No disasters as EGP hits 16.32 against the greenback in day one of interbank market

There are only three questions that matter this morning:

• When will the interbank market for FX pick up?
• When will the IMF Executive Board consider the USD 12 bn extended fund facility agreement with Egypt?
• Are relations with Saudi so poor that Oil Minister Tarek El Molla is really in Tehran to broker an oil agreement?

We have more on all three topics in Speed Round, below.

A French parliamentary delegation began a three-day visit to Egypt yesterday. The delegation, headed by President of the Senate of France Gerard Larcher, will reportedly meet with President Abdel Fattah El Sisi, Prime Minister Sherif Ismail, House Speaker Ali Abdel Aal, and Secretary-General of the Arab League Ahmed Aboul Gheit, among others.

World Travel Market beings today in London. Tourism Minister Yehia Rashed is at the head of a 44-company Egyptian delegation to what’s arguably the world’s most important travel industry gathering.

It’s the day before election day in America, and the FBI director has decided that Hillary Clinton probably didn’t do anything wrong, after all. “FBI Director James Comey told lawmakers Sunday the agency hasn’t changed its opinion that Hillary Clinton should not face criminal charges after a review of new emails, CNN reports. Clinton continued to hold her lead at the polls over Republican challenger Donald Trump in the polls, Politico noted yesterday.

Russian president Vladimir Putin will visit Egypt sometime this month to sign an agreement to construct the Daba’a nuclear power plant, Al Masry Al Youm reported. The agreement was delayed for a few months over disagreements on implementation details that were ultimately resolved. Sources said the project will cost USD 29.25 bn, 30% of which will be sourced domestically. We’ll be looking for any suggestion that Vladimir is willing to allow planes to fly directly to Egypt once more to restore tourism flows for a destination that is now half-price for Russian travelers.

Bank of America Merrill Lynch’s MENA 2016 Conference will run from Monday, 14 November till Wednesday, 16 November in Dubai.

The Egypt Trade & Export Finance Conference 2016 begins on Tuesday, 15 November.

The Central Bank of Egypt’s Monetary Policy Committee will convene on Thursday, 17 November to review interest rates, which we’re guessing will be left on hold after this past Thursday’s 300 bps hike.

Egypt will ask the International Monetary Fund’s executive board within a day or two to consider its USD 12 bn facility, Finance Minister Amr El Garhy said on Sunday. El Garhy expects that Egypt will receive the approval in the coming 10 days, he tells Youm7. The board has meetings scheduled for today, Wednesday and Friday, but Egypt is not on the agenda for any of them (or at least not on the public version).

That news comes as Egypt will reportedly pull the trigger on its USD 2-2.5 bn eurobond issue during the last week of November, following approval from the IMF, El Garhy added. IMF approval for the loan is expected to lower the costs of borrowing for the government. The finance minister had said on Saturday evening that the road show for the issue will take place on 20 November, with the issue launching 10 days later.

The push to finalize the loan comes as Egyptian banks on Sunday began freely trading foreign exchange on the interbank market for the first time, writes Bloomberg’s Ahmed Feteha. USD 15.8 mn was traded on Sunday, considered low by some analysts. This is to be expected given that banks have been starved of FX, said Reham El Desoki, senior economist with Dubai-based Arqaam Capital. “The central bank will probably wait and see how the system works in terms of self-financing” before deciding whether to inject liquidity into the market. According to the CBE, the average exchange rate in the banking sector shows greenbacks changed hands at EGP 16.32 on Sunday.

“Black market volumes were low on Sunday,” Reuters reports, noting, “most traders waited to see how the interbank system would operate, but some [transactions] were done at 17 to 17.25.”

With 12-month non-deliverable forwards shown at EGP 16.85 to the greenback on the screen behind him, Bloomberg’s Alaa Shahine appeared in-studio on the business information service’s morning show to discuss the float (watch, run time: 2:42). Renaissance Capital’s Ahmed Badr was also on the show yesterday, suggesting that with everyone expecting EGP 11.00-13.00 as a fair value, it’s natural for the EGP to “overshoot to 16 … is it going to overshoot to 18? … The central bank is trying to get liquidity from a black market flush with liquidity into the banking sector. That’s going to take time, since you have a lot of demand and very little supply, to attract the supply, it has to overshoot. I think it’s going to be quite unstable” in the coming days, he says. Watch (run time: 6:04). Badr is worth watching — if you can tolerate the male anchor: “There’s history to go by — a drastic debut — Egypt the accolade it has been awarded is the worst — you can call it whatever you want. You call it a free float, I call it a devaluation [inaudible] buddy, but Egypt on day one, it’s a pretty solitary affair.” Trenchant.

We may not yet have hit a market-clearing rate. If yesterday was about anything, it was about testing the boundaries. The EGP avoided a sharp drop yesterday on first day in free float “because years of [USD] shortages had starved the market of liquidity,” Asma Alsharif and Eric Knecht write for Reuters. “Logically, if it is a properly functioning market, the natural thing would be for the price of dollars to keep rising, until flows comes in from outside the banking system … That is not happening now — all banks are just holding on,” one banker said, adding that he believes the central should inject more USD to the market. Edita’s Chairman Hani Berzi said: “If you ask me today, I would say no, banks don’t have enough supply of foreign currency. But I think it will stabilize in the next few weeks or months.”

Prepare for a “currency rollercoaster” in the coming days, Reuters says. The newswire says “activity was extremely slow [yesterday] because banks were uncertain about the prospects for supply and demand” of USD. It adds that people are expecting a further EGP devaluation as banks will struggle to meet the USD demand backlog. Banks are reportedly prioritising covering the import backlog for strategic goods over other importers’ requests, Al Mal reports, citing market sources, with others saying FX bureaux are being “more flexible.” One banker was dismissive of all efforts, telling Reuters yesterday: “People do not know how to trade FX in a free market yet. I’d say it will touch 18 before the end of the day if anyone is offering … Activity will pick up [on Monday], irrespective of what happens today."

How much FX is flowing into the banking system? Al Mal tries to crunch the math (with little success) and Al Masry Al Youm suggests that there must be some inflows if Banque du Caire can raise its limits on the amount of FX travelers can buy before flying.

There will be no substantial portfolio inflows until the exchange rate stabilizes, CI Capital’s senior economist Hany Farahat suggests. He told Bloomberg “the price of the pound must first stabilize in the interbank market before we see major portfolio inflows … it will happen gradually over the coming months, not overnight.” Farahat also says banks domestically are in “uncharted territory” as they undergo a phase of price discovery using the interbank market.

…Fund managers agree, saying we should not expect “quick inflows of portfolio investment from abroad” into Egypt, according to Reuters. Analysts at Citi said the EGP’s value will steady once the backlog for USD demand is cleared, and they estimate that backlog at USD 9-11 bn. The devaluation "definitely makes it more attractive as the pound is now no longer such a risk … But at this level the good news is priced in on the [USD] bonds. Now the focus switches to the implementation of the IMF programme, which is more difficult,” said Allianz Global Investors portfolio manager Shahzad Hasan.

Early buying yesterday was mainly by local investors as many foreign fund managers said the devaluation was unlikely to cause them to rush back into Egypt, given continued uncertainty about the economy, Reuters reported. The EGX30 closed up 6.12% yesterday, while the broader EGX50 was up 4.24% and the EGX70 climbed 4.18%.

Also yesterday, the yield on 91-day treasury bills rose to 19.055% from 14.594% last week, while the yield on 266-day bills climbed to 20.367% from 16.545%, Reuters’ Arabic service reports. Yesterday’s was the first treasury auction to take place since the float of the pound and accompanying 300 bps hike in interest rates.

Gov’t tallying the cost of the float: It is too soon to tell what effect the float will have on the state budget, and the Finance Ministry is awaiting the FX market to stabilize before making that call, said Deputy Finance Minister Mohamed Moeit. Debt service on Egypt’s USD 53 bn tab will definitely rise, he added. Other Finance Ministry sources tell Al Shorouk that government expenditures are expected to rise by no less than 48% this fiscal year thanks to the float, not including the increase in the price of imports. Other sources expect the budget deficit to grow to 15% as a result of the rising cost of imports. Mitigating factors, Moeit is quoted as saying, will be new sources of USD revenue for the state and an influx of tax and customs revenues expected in the current fiscal year. Government sources tell AMAY that the VAT and the one-year tax disputes resolution mechanism should see the state’s receipts from taxes swell by EGP 38 bn this year. In parallel, rumors persist the government is looking at some form of progressive income tax.

Meanwhile, the EGPC has begun adjusting its budget for the next eight months of the fiscal year to account for the float. The Egyptian General Petroleum Corporation — think of it as the Oil Ministry’s commercial arm — is factoring in an exchange rate between EGP 13.00 and EGP 15.00. It is also planning on oil at USD 45 per barrel for the current fiscal year, up from an original forecast of USD 40 per. Media reports based on comments attributed to Tarek El Molla have suggested the impact of the float and higher oil prices will see the total fuel subsidy bill rise to EGP 64 bn, up 83% from the initial estimate of EGP 35 bn.

Electricity prices set in August will not change as a result of the rising costs of equipment, fuel and gas imports expected from the float, said Electricity Minister Mohamed Shaker on Sunday. The ministry will adopt a cost cutting strategy within its departments and subsidiaries to counter the effects, he added, according to the newspaper.

This comes as President Abdel Fattah El Sisi, CBE Governor Tarek Amer, Finance Minister Amr El Garhy and other senior cabinet ministers met on Sunday to follow up on the effects of devaluation and raising fuel prices, AMAY reports. The meeting also looked at implementing the 17 tax and other incentives adopted by the Supreme Investment Council last week.

Did El Molla really go to Iran to secure fuel? Petroleum Minister Tarek El Molla was reportedly on his way to Iran on Sunday to meet with senior officials and try to secure a new oil agreement, according to Reuters, which cites sources “close to his delegation” and another individual who allegedly accompanied the minister to Cairo International. This was, however, denied by the ministry’s spokesperson Hamdy Abdel Aziz who told Al Masry Al Youm that El Molla left to attend a two-day energy summit in Abu Dhabi where he is expected to promote investment in the industry. The wire had framed the alleged Iran visit as part of the fallout of Aramco’s delay in October fuel shipments.

On that front, future fuel shipments from Saudi Aramco are still in question, but the agreement has not been cancelled, Abdel Aziz told the newspaper. Another source with whom Al Mal spoke claims it is unlikely that Aramco will deliver the shipment slated for November. Abdel Aziz said the ministry has contracted sufficient gasoline and diesel shipments to meet domestic demand for November; the ministry should have locked in December supplies by the middle of this month, he said.

The Egyptian government has reached a settlement agreement with Luxembourg-based steel and mining company ArcelorMittal in an arbitration case the company filed with the International Centre for Settlement of Investment Disputes (ICSID) in November 2015, we have been informed by a source close to the case. ArcelorMittal was seeking USD 600 mn in damages, claiming Egypt had violated its agreement regarding its proposed steel plant in North West the Gulf of Suez. The ministerial committee to settle investment contract disputes has managed to end or settle 16 disputes and arbitration cases filed against Egypt this year.

Cabinet has not committed to laying off two mn state employees, it said in a formal denial yesterday noting that there is no such condition for Egypt to unlock the USD 12 bn IMF bailout package, Al Shorouk reported.

The Germans haven’t given up on an aid-for-refugees agreement with Egypt. That’s the take-home message for us here in Cairo from a media report out of Berlin that the German interior ministry “wants migrants picked up in the Mediterranean — most of whom set off from conflict-torn Libya — to be sent to Tunisia, Egypt or other north African states to apply for asylum from there.” Both the Germans and the Austrians have nibbled around the edges of a package of aid in return for Egypt agreeing to host additional refugees; the notion was first promoted by German Chancellor Angela Merkel earlier this fall.

UAE faces tax haven blacklist threat from G20 –Financial Times. The salmon-colored paper suggests this morning: “The United Arab Emirates is at risk of being put on a tax haven blacklist unless it promises to help other countries track down evaders, experts say, amid growing fears about the use of the Gulf state as a conduit for illicit flows.” Any story that quotes the Tax Justice Network bugs us, but still…

Having trounced actively managed funds, EFTs are now the bully kicking sand in the face of the hedgies. Exchange-traded funds have now ballooned to USD 3.2 tn in assets, eclipsing hedge funds “as investors pile into low-cost offerings to capture the multiyear market rally,” the Financial Times reports. “For many years, hedge funds generated returns beyond those investors could gain from exposure to market benchmarks — known as “alpha” — according to a note in August from the capital introduction group at Barclays. But as the industry grew, performance faltered. Hedge funds stopped generating excess returns in 2011, and since then have underperformed benchmarks.” Pension funds have since cut their exposure. We have issues with hedgies, but absentee landlords (as we like to think of ETFs, stealing boldly from Saker Nusseibeh) bother us significantly more — we hope to be grumping about that this Friday when the Weekend Edition returns.

Aside from some domestic politics in the UK centered on the British parliament’s investigation of the Foreign Office’s report on the Muslim Brotherhood, there is only one story in the international press on Egypt, and that’s last week’s basket of economic reforms. Wire reports from the Associated Press, Reuters and Bloomberg are setting the tone.

Egypt’s recent reforms are a step in the right direction, but it does not mean that there will not be short-term pain, Tim Worstall writes for Forbes. He says “the floating of the pound means that something now costs what it costs. That’s an increase in efficiency. And the cutting of fuel subsidies works in the same manner. We will now be more efficient at poverty alleviation. The medium term result will be richer people in a richer country with also the ability to do more about the remnant poverty. This is just good economic policy.”

Robin Mills writes in The National, saying Egypt need to build on the devaluation and move to abolish subsidies while compensating low-income citizens. He says “the greater availability of foreign currency should allow the government to pay down debts to oil companies and stabilise production levels. Raising gas prices uniformly to a market ­level – the equivalent price for LNG imports – would encourage investment in offshore and tight gasfields.”

The Carnegie Endowment for International Peace has published a series of Egypt-related pieces in the past few days.

Looking at Egypt’s judiciary,Nathan J. Brown writes that the Supreme Constitutional Court (SCC) will likely return “gradually to offering a blend of activist and pliant stances.” Brown also says “the SCC is likely to receive a string of sensitive cases. It should be expected that the court will deal the regime defeats but also some victories. The former will be issued in a way that do not threaten core regime interests—ambitious courts often learn that those who stick out their necks too far are liable to get their heads chopped off.”

Maged Mandour argues that the fallout between Egypt and Saudi Arabia “was caused by Egypt’s inability to act as a guarantor of Gulf security.” He says Egypt is now gravitating towards “other, less demanding allies, most notably Russia.”

“The dynamics of sectarianism are fluid and sometimes contradictory,” Stephanie Lacroix writes describing the curious case of the salafi Nour Party in an in-depth assessment. Lacroix says that, unlike the Ikhwan, for the Nour party “politics is just a means to an end.”

The process of registering Syrian asylum seekers is “slow” as there are “almost 118,000 Syrians out of a total of more than 190,000 from several dozen countries” registering as refugees in Egypt, according to a piece by UNHCR. The Agency also reports on people who often “decide they cannot wait” and turn to smugglers to help them attempt to make it to Europe.

The Al Masry Al Youm columnist writing under the pseudonym Newton is optimistic about the economic reform program, asserting that Egyptians are aware of the difficulties on the road towards building a powerful economy. He likens the potential of Egypt’s expansion and growth trajectory to that of the Asian Tigers economies.

Al Ahram columnist Farouk Goweda says the government should address nepotism in public sector jobs before it claims it will not hire any new people, referring to a statement made by International Cooperation Minister Sahar Nasr. The government has the right to implement austerity measures to curb its excessive spending on wages, but it needs to do so fairly, he adds.

It’s a rare and wonderful morning when the international press tips you off to something new in Egypt. Hats off to Marwa Sameer Morgan, who filed a piece on Egypt’s first and only all-women’s roller derby teamfor US National Public Radio. The team is having to “crowdsource” funding — any of you deep-pocketed types out there interested in sponsoring their team? Check out their Facebook page here.

The UK Foreign Office has been criticized by members of Parliament for a “misguided” report into the Muslim Brotherhood in Egypt, the Telegraph reports. Appointing Sir John Jenkins, the ambassador to Saudi Arabia, to lead the "secretive" review gave the perception of a foreign state having "undue influence" over the report, the Foreign Affairs Committee said. The FCO had "hindered" inquiries by the committee by refusing to give it a full or redacted copy, or allow Sir John to give oral evidence. "Whilst we have seen no evidence to suggest that Saudi Arabia was able to exercise undue influence over the report, the appointment of Sir John Jenkins created the perception that this was the case,” the committee said.

Trade Minister Tarek Kabil signed two collaboration protocols with the United Nations Industrial Development Organisation (UNIDO), Al Masry Al Youm reports. The first would see UNIDO help set up the Egyptian Food Safety Authority, which was established with the Food Safety Authority Act. The second agreement would see the UN collaborate on the 1.5 mn feddans project.

International Cooperation Minister Sahar Nasr met with the International Labour Organization’s (ILO) Cairo Director Peter Van Rooij to discuss future collaboration on job creation projects as part of the CAD 5 mn agreement to extend ‘Decent Jobs for Egypt’s Young People’ to 2019.

Egypt is delaying plans to commission a third LNG terminal for one month until the Electricity Ministry determines its LNG needs, an EGAS official told Reuters. The FSRU was expected to arrive in June 2017 to meet a surge in LNG demand as new power plants start operations.

Eni has begun drilling the seventh and final well in the Zohr field accelerated development project. Eni plans to have the field producing around 1 bcf/d by the end of 2017 and to increase to 2.7 bcf/d by the end of 2019 when the development phase is completed, Ahram Gate reported.

Abu Qir Fertilizers signed a partnership agreement with seven other entities to set up an EGP 1 bn phosphoric acid manufacturing complex, Al Borsa reported. The project aims to produce an annual 517k tonnes annually and is expected to begin production in 2020.

The Egyptian Medical Syndicate is calling for a 25% annual raise on basic salaries for doctors, Al Mal reported. Doctors and medical professionals not under the Civil Service Law were not offered a raise since 30 June 2015, the syndicate said. The demands came after the flotation of the EGP.

Qatari Diar cannot initiate international arbitration proceedings against Egypt as it operates through an Egyptian subsidiary, formed in accordance with Egyptian law, unnamed sources tell Al Shorouk. Additionally, Egypt and Qatar have never signed an investment agreement that would permit international arbitration, he added.

British Airways increased the prices of its tickets by 15% following the EGP float on Thursday, according to a company source speaking to Al Borsa. The source noted that the airline was willing to bear the cost of the float, once Egypt allows for the repatriation of the company’s USD revenues.

The National Telecommunications Regulatory Authority told Vodafone Egypt to put a halt on consumer trials of its 4G services, until more frequencies can be made available, Al Mal reports. Vodafone Egypt had been testing 4G service in 10 districts in Cairo, including Zamalek, Mohandiseen, and New Cairo, according to the company’s Facebook page.

The Arab African International Bank (AAIB) is studying EGP 800 mn in loans to three real estate developers, an official at the bank told Al Borsa. The three companies own projects in Six of October and New Cairo, the source added. The story does not speculate on the names of the story and is noteworthy only because we’re really, really tired of the constant stream of stories “leaked” (if it can charitably be called that) by low-to-mid-level bankers banging on about how Bank X is going to loan a gazillion pounds to a company / five companies / whatever in one industry or another.

The EGX has signed an MoU with Brazil’s BM&F Bovespa on technical training, capital markets information and investor awareness, according to an EGX statement. The MoU was signed on the sidelines of the General Assembly of the World Federation of Exchanges. Also while there, EGX chief Mohamed Omran said he wants to look at a dual-listing mechanism with the Taiwan Stock Exchange (which will doubtless result in lots of love and approval from our new BFFs in China…) and called on other exchanges to issue sustainability reports.

The Education Ministry has just completed drafting the new Education Act, which has now be sent to cabinet for review ahead of bringing it up for a national dialogue, Education Minister El Helali El Sherbiny told Al Ahram. The new legislation would make changes to teachers’ current salaries, and set new minimum wages as well as bonuses. A committee on developing the Thanawiyya Amma system (Egypt’s high school system) will meet next week with PM Sherif Ismail, he added.

The House Economics Committee called on the Ismail cabinet to reverse its decision on raising fuel prices, Al Mal reports. The committee announced that it will review the adverse impacts of raising fuel prices following a meeting yesterday. The House Energy also demanded that the government not raise prices on 80-octane petrol, recommending that it begins implementing the fuel smart cards program. These objections come as a number of political parties have endorsed the EGP flotation and rising fuel prices. Among these was the Free Egyptians Party. The party’s parliamentary bloc chief and chair of the House Human Rights Committee Alaa Ab issue a stern warning: if the Ismail cabinet does not show progress in its quarterly update on the status of the reform agenda, then it must be replaced, Al Borsa reports. The Support Egypt coalition also came out strongly in favor of these policies and praising the Supreme Investment Council’s 17 incentives announced last week. Chair of the House Budget Committee MP Hussein Eissa described last Thursday’s decisions as a golden opportunity, but called on the government to do more by way of implementing cash subsidies and reducing imports by 30%.

Also yesterday, Parliamentary Affairs Minister Magdi El-Agati stressed that it would be “quite impossible” for the government to backtrack on last week’s reforms, Essam Gamal El Din reports for Ahram Online. The minister’s come as a “small, left-leaning” group of MPs were scheduled to meet yesterday for last week’s “disastrous” moves to be rolled back and for the Ismail government to be sacked, the paper reports.

The government’s State Lawsuits Authority has filed another motion with the Supreme Constitutional Court to suspend the Administrative Court’s ruling voiding the border demarcation agreement with Saudi Arabia which granted the latter sovereignty over the islands of Tiran and Sanafir, Al Shorouk reports. This is would be the second time since August that the authority had filed such a motion with the highest court in the land.

The Finance Ministry raised interest rates on Suez Canal investment certificates to 15.5% for the remaining three years of the five-year certificates, Ahram Online reports. The move follows the CBE’s decision to raise key interest rates by 300 basis points. Raising interest rates on Suez Canal bonds will cost the state EGP 2.2 bn, said Deputy Finance Minister Mohamed Moeit, according to Al Borsa.

Mohamed Diab’s Clash (Eshtebak) raked in four more awards at the 27th Carthage Film Festival, including the awards for best photography, best editing and the African University Award for Cinematic Criticism for Best Feature Film, Ahram Online notes. The film is Egypt’s official submission to the Best Foreign Language Film category in the Academy Awards 2017.