Wednesday, 15 June 2016

U.S. Fed to announce interest rate decision today, CBE follows suit tomorrow


What We’re Tracking Today

Interest rate watch: The U.S. Federal Open Market Committee met to discuss interest rates yesterday and will make its announcement today. The market is largely anticipating the Fed to maintain rates, with Luke Bartholomew, investment manager at Aberdeen Asset Management, saying a June hike is “dead in the water.” Timothy A Duy writes for Bloomberg that a change isn’t expected until September while the FT’s Kelly Friendly opines that the “hawkish inclination of the Fed … is misguided. The greater danger is of too little rather than too much demand. A new Fed paradigm is therefore in order.”

Meanwhile the Central Bank of Egypt’s Monetary Policy Committee is due to meet on Thursday.

Analyst consensus (so far) is for a rate hike. Of the eight analysts who have made public calls on which way they think the MPC will break, four expect rate hikes, three expect the committee to leave rates on hold and two see it as even odds.

  • Rate hike: EFG Hermes, Arqaam, Institute of International Finance, Prime
  • On hold: Beltone, Multiples, and Pharos (more in By the Numbers).
  • On the fence: CI Capital and Mubasher see there being a 50-50 chance of a 25-50 bps price bump

Over at Reuters, six out of 11 economists expect the bank to hold rates while five forecast a hike ranging from 25 bps to a full percentage point.

Also today, the local wheat buying season officially comes to an end as the government has already surpassed its set target of buying 4 mn tonnes. "Supplies Minister Khaled Hanafi pointed out that the door for receiving local wheat from farmers will close at the end of Wednesday due to lowering local procurement rates," Reuters quoted a Supply Ministry statement as saying.

When do we eat? Iftar will be at 6:58pm CLT today, while the cut-off for sohour will be at 3:08am CLT, according to Islamic Finder.  

On The Horizon

The next session in the trial of former Central Auditing Organization chief Hisham Genena is due to take place on Tuesday, 21 June, and next week is Brexit week as the U.K. heads to the polls to vote on whether to remain in the European Union on Thursday, 23 June.


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Speed Round

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EGAS is not required to pay the Spanish Egyptian Gas Company (SEGAS) USD 270 mn in arbitration, the International Chamber of Commerce (ICC)’s International Court of Arbitration decided. SEGAS runs the Damietta liquefaction plant, which is 80% owned by Union Fenosa Gas, and had filed a complaint with the ICC in 2013 alleging that “its state partner had failed to comply with contracts by halting gas supplies in 2012 and not making payments,” Reuters explains. It asked EGAS to pay USD 270 mn plus interest in compensation. EGAS was represented in the case by Shearman & Sterling, who said the ruling came in EGAS’ favour because the arbitrator “found that the claimant had assigned to a third party all of its rights under the relevant contract.”

Shearman & Sterling explain that “the tribunal … concluded that the claimant had absolutely assigned its rights to an offshore security trustee acting on behalf of a large consortium of banks. As a consequence of the assignment, the claimant could not seek to recover any amounts under the contract. In addition, the tribunal rejected the claimant’s attempt to salvage its claims by entering into a deed of reassignment with the lenders during the course of the arbitration.” Al Masry Al Youm has coverage in Arabic.

In other energy news, EGPC reached an agreement to pay Eni’s receivables in EGP-equivalent, a source told Al Borsa. Eni is owed around USD 650 mn from its production share from JV’s Agiba, Petrobel, and Pharaonic. Eni agreed to receive the amounts in EGP after local operators Petrojet and Enppi agreed to conduct the marine services works and connect production from Zohr to the national grid while receiving payment in EGP. The agreement also involved rescheduling payments. EGPC is also negotiating a similar agreement with another IOC, which was not named, regarding USD 800 mn it is owed in receivables, said the source.

An explosion on EgyptAir Flight 804 is unlikely since it veered off course before losing altitude and ultimately plunging into the sea, according to a report based on radar images from the Egyptian Civil Aviation Ministry on Monday, CNN Arabic reported. The plane turned left before rolling right into a full circle, the investigators said in their latest report. The findings confirm initial statements made by Greek officials that were initially rejected by Egyptian authorities who suggested contact with the plane was lost more abruptly. Some of the experts on the team believe the steep angle of the wings and sharpness of the left turn could exceed computer-controlled flight protections. The turn appears to have come close to, or even exceeded, the jet’s structural design limits, one former investigator said. Egyptian authorities also said they have invited the US National Transportation Safety Board to participate in the investigation, according to the Wall Street Journal (paywall).

Egypt will commence negotiations for the second USD 500 mn tranche of the African Development Bank (AfDB) USD 1.5 bn loan to support the state budget this month, AfDB representative in Egypt Laila El Mokaddem told Amwal Al Ghad. El Mokaddem expects negotiations to be completed in October or November, with Egypt likely to receive the loan by the end of the year. The interest rate on the loan signed earlier this year will be unaffected by the devaluation, she added. The agreement stipulates a 0.6% annual interest with a five-year grace period and will be paid back over 20 years.

Obour Land will float 25% of its share capital on the EGX, Chairman Mohamed Hamed told Al Borsa. After saying last week that it was “close” to an IPO, Obour Land will submit a formal request to list on the EGX next week, complete its required documentation before June’s end, and begin trading in 3Q2016. The company will issue 200 mn shares at a par value of EGP 1 per share, sources added.

Naguib Sawiris is reportedly in negotiations to acquire Brazilian telecom operator Oi SA, Al Borsa reported, quoting Brazilian news website Estadao (in Portuguese). Oi is undergoing debt restructuring talks that were complicated following the resignation of CEO Bayard Gontijo, who has been working “for months to reach a deal between company’s creditors and shareholders,” according to the Wall Street Journal. Oi owes its creditors around USD 14.4 bn, Al Borsa notes. It is unclear which hat Sawiris is wearing in this transaction as Orascom Telecom Media and Technology (OTMT)’s head of IR told Al Mal that the negotiations Sawiris is reportedly engaged in are not related to OTMT.

The CBE reportedly sold only USD 106.7 mn of the USD 120.0 mn it offered during Tuesday’s auction, far lower than the usual number sold (USD 118.0-120.0 mn), Reuters reports. The bank kept the EGP steady to the USD at 8.78.


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The Macro Picture

The oil market is unlikely to find a sustainable balance until 2017, writes the International Energy Agency in its latest monthly report. In the short term, “less oil has been stockpiled than we originally expected,” according to the report. While it expects supply and demand to even out by the second half of 2016, it forecasts a small surplus in 2017. OPEC supplies are expected to increase “modestly” while production elsewhere, such as the US, will carry on its growth trajectory. “This will make way for a slight increase in global stocks in the first half of 2017, before they begin to fall again,” writes the FT (paywall)

Egypt in the News

CNN picks up on Egypt’s gold mining potential, quoting vice president at EFG Hermes Yousef Husseini as saying mineral resources will “add a lot of GDP growth." But even as Alexander Nubia says there’s large potential in looking for gold along ancient gold mines, "the issue is the quantity to make it commercial to spend the money to go and mine it," says CEO Mark Campbell. But Leonard Karr, a geologist with Alexander Nubia, says Egypt is "like a geologic Disney World," with “silver, copper, lead and zinc also expected to lie beneath the surface.”

Swedish furniture brand IKEA is in hot water over alleged ties to the Mubarak regime, Sputnik writes. Swedish paper Svenska Dagbladet reported earlier this month that IKEA Egypt carpet provider Oriental Weavers “was very close to the Egyptian dictatorship and reportedly siphoned mns of USD to organizations controlled by the Mubarak family.” But “despite a wave of harsh criticism from, among others, Amnesty International, Swedwatch and Institute Against Bribes for indirectly supporting the Egyptian regime, IKEA still maintains the provider was good and stresses that the company “does not chart the political affiliation of its business partners.<snark>Thank you, Sweden, for your incredibly sophisticated and nuanced understanding of Egypt’s business community.</snark>

Diplomacy + Foreign Trade

The governorate of Sohag has received five offers from Indian companies to establish factories in various industries as part of an effort to create a major industrial area for Indian firms in the governorate, Sohag Governor Ayman Abdel Moneim said, Al Borsa reported on Tuesday. The health sector is a potential industry for Indian investment, be said, but centralisation in the region has proven to be an obstacle for proposing offers. Several meetings with Industry and Trade Minister Tarek Kabil will take place to review the offers, with negotiations expected to end in two months at the latest.

Minister of Industry and Trade Tarek Kabil will hold a number of meetings with Russian officials, including Minister of Economic Development Alexey Ulyukaev, Minister of Industry and Trade Denis Manturov, in June in St. Petersburg as part of the ongoing talks on a free trade agreement between Egypt and the Eurasian Economic Union, which includes Russia, Belarus, Kazakhstan and Armenia, AMAY reported on Tuesday. Kabil will also hold meetings with three Russian firms, X5 Retail Group, Rosatom and Kamaz, for potential trade in the retail industry.


Shell production increases to 686 mcf/d from Burullus and Rosetta concessions

Royal Dutch Shell’s natural gas production from the Burullus and Rosetta concessions increased to 686 mcf/d from 640 mcf/d at the end of 2015, Al Borsa reported. The production is divided into 641 mcf/d from the Burullus concession and 45 mcf/d from the Rosetta concession, an Oil Ministry official said. The two concessions lose around 480 mcf a year that will be compensated when Phase 9B becomes operational, the source added.


First phase of administrative capital infrastructure to be completed within a year and a half –Holding Company for Construction and Development

The Holding Company for Construction and Development is looking to complete its share of the first phase of infrastructure at the administrative capital within a year and a half at a total cost of EGP 1 bn, company chairman Mahmoud Hegazy told Amwal Al Ghad. The company’s activities at the Administrative Capital include paving main roads and extending electrical grids over an area of 1,200 feddans, he added.

Basic Materials + Commodities

Supply Ministry unable to pay EGP 4 bn to Sugar and Integrated Industries Company

The Supply Ministry is unable to pay EGP 4 bn in backlog to the Egyptian Sugar and Integrated Industries Company (SIIC) for the full amount of their production, sources within the ministry tell Al Mal. Finance Minister Amr El Garhy recently announced the Supply Ministry was allocated EGP 15.93 bn in emergency financing, but sources at the ministry claim the funding only covers expenses for cooking oil and wheat. Meanwhile, SIIC has resorted to banks for EGP 3 bn to cover its expenditures, sources said, but has reached the ceiling for credit facilities set by the CBE at 20% of a company’s capital.

Spinning and weaving companies don’t rely on sales to the general public anymore -El Sewedy

Spinning and weaving companies rely on sales to the military and the police, and don’t look to citizens as consumers, head of the industry committee at the House of Representatives Mohamed El Sewedy told Al Shorouk. The companies face difficulties from power shortages, a weak financial supervisory system, and a lack of marketing plans, he added. In addition, the companies also have weak legal departments that allow for aggressions against its assets, said El Sewedy.


Tourism Ministry begins promotional campaign in Saudi, targets 600k tourists this year

The Tourism Ministry is commencing the first round of a promotional campaign to targeted at Arab countries, starting with Saudi Arabia, Amwal Al Ghad reported. Saudi ranks first among Arab tourists to Egypt with 433k visitors last year compared to 350k in 2014 and an expected 550k-600k visitors this year, said head of the Egyptian Tourism Authority Samy Mahmoud. EgyptAir added around 54 weekly flights to major Saudi cities, bringing the total to over 200 weekly flights between the two countries.

Telecoms + ICT

Paying for 4G licence in USD would be “problematic” – Vodafone Egypt CEO

Paying for a 4G licence in USD would be a “problem,” Vodafone Egypt’s CEO Ahmed Essam told Al Shorouk, as the company does not have access to foreign currency except through borrowing from the banking system. Vodafone Egypt is yet to tap any local banks for funding as the details of the licence and its issuance remain unclear. Essam added that Vodafone Egypt has the technical capabilities to support 4G services and could begin providing them four months after being awarded the licence. Essam told Amwal Al Ghad that the company spent more than EGP 9.5 bn refurbishing its network infrastructure over the past three years.

Banking + Finance

Banque Misr begins operations at representation offices in Russia, China within two months

Banque Misr is set to begin operations at its new representation offices in Russia and China within two months, Chairman Mohamed El Etreby told Al Mal. The representation office in Moscow, Russia is considered Egypt’s first in the country, while the new office in China will be in Guangzhou, he added. Operations will begin once the bank receives final approvals from both countries, he said. Banque Misr is following the CBE directive to expand in regional markets, said El Etreby, eyeing Kuwait and Bahrain next.

Islamic financing expected to grow to EGP 150 bn by end of 2016 –EIFA

The size of Islamic financing is expected to grow to EGP 150 bn by the end of 2016 from EGP 120 bn in 2015, Egyptian Islamic Finance Association Chairman Mohamed El Beltagy told Al Shorouk. Islamic finance represents 8.2% of total financing in Egypt and has grown 18% last year from 2014, he added.

SocGen becomes the financial advisor for Tahrir Petrochemicals Complex

Societe Generale and Carbon Holdings-owned Tahrir Petrochemicals Corporation signed an agreement mandating the bank to serve as financial advisor to the Tahrir Petrochemicals project in Egypt. “The Tahrir project is a perfect example of how we can bring value to our clients in Egypt … Societe Generale has a long history of advising on transactions of this nature and size in Egypt and the MENA region,” said Richad Soundardjee, Societe Generale’s CEO. Egypt is a key component for Societe Generale’s efforts to be relevant to strategic clients in the region, CPI Financial explains.

Legislation + Policy

Parliament approves amendment to allow El Sisi to reshuffle Higher Press Council

The Parliament’s Media and Culture Committee approved on Tuesday an amendment of Article 86 of the Press Law that would give President Abdel Fattah El Sisi the power to reshuffle the Higher Press Council (HPC) for one temporary term until the legislation is passed by parliament, Ahram Online reported. The HPC will also name new editors and board chairmen of state-run news organisations, as well as have the same powers as the defunct upper house of the Shura Council. “The amendment just grants the president of the republic the right to appoint a new HPC as the legal term of the current one has expired and it no longer has the legal capacity to name new editors and board chairmen of national press organisations,” independent MP Mustafa Bakri, who proposed the amendment, said, ensuring that there are no political motives behind the move.

On Your Way Out

The House of Representatives has approved custom tariff increases on a number of “luxury goods” decreed by President Abdel Fattah El Sisi in January, Al Ahram reported. At the time, we reported that “tariffs on nuts, including cashews, almonds, and pistachios, are up to 20%, while avocados will be charged 30% and apples 40%. Custom tariffs on pet food have also been increased 40%, the same rate as will now be charged on cosmetics, deodorants, sports shoes, dental floss and home appliances.” Al Masry Al Youm carried the decree in full.

Egypt’s outgoing ambassador to Bangladesh Mahmoud Ezzat met with Foreign Minister in Dhaka to discuss political and economic matters and to bid him farewell after four years of service in the country. Ezzat received some degree of fame last year when he went on Bangladeshi TV to explain Egyptian traditions and recipes for Eid Al Adha on a show where he also sang a few songs (runtime 05:05).

Dozens of Nile Cotton Ginning employees protested outside the Ittihadiya Palace in Cairo on Monday demanding the company be returned to government control, DNE reports. Workers protested in April at headquarters in Mahalla to demand that their late salaries be paid. Employees from the Egyptian Holding Company for Land Reclamation have also been on strike since Monday to demand salaries owned since May 2015, they told DNE.  

An Egyptian court acquitted 52 people standing trial for protesting against the maritime border demarcation between Egypt and Saudi Arabia that saw the transfer of two Red Sea islands to the kingdom, Reuters quotes judicial sources as saying. Around 200 were arrested for the protests, and earlier this month, another court acquitted 33 protesters.

Ramadan miracle: Saving the best and most important news for last, HBO announced on Tuesday that Larry David will be returning for a ninth season of Curb Your Enthusiasm. When asked to comment on his return, David is quoted in the statement as explaining “In the immortal words of Julius Caesar, ‘I left, I did nothing, I returned.’” We’ve lost track of how many times we’ve linked to this video, but here you go: Larry vs. Susie, running time: 9:49.

The markets yesterday

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USD CBE auction (Tuesday, 14 June): 8.78 (unchanged since Wednesday, 16 March)
USD parallel market (Saturday, 11 June): 10.92-10.95 (compared to 10.90 on Tuesday, 7 June, domestic press)

EGX30 (Tuesday): 7,570.05 (-0.98%)
Turnover: EGP 427.9 mn
EGX 30 year-to-date: +8.05%

THE MARKET ON TUESDAY: EGX30 fell 1.0% by the end of trading yesterday. The benchmark index’s top-performing stocks were Ezz Steel and Elsewedy Electric, which were also the only index members to close in the green. Edita Food Industries, GB Auto, and South Valley Ce­ment were the index’s worst-performing constituents. Market turn­over stood at EGP 427.9 mn, and foreign investors were the sole net buyers.

Foreigners:Net long | EGP + 45.8 mn
Regional:Net short | EGP – 2.4 mn
Domestic:Net short | EGP – 43.4 mn

Retail: 51.9% of total trades | 51.0% of buyers | 52.8% of sellers
Institutions: 48.1% of total trades | 49.0% of buyers | 47.2% of sellers

Foreign: 21.4% of total | 26.8% of buyers | 16.1% of sellers
Regional: 9.7% of total | 9.4% of buyers | 10.0% of sellers
Domestic: 68.9% of total | 63.8% of buyers | 73.9% of sellers


Expect the MPC to maintain rates; cost of a rate hike outweighs the potential benefits

We expect the Egypt MPC to maintain rates at its upcoming meeting on Thursday, 16 June, with a potential rate hike in one of the following two meetings. In the background: inflation; currency defense dynamics, the budget deficit, and low economic growth are not supportive of a rate hike, for the time being.

  • Inflation spiked, but the reasons are clear. The annual core inflation rate accelerated to 12.3% in May 2016 from 9.5% in April, as consumer prices jumped 3.05% m-o-m. This is a natural result of the 13% drop in the EGP versus the USD, effective March 2016, and the pre-Ramadan surge in demand.
  • Further rate hikes would not defend the local currency, unless it is undertaken aggressively at +200-300bps, which would not help an already high budget deficit. This has presented itself following the March devaluation when most banks raised rates on 3- and 5-year CDs to 12.5%, with an even higher 15% rate for USD converted to local currency funds.
  • The shortage of USD and other foreign currency continues to pressure economic growth, especially within the industrial sector. A rate hike would not be helpful for business and the private sector in general.
  • Consensus points to a Fed  hike in July rather than in June. After a disappointing employment report for May 2016, the consensus has shifted towards a July, rather than June, Fed rate hike. If the Fed maintains, this will further support our view that the Egyptian MPC will maintain rates.

If the MPC maintains rates, there should be no effect on the EGX. A rate hike would be negative for equities due to higher required rate of return.

WTI: USD 47.86 (-2.09%)
Brent: USD 49.83 (-0.34%)
Gold: USD 1,288.40 / troy ounce (+0.17%)
Nymex (futures prices) USD 2.6 MMBtu, (+0.39%, July 2016 contract)

TASI: 6,626.58 (+0.56%) (YTD: -4.13%)
ADX: 4,386.42 (+0.49%) (YTD: +1.84%)
DFM: 3,329.71 (+0.19%) (YTD: +5.67%)
KSE Weighted Index: 353.91 (-0.11%) (YTD: -7.28%)
QE: 9,756.38 (+0.54%) (YTD: -6.45%)
MSM: 5,838.87 (-0.15%) (YTD: +8.00%)
BB: 1,123.30 (flat) (YTD: -7.62%)

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14-15 June (Tuesday-Wednesday): The U.S. Federal Open Market Committee meets to discuss interest rates.

15 June (Wednesday): Buying season for Egypt’s domestic wheat harvest officially ends.

16 June (Thursday): The Central Bank of Egypt’s Monetary Policy Committee meets to consider interest rates.

21 June (Tuesday): Trial of former Central Auditing Organization chief Hisham Genena resumes.

23 June (Thursday): It’s Brexit Day as the United Kingdom holds a referendum on whether or not to leave the European Union.

27 June (Monday)” Beltone Financial’s general assembly to decide on converting a third of its share capital to GDRs, according to Reuters.

06-08 July (Wednesday-Friday): Eid El Fitr (national holiday, tentative date)

05-08 September (Monday-Thursday): The 6th EFG Hermes London MENA and Frontier Conference, Emirates Arsenal Stadium, London, U.K.

11-13 September (Sunday-Tuesday): Eid El Adha (national holiday, tentative date)

19-20 September (Monday-Tuesday): Euromoney Egypt, venue TBD

02 October (Sunday): Islamic New Year (national holiday, tentative date)

06 October (Thursday): Armed Forces Day (national holiday)

November (TBD): Delegation of German companies in the renewable energy sector due to visit to discuss investment opportunities.

01 November (Tuesday): Prophet’s Birthday (national holiday, tentative date)

27 November (Sunday): 2016 Cairo ICT, Cairo International Convention Centre

04-06 December (Sunday-Tuesday): Solar-Tec exhibition, Cairo International Convention Centre

04-06 December (Sunday-Tuesday): Electricx exhibition, Cairo International Convention Centre

11-13 December (Sunday-Tuesday): The Middle East Fire, Security & Safety Exhibition and Conference (MEFSEC), Cairo International Convention Centre, Cairo

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