capital. El Sewedy Electric posted more modest gains after it announced it had signed an agreement with the Egyptian Electricity Transmission Company, in a consortium with Siemens, to build six transformer stations. On the flip side, Ezz Steel was among Thursday’s loses after its most profitable subsidiary, EZDK, reported an attributable net loss of EGP 248.3 mn in 3Q2015. Misr Cement Qena, Palm Hills and Beltone Financial were the index’s biggest losers on Thursday. At a turnover of EGP 549.5 mn, local investors were the sole net buyers of the day. Saudi Arabia advanced 0.1%, while markets in the UAE, Kuwait and Oman were closed for holidays.
Foreigners: Net Short | EGP -30.0 mn
Regional: Net Short | EGP -21.8 mn
Domestic: Net Long | EGP +51.8 mn
Retail: 68.4% of total trades | 72.9% of buyers | 63.9% of sellers
Institutions: 31.6% of total trades | 27.1% of buyers | 36.1% of sellers
Foreign: 12.0% of total | 9.4% of buyers | 14.5% of sellers
Regional: 4.8% of total | 3.0% of buyers | 6.6% of sellers
Domestic: 83.2% of total | 87.6% of buyers | 78.9% of sellers
WTI: USD 38.10 (+1.60%)
Brent: USD 37.89 (+1.42%)
Gold: USD 1,075.90 / troy ounce (+0.52%)
TASI: 6,941.8 (+0.1%)
KSE Weighted Index: closed
QE: 10,258.7 (+0.4%)
Steel price deflation and NG pricing dynamics will limit gains from backward integration at Ezz Steel
Ezz Steel announced last Tuesday in a local newspaper that it launched its long awaited DRI facility in El Ein El Sokhna, rendering Ezz Steel the owner of the second largest DRI facility worldwide, according to the firm’s announcement. We still expect Ezz Steel will see limited gains from backward integration. We remain concerned over the potentially higher blended average price of natural gas given the higher cost of imported LNG (cc USD 10-12/MMBTU according to selected sources) as well as the costs associated with regasification. What’s more, the Egyptian government is struggling to pay for USD-priced LNG imports. And this comes as the deflation wave that hit commodity prices since 2014 led steel prices as well as raw materials prices to hit multi-year low. How will all this limit DRI benefits to Ezz Steel? Tap here to find out.
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