EGP is seen settling at 11.50 post-devaluation + wheat scandal entering final act?

The House committee investigating allegations of corruption in this year’s wheat harvest has submitted its final report to the House of Representative, Reuters’ Eric Knecht and Maha El Dahan write. Noting the report was tabled “amid mounting pressure on the minister of supplies to resign,” the story says “the world’s largest importer of wheat has been mired in controversy over whether much of the roughly 5 mn tons of grain the government said it procured in this year’s harvest exists only on paper, the result of local suppliers falsifying receipts to boost government payments.”

Committee deputy chair Yasser Omar told Reuters that the final report “concluded some 200k tons of wheat was missing at ten private storage sites visited by the commission. … ’Of course there is more than 1 mn tonnes missing … but we won’t be able to know exactly how much is missing because we can’t inspect every single site,’ he said.” We have more on Hanafy — including the hotel bill flap and his appearance in front of the House yesterday — in Speed Round, below.

The House of Representatives’ vote on the value-added tax could come as early as Sunday, 28 August; no date is as-yet confirmed.

Russian security officials will inspect Cairo, Hurghada, and Sharm El Sheikh airports on 29 August, Al Masry Al Youm reports.

El-Sisi in China: President Abdel Fattah El Sisi is expected to sign bilateral agreements worth several bn USD while in China on 4-5 September for the G20 meeting.

Eid Al-Adha will begin on or around Sunday, 11 September. The Central Bank of Egypt is yet to confirm when banks (and hence capital markets) will be off for the occasion.

Michael Bolton is coming to Egypt in October. Following concerts by the Dire Straits and Yanni, Bolton’s concert in Egypt would thus complete the holy trinity of playlists from the ‘80s and ‘90s.

The UAE will make a six-year, USD 1 bn deposit to the Central Bank of Egypt, UAE state news agency WAM reported on Monday. The agreement on the deposit was signed between Central Bank Governor Tarek Amer and the Director-General of the Abu Dhabi Fund for Development Mohammed Saif Al Suwaidi. The report does not specify if the deposit has been made or when it is expected to be deposited. A government source tells Youm7 that this is the second tranche of a USD 2 bn deposit the UAE had pledged this spring, with Egypt having received the first USD 1 bn back in May.

Devaluation within weeks? EFG Hermes sees the pound stabilising at EGP 11.50 post-float.  EFG Hermes Research’s Mohamed Abu Basha said in a note published yesterday that Egypt could be as little as a few weeks away from devaluation. The government will be able to build USD 7-8 bn in reserves by late September or early October, providing a decent buffer to begin the float. Key during the adjustment period, Abu Basha says, is Egypt’s ability to attract capital inflows — particularly the revival of the carry trade. Domestically, he expects demand to come under intense pressure over the next 6-12 months. Among the other takeaways:

Where’s the EGP going to settle? “We see the level of EGP11.5 as a potential point of stabilisation for the EGP post a float process. Such expectation is built on parallel market movements over the past few months, as well as real effective exchange rate (REER) calculations.”

Be Argentina, not Nigeria (or: rip the Band-Aid off): Nigeria floated the Naira, then “started to manipulate the market, insisting on a narrow band of trading for the currency against market expectations,” with the result being foreign investors turning away and a widening gap between the official and parallel markets. In Argentina, by contrast, devaluation was “a fully market-driven adjustment for the peso with minimal intervention. The process quickly built up credibility and attracted capital inflows within a relatively short period of time.”

Watch Abu Basha’s video guide to the EFG Hermes research note here (runtime: 03:55).

Meanwhile, five FX exchanges have filed suit in the Administrative Court, appealing to reverse the CBE’s decision to permanently revoke their licenses. One of the bureaux alleges that it was not even officially informed of the decision, but received only a verbal notification that its license was revoked, Al Borsa reports. The court plans to hold its first hearing in the cases in early September. As we noted on Sunday, an estimated 53 FX bureaus have been shut down by the CBE since the beginning of the year, with 17 seeing their licenses permanently revoked for trading on the parallel market. By Al Borsa’s count, the number stands at 57.  

El Sisi: We have a plan to deal with the FX crunch over the coming six months. Coming in the wake of yesterday’s interviews on foreign policy, state-owned dailies Al Ahram, Al Akhbar, and Al Gomhouria are leading their front pages this morning with an interview that focuses on the economy and the reform program. Speaking of the IMF, El Sisi repeated the government line that the reform program was not imposed and is fundamentally Egyptian. El Sisi referred to the decision to lift power subsidies as an example of the government being willing to take “tough decisions” and stick to the reform agenda.

Expanded welfare spending: The government will continue to protect society’s neediest from the economic hardships inherent in the reform program, El Sisi said. That’s why his administration has raised state pensions and will continue to expand welfare benefits to include an additional 2.5 mn families at a cost of EGP 7 bn per year. The government hopes to grow the beneficiaries of the Takaful and Karama social programs to 1 mn families by December and 1.5 mn by the end of next year. The low-income housing program will also expand, adding 1 mn homes over the coming two years at a cost of EGP 170 bn. The government will also organize a nationwide hepatitis C diagnosis awareness campaign, said El Sisi.

The president then defended national projects, which he says helped reduce unemployment to 12.5% from 13.8% and brought GDP growth to 4.5%. El Sisi proclaimed that the costs of national projects underway came at over EGP 1 tn. Other projects announced include a plan to develop 100k greenhouses. El Sisi also defended the broad role the armed forces have played in these national projects. “The armed forces’ contribution to GDP amounts to 2.5%, which is less than our neighbors,” said El Sisi.

Speaking price increases under the reform agenda: households and SMEs will be spared the upcoming cut to natural gas subsidies, an unnamed source at EGAS told Amwal Al Ghad on Monday. Unlike with power, the government has no intention of increasing prices across all consumption tiers, he added, implying that only industry will have to brace for the coming increases.

The value-added tax (VAT) could be implemented as early as October if the House of Representatives approves the bill, said Finance Minister Amr El Garhy at a hearing held by the House Economic Committee. Delays in passing the VAT this year have led the ministry to reduce its estimated intake from the tax from EGP 32 bn, according to Al Shorouk. El Garhy added that he’s met with members of the House 15 times to discuss the tax.

It seems clear we’re going to see more than four dozen exemptions in total from the VAT, with media reports putting the number at anything from 52 (Al Masry Al Youm, quoting El Garhy), to 57 (Deputy Finance Minister Amr El Monayer, also cited by Al Masry Al Youm).

Finance Ministry sources tell AMAY that a cut to the Ministry’s proposed 14% baseline rate see the state give up revenues of as much as EGP 13 bn per year. Leaders of the Federation of Egyptian Industries and the Federation of Egyptian Chambers of Commerce are disputing that figure. The House Planning and Budget Committee was set to decide on the baseline rate on Sunday, but instead chose to leave it up to Parliament to decide.  

Members of the Economic Committee have expressed concern about  the proposed VAT lotter, with two committee members opposed to the idea.

Pharma Regulator Act in the works: The House Health Committee is drafting the Pharma Regulation Act and will table it, with a full report, to parliament in October after MPs return from summer recess, sources in the House tell Al Borsa. The industry regulator will have wide ranging authority over the industry, including responsibility for quality control and distribution policies as well as exports. The proposed regulator would be an independent operator, reporting to cabinet and not the Health Ministry, said House Health Committee Chairman Magdy Morshid. The move was prompted by the continuing shortages of medication in the country despite the Health Ministry allowing a marginal increase in the price of goods retailing for under EGP 30, as we noted yesterday. Morshid is working on the law in conjunction with the Pharmacists Syndicate and has consulted with Assistant Health Minister Tarek Salman, according to sources. The news comes as the domestic press report (here and here) on ongoing shortages of key products in the market as a result of the FX crunch.

The beginning of the end for Hanafy? Prime Minister Sherif Ismail summoned embattled Supply Minister Khaled Hanafy to discuss corruption claims surrounding wheat purchases and his alleged tax-payer funded stay in a Downtown hotel. The meeting came ahead of Hanafy’s scheduled grilling by the House of Representatives. Al Masry Al Youm was told by sources that Ismail has been shown documents that indicate Hanafy paid for the stay himself. Separately, Hanafy issued a statement, covered widely by the domestic press, saying submitting his resignation is not on the table and the issue was never brought up.

Meanwhile, rumors in the media continue to dog the minister. The latest: the Federation of Egyptian Chambers of Commerce paid for his hotel stay. The organization’s secretary general quickly issued a denial, Al Mal. The statement noted that Hanafy had been a consultant with the federation.

Separately: Hanafy outlined yesterday a plan to impose permits on the rice trade in outlying governorates to ration out the country’s supply. Hanafy made the remarks at a hearing on the government’s rice policy held by the House Agriculture Committee. He has also apparently increased the target for the rice harvest to 2.5 mn tonnes, up[ from a previous 2 mn, according to Al Shorouk. Hanafy continued to defend his reputation as a reformer, repeating previous statements on the success of the bread subsidy program and how he had long called for an overhaul of the system, the newspaper reports.

Egypt’s tourism industry is bearing the brunt of a slump in tourism arrivals regionally, Steve Johnson writes for the FT (paywall). Compared to cities affected by terrorist attacks, like London and Madrid, “tourism levels ‘returned to normal quite quickly’ … while countries in the same boat as Tunisia and Egypt typically ‘take two to three years to recover’,” David Scowsill, president and chief executive of the World Travel & Tourism Council (WTTC) says. He explains that “past experience showed more ‘random’ acts of terror, such as those targeted at the UK, Spain and France in recent years, tend to have less of a long-term impact on tourism than attacks specifically targeted at holidaymakers, as seen in both Egypt and Tunisia.” Regionally, Scowsill expects Turkey to recover faster than Egypt and Tunisia “the feud between Russia and Turkey now appears to have been resolved and Russian tourists are starting to return.”

EFSA has given Arabian Food Industries Company (Domty) the green light to issue GDRs, according to a bourse statement. The normal restrictions apply: the global depositary receipt cannot exceed a third of the company’s issued and paid-in capital and cannot be more than the number of shares in free-float.

Meeting between ministers of investment and power over FiT comes to nothing: Investment Minister Dalia Khorshid’s bid to put phase one of the feed-in tariff program back on track has ended. Khorshid had reportedly hoped to convince the Electricity Ministry to back away from its requirement that participating companies agree to domestic arbitration on any potential disputes and source 85% of their financing from international sources. Sources who attended a meeting between Khorshid and Electricity Minister Mohamed Shaker tell Al Borsa that the meeting ended with Khorshid appearing to have understood the insistence on domestic arbitration and not pushing to save phase one of the FiT program. Some 20 companies have said they are canceling or thinking of canceling solar power projects under the FiT regime.

MOVES- Abdel Aziz Abaza has joined corporate law firm Zulficar & Partners as a partner. Abaza was formerly legal counsel at Qalaa Holdings, where he worked on exits in several sectors. He was previously an M&A specialist at Zaki Hashem and Partners and has worked on transactions involving Olympic Group, Japan Tobacco International, and QNB. He has also worked on initial public offerings, GDR programs and mandatory tender offers.

Egypt Kuwait Holding (EKH) reports improved revenues, top line despite translating underlying results into USD from EGP: The company reported 2Q2016 attributable net income of USD 15.3 mn on revenues of USD 89.5 mn. Attributable net income rose 5.5% y-o-y despite devaluation of the EGP compared to the same period last year. Rising net income came in the absence of provision write-backs (a hallmark of its 2Q2015 results). “For the past six months, we have focused on a restructuring of our portfolio that has seen us increase stakes in high-profile assets while simultaneously de-consolidating legacy businesses. Our singular focus on our most profitable and stable investments has already begun to bear fruit,” noted EKH Chairman Moataz El-Alfi. Read EKH’s full earnings release here (pdf).

EgyptAir’s losses grew to EGP 14 bn in FY2015-16, EgyptAir Holding Company CEO Safwat Muslim tells Al Borsa. The company plans to reverse this loss this fiscal year.

Are we doing the whole “we love you, love you not” dance with Turkey again? We are support strengthening our relationship with Egypt, and feuds between government shouldn’t dampen relations between our peoples, said Turkish Prime Minister Binali Yıldırım on Monday, Anadolu reports. His comments come in response to comments made by President Abdel Fattah El Sisi during his interview with state-owned newspapers yesterday in which he said “there is no reason for a feud between the Egyptian and Turkish people.” Anadolu noted El-Sis’s remarks yesterday. Neither country has spoken outright of plans for government-to-government talks.

Israeli media is having a field day reporting on Foreign Minister Sameh Shoukry’s comments that Israel has the right to defend itself. Israel’s presence in the West Bank and its policies toward Palestinians do not constitute terrorism, Foreign Minister Sameh Shoukry said in response to a high school student asking why international communities don’t consider Israel and the US terrorist groups, the Times of Israel, i24News, and JPost reported. “You can look at it as a rule of force, but there is no proven link between Israel and terrorist groups,” said Shoukry. The article describes the action as “an unusual display of public empathy from an Arab official.” Shoukry made a surprise visit to Israel last month. The Foreign Ministry has subsequently stated that foreign and local newspapers are deliberately misquoting Shoukry, adding that he was claiming that Israel’s actions can’t be said to be terrorist because there is no accepted international definition of terror or state terrorism, as a number of countries have conflicting views on the subject.

Hamas shot back, with their spokesperson Husam Badran subtweeting “Someone who doesn’t see in the crimes of the Zionist occupation terrorism is blind,” as noted by the Times of Israel.

The potential to benefit from gas discoveries has created an opportunity for eastern Mediterranean countries to forge closer ties, Amos Hochstein, the US Secretary of State envoy on energy affairs tells Bloomberg. “Countries in the region must work together if they hope to unlock multibillion dollar gas discoveries in Israel and Cyprus … As Israel looks to develop its offshore Leviathan gas field, it’s considering a pipeline to Turkey — a strong energy consumer as well as a portal to European markets — while mulling an undersea pipeline to Egyptian liquefaction terminals.” Hochstein believes “there’s enough gas in Leviathan to do both … we’re just beginning to open the spigots of what is the potential for the broader region.”

Egyptian authorities are allegedly clamping down on satirical social media pages, according to an Al-Monitor feature. The piece reports on the shutting down of a number of satirical pages carrying the names of President Abdel Fattah El Sisi as well as former presidents and politicians.

The lesson learned from the 1977 bread riots should be “not to trick the people,” writes Al Ahram columnist Salah Montasser in reference to state media hinting that prosperity is right around the corner ahead of ultimately announcing a price increase on almost all basic commodities. Former President Hosni Mubarak never talked about prosperity, and instead “spoon-fed” the people multiple price increases during his rule, he says.

In contrast, the Al Masry Al Youm columnist with the pseudonym Newton calls for a more realistic policy discussion. He publishes a letter from former Planning Minister Othman Mohamed Othman criticizing the House of Representatives for slowing down the economic reform process. Othman says the House should either accept the reform package as is or focus its energy on an alternative route to balancing the budget if it decides to reduce the VAT rate. Newton himself then criticizes the House for pursuing Supply Minister Khaled Hanafy over the very flawed wheat import system he insisted on replacing.

Makram Mohamed Ahmed asks why there’s secrecy around the new draft bill on the construction of churches in a column for Al Ahram. Rumors circulating that the draft requires the approval of the governor to build or renovate a church within four months, but allows for appeals on the approval in front of the administrative judiciary which can take up to 10 years will enrage public opinion on the draft, he says.

Former MP and scholar Amr El Shobaki writes on the state’s inability to deal with “institutional thugs” in a nod to infamous lawyer / football club president Mortada Mansour, in a piece for Al Masry Al Youm. The article chastises the government generally for being unable to enforce the law in police stations, public transportation, implementing court rulings, or address the situation with Christians being kicked out of their homes in Minya, claiming the state is either “involved” or “unaware,” both of which are disasters.

‘How a scheme to help Russians secretly funnel money offshore unraveled’: The New Yorker’s Ed Caesar takes a look at a mirror trade scheme by Deutsche Bank that was used to expatriate money out of Russia. “Mirror trades are not inherently illegal… Viewed with detachment, however, repeated mirror trades suggest a sustained plot to shift and hide money of possibly dubious origin. Deutsche Bank’s actions are now under investigation by the US Department of Justice, the New York State Department of Financial Services, and financial regulators in the UK and in Germany.” (Read Deutsche Bank’s USD 10 bn scandal)

Legofied mosalsal: One of this past Ramadan’s most popular television series, Al Ostoora [The Legend] gets the Lego treatment from the Glocal. (Watch in Arabic, running time: 1:21)

The House of Representatives approved a number of international loan and aid agreements, including three loans worth USD 942 mn from the Japanese International Cooperation Agency (JICA), the Kuwait Fund for Arab Economic Development and the European Investment Bank (EIB) for power projects. JICA’s USD 243 mn loan will go towards upgrading the power grid, Al Mal reported. The 40-year facility carries an annual interest rate of 1.3%. The KWD 30 mn (USD 99 mn) Kuwait Fund loan will help finance the electricity interconnection project between Egypt and Saudi Arabia, Al Mal reports, while the USD 600 mn EIB loan will fund the 1.8 GW Damanhour power plant, Al Mal reported. The House also approved an EUR 8.6 mn credit line from the Italian government to the Social Fund for Development to help SME development, Al Borsa reported. The House also approved a MoU signed with the EU which could potentially expand aid from the EU to EUR 380 mn from a current aid framework of up to EUR 257 mn.

Plans to form a joint Arab military force are still ongoing, Foreign Minister Sameh Shoukry told Ahram Online. The initiative was first introduced at an Arab League Summit meeting in March 2015 but later indefinitely postponed by August that year. Shoukry did not provide any details for the policy’s implementation.

Egypt’s exports to the UAE grew 112% year-on-year to USD 1.1 bn during 1H2016, Industry and Trade Minister Tarek Kabil said, according to Ahram.

EGAS has resumed supplying AlexFert and the Misr Fertilizers Production Company (MOPCO) with 90 mcf/d of natural gas following 20 days of no supplies, for “scheduled annual maintenance,” sources at EGAS told Al Borsa. EGAS had previously requested fertilizer factories conduct their annual maintenance in August, the time when demand for natural gas to electricity plants peaks. Helwan Fertilisers and Methanex are still conducting the annual maintenance, the source added, and that 205 mcf/d is currently supplied to Abu Qir Fertilizers and the Delta Company For Fertilizers and Chemical Industries.

Foreign companies operating in the Suez Canal Economic Zone are refusing to pay for utilities in USD, despite assurances from the CBE that these companies would repatriate USD profits Al Borsa reported. As we had earlier reported, the SCZone had obtained CBE approval to charge the companies in USD for utilities. China’s TEDA, which operates an industrial zone in the SCZone, said only these assurances might win over factories in its area.

China’s Egypt Teda Investment (TEDA) has completed 45% of infrastructure in the first phase of its industrial zone in Ain Al Sokhna, Al Borsa reported. TEDA aims to complete the project by the end of the year, said CEO Wei Jianqing. The company has invested USD 140 mn so far, and is investing an additional USD 500 mn into completing the development project, he added. TEDA was contracted in December 2015 to develop 6 sq km in the area north west of the Gulf of Suez. Additionally, TEDA is negotiation with 10 companies from Egypt, China, and Europe to start projects in seven sectors including machinery, IT, electrical appliances, building materials, chemical industries, and light industries.

The Arab Contractors will complete extending infrastructure into the first phase of New Alamein by mid 2019 at a total cost of EGP 1.3 bn, Chairman Mohsen Salah told Amwal Al Ghad. The first phase spans 1,466 feddans, and includes the water, irrigation, rainwater drainage, and fire safety networks, in addition to electricity, communications, and sewage plants. The company began operations at New Alamein three weeks ago, said Salah.

Saudi Arabia’s Construction Products Holding Company (CPC) has begun construction on the second phase of its SME complex in Six of October, the company’s general manager Mohamed El Yafi told Al Borsa. The company is looking to build 63 units each with a space of up to 300 sqm each, with an investment value of EGP 80 mn, he added. CPC is the industrial arm of Saudi Binladen Group, and operates seven industrial complexes in Saudi, Syria, the UAE, Morocco, and Egypt.

Education Minister El Helaly El Sherbini met with a delegation from the Japanese International Cooperation Agency (JICA) to discuss a project to build 100 schools set to start in 2017. He also discussed modelling 100 existing schools after the Japanese system, Al Masry Al Youm reported. The project was initially proposed during President El Sisi’s trip to Japan earlier this year.

The Health Ministry signed a cooperation protocol with the Military Production Ministry, Vacsera, and Pharco Pharmaceutical to build the first oncology medicine factory at a total cost of EGP 400 mn, Al Masry Al Youm reported. The factory will produce 103 types of medicine chosen after coordination with the National Cancer Institute and will cover 95% of Egypt’s oncology treatment demand, said Health Minister Ahmed Rady. A drop in oncology treatment prices is expected after the launch of the factory, he added.

Talaat Moustafa Group is building a Four Seasons Hotel, a hospital, and a shopping mall in its Madinaty development as part of the EGP 2.5 bn it plans to spend in 2H16, said group vice-president Jihad Sawafta. The company is also hoping to complete phase three of the development and deliver 5-6,000 homes this year, he tells Al Borsa.

Darna Real Estate Investment is set to start constructing a shopping mall in Al Shorouk City, worth EGP 100 mn in investment, Al Mal reported on Monday. The new project will be comprised of 40 stores with Darna particularly targeting big name restaurants and international fashion brands. The mall is set to launch in August 2018.

Civil Aviation Minister Sherif Fathy denied reports that Russia is requiring special terminals for its passengers as a prerequisite for resuming flights to Egyptian airports, Al Masry Al Youm reported. Fathy also denied reports Russia was presenting Egypt with a security protocol. Egypt may potentially create separate security zones in airports for Russian tourists arriving or departing “if their number increases accordingly.” Separately, the Civil Aviation Ministry also said it is expecting a Russian security inspection of the Cairo, Hurghada, and Sharm El Sheikh airports on 29 August, and a delegation from the International Civil Aviation Organization for the annual inspection before the end of 2016, said Fathy.

Brilliance Bavarian Auto are looking to invest USD 80 mn into a project to domestically assemble vehicles starting in January 2017, the company’s deputy general manager Khaled Saad told Al Mal. The company is looking to assemble the Brilliance V3, H330, and H2S models domestically at its factory in Six of October, in addition to building a new factory in the logistics zone at the Suez Canal axis, said Saad.

United Bank of Egypt is in talks with a number of unnamed, international financial institutions for a USD-denominated loan, Managing Director Farag Abdelhamid told Al Mal. He added that the bank is aiming to diversify sources of foreign currency, similar to other local banks such Banque Misr and NBE.

Trade and Industry Minister Tarek Kabil defended amending the Importer Registry Act at a hearing with the House of Representatives economic committee, Al Borsa reported. Kabil says the move is to limit the amount of “low quality” foreign products on the domestic market. The amendments include increasing the minimum capital required to be on the registry to EGP 500k from EGP 10,000 for joint liability companies and to EGP 2 mn from EGP 15,000  for limited liability companies. The amendments also impose  of a minimum import requirement of EGP 5 mn for individuals and EGP 10 mn for companies. Importers have six months to meet these new requirements. The amendments have garnered significant opposition from domestic importers, as we noted last week. The importers and home appliances divisions of the Federation of Egyptian Chambers of Commerce are particularly incensed that the foreigners have been allowed entry into the importers registry

Defence Minister Sedki Sobhy and Military Chief of Staff Mahmoud Hegazy met with US Congressman Jeff Fortenberry yesterday in Cairo to discuss potential areas of military cooperation between both countries, Al Ahram reports. Fortenberry is a member of the House Appropriations Committee, as well as the subcommittees of Energy and Water, Military Construction and Veterans Affairs, and State and Foreign Operations. Details of the meeting were not provided.

Momen Soleiman has been appointed as head coach of Zamalek, said the club’s chairman Mortada Mansour, according to Youm7.

Egypt’s mobile platform for comic artists: Wamda’s Rachel Williamson profiled Koshk Comics, an Egyptian “mobile-first platform into which comic artists can upload their work, with the option to sell it.” Co-founder Amr Hussein says “our goal is to [give artists] a commercial alternative, to attract them to do more effort in that direction, to make it worth it, to make some kind of profession called a comic artist.” Williamson writes “Koshk has six books on the app and one of the most recent is Lamis. It’s a strip about a woman, Lamis, who is a powerful [redacted] dealer in Cairo. Although the first episode conveyed a noble side Lamis is a much darker, distinctly human character, more so than another Cairene superheroine Qahera, who battles misogyny in the Egyptian capital, or Joumana Medlej’s Lebanese Malaak: Angel of Peace.”

A presidential pardon for more than 200 prisoners is reportedly coming this week, an unnamed source told Al Shorouk on Monday. The source added that the pardon will be mostly for political prisoners, and will include “notable figures”, as well as some women and students.