Growth falling to 4% by 2022 without more reform?

Talk as much as you like about the global economy, business here at home or domestic politics, but all anyone is really paying attention to this morning are the results of the US midterm elections. Polls were closing across the United States in a rolling wave as we slid toward dispatch time this morning, and live coverage of the results dominates the front pages of the global business press. At stake: Control of the House of Representatives in what some are presenting as a referendum on both US President Donald Trump and on which faction of the Dems has the chops to challenge him in 2020.

At dispatch time, Democrats had flipped 11 seats in the House, while the GOP had picked up one Senate seat. Democratic candidates had also ousted two republicans in gubernatorial contests, according to Axios’ live elections map.

What’s animating US voters? Healthcare, immigration and The Donald (love or hate), according to a poll of tens of thousands of voters and likely voters released yesterday, the WSJ reports.

Take your pick of news sources — from CNN, the New York Times, the Guardian and Politico to Bloomberg, Reuters, the Financial Times, and the WSJ, everyone is running results sliders and election maps on their homepages today.

Meanwhile:

Breach US sanctions on Iran and you’ll face “severe penalties,” Secretary of State Michael Pompeo warned. “I promise you that doing business in Iran in defiance of our sanctions will ultimately be a much more painful business decision than pulling out of Iran,” Pompeo told reporters on Monday. Tehran has said it would defy the sanctions. Eight countries were temporarily exempted from a ban on oil imports to minimize disruption to the global market; Egypt was not among them.

The next frontier: The UN Security Council could lift sanctions on Eritrea next week as the country pushes ahead with its recent truce with Ethiopia and eases tensions with other neighbors, according to Reuters. A British-backed resolution could lift an arms embargo, travel ban and asset freeze imposed in 2009, but the international community will likely require Eritrea to make progress on improving ties with Djibouti. Changing dynamics in the Horn of Africa will be crucial and Egypt, Sudan and Ethiopia take the next steps in their detente on the Nile.

Meanwhile, in Ethiopia: Cairo wants formal agreements as assurance that Addis Ababa will not reduce Egypt’s share of Nile water during filling the Grand Ethiopian Renaissance Dam, President Abdel Fattah El Sisi told reporters on Tuesday, emphasizing that the dam should not be used for political purposes.

Much ado about risk, part I: Two pieces on general systemic risk caught our attention this morning. Former Goldman boss and ex-US Treasury Secretary Hank Paulson warns we are living in an age of unprecedented risks — this from the guy who helped save the world from financial oblivion during the global financial crisis a decade ago. Business in emerging and developed markets alike face threats from political upheaval, he suggests, while politicians haven’t begun to get their minds around the risk posed by everything from the innovation businesses drive to the spread of communications technologies. “Even authoritarian governments can no longer expect to exercise exclusive control over their domestic economies,” he notes.

Much ado about risk, part II: Sovereign ratings face pressure as global growth slows — and a confidence shock looms ahead, Moody warns. The credit ratings agency said yesterday that while the global picture for ratings was still stable, slowing global growth, stark political risk, and high debt levels all pose challenges in the near term.

In miscellany this morning, for those moments when you’re not hitting ‘refresh’ on the US election results:

And Don Draper wept: If you’re in the advertising business, you’ll want to read a couple of Wall Street Journal stories back-to-back. “The rise of the internet battered industries from newspapers to retailers, but it was a gold mine for the world’s major advertising companies. Until now,” the Journal argues, noting that “Madison Avenue is under intense pressure to change and no one has yet discovered a path to renewed growth.” Among the agency types worst-hit, it argues, are non-digital media-buying agencies, PR firms, ad agencies and direct marketers. The problem? Google and Facebook are cutting out the middlemen. Read:

• Digital Disruption Snarls Madison Avenue
• Madison Avenue’s Unequal Fight With Google

The two pieces are part of a Heard on the Street series on what digital disruption in the ad industry means for traded players. We’re keeping an eye out to see if there’s a third installment.

The high priests of Davos have banned three Russian business leaders from attending the World Economic Forum under pressure from the United States. Among them is Oleg Deripaska, whose bid to dodge US sanctions we noted yesterday.

The talking heads slowly weaned themselves off covering the World Youth Forum as the event came to a close yesterday.

El Sisi’s speech in the spotlight again: Yahduth fi Masr’s Sherif Amer ran through the most important issues President Abdel Fattah El Sisi discussed during the last day of the forum (more on that in Diplomacy + Foreign Trade, below) (watch, runtime: 4:27). El Sisi’s interview with American filmmaker and education advocate Zuriel Oduwole was also of particular interest to Masaa DMC’s Osama Kamal (watch, runtime: 7:24 and runtime: 5:56). Al Hayah Al Youm once again forfeited its airtime to make space for wall-to-wall coverage of the forum.

Amending the controversial NGO Act will be in the country’s favor, particularly since the law, in its current form, severely restricts civil society, National Council for Human Rights head Hafez Abu Saada said on Hona Al Asema. He stressed that civil society includes NGOs whose work is important in furthering the country’s development, and that these entities are suffering as a result of restrictions aimed at rights organizations. Lawyer Essam Shiha was of the same mind, and called on the media to stop painting NGOs in a negative light (watch, runtime: 3:39 and runtime: 4:49).

Tiered system coming for garbage collection fees? The House of Representatives is mulling an “adjustment” to garbage collection fees by introducing a tiered system that would impose higher fees on middle- and high-income earners while keeping low-income earners’ fees unchanged, Rep. Ahmed El Segini told Masaa DMC. According to El Segini, the move would only be one element of a more comprehensive strategy to address the country’s garbage woes (watch, runtime: 13:00).

The Electricity Ministry’s plans to install more prepaid and smart electricity meters to help citizens rationalize their consumption was the main talking point for ministry spokesman Ayman Hamza on Hona Al Asema. Hamza noted that the ministry expects to install 40 mn meters within 10 years (watch, runtime: 2:26 and runtime: 2:41).

Elsewhere, UN Global Compact Network Egypt Executive Director Muhammad Al Fouly had a chat with Masaa DMC’s Osama Kamal about the initiative’s work and goals (watch, runtime: 43:51).

IIF sees Egypt growth falling to 4% in 2022 unless policymakers go for deeper structural reforms: The Institute of International Finance (IIF) sees growth in Egypt falling to 4% in 2022 from an estimated 5% in the state’s current fiscal year “due to structural bottlenecks and a less favorable global environment, including tighter financial conditions and uncertainty over the global trade system,” it said in a late October country report.

A new reform agenda? To sustain the growth rates of the past two years, policymakers will need to “make the economy more responsive to market forces and empower the private sector … Laws and regulations governing business and investment need to be overhauled and brought in line with best practices in successful emerging economies.” Among the keys: Driving exports, improving the efficiency of land allocation, strengthening competition and public procurement and cutting corruption, the IFF said, adding, “The country needs to create more freedom and space for private-sector initiative, facilitating growth of SMEs.”

No interest rate cuts before 2019: The IIF expects inflation to decline to single digits and the CBE to keep its key interest rates unchanged until it achieves its target of 13% (±3) in 4Q2018. “Once headline inflation declines to below 10% and demand pressures remain contained, the CBE may ease the monetary stance, most likely in 2019,” the report said.

Is US monetary tightening the biggest external risk to Egypt? A “faster-than-expected US monetary tightening … would hit appetite for Egypt’s eurobond issuances,” IIF writes, noting, “External risks have increased in recent months, with a shift to net portfolio capital outflows as global financial conditions have contributed to a pullback from EMs. However, Egypt’s narrowing external and fiscal deficits, falling core inflation, and adequate level of reserves will help the economy cope well with any acceleration in capital outflows.”

Public debt-to-GDP ratio in decline for the first time in a decade: The report highlights that Egypt’s public debt ratio starting to decline for the first time in nearly a decade is definitely a positive sign.It expected the ratio to start declining to “levels consistent with long-term sustainability due to high nominal GDP growth and the authorities’ fiscal consolidation plan” – which includes further reductions in fuel subsidies and more stepping up taxes.

Beltone denies allegations of irregularities in Sarwa IPO: Beltone Financial investment banking chief Sobhy El Sehrawy told Reuters yesterday that the IPO prospectus for structured and consumer finance player Sarwa Capital “contained no irregularities.” His remarks were the firm’s first public statement directly addressing still-hazy allegations of wrongdoing during the IPO. The Financial Regulatory Authority (FRA) last week suspended the investment bank’s IPO unit for six months claiming that irregularities had taken place on the Sarwa IPO, which was managed by Beltone. Sources speaking to the local press had said that the FRA’s investigation had been prompted by complaints from investors and not the drop in Sarwa’s share price on the first day of trading. The FRA suspension came a day after an announcement by Beltone’s parent company, Naguib Sawiris’ Orascom Investment Holding (OIH), of intentions to buy a large stake in Sarwa Capital.

Meanwhile, the rumor mill is still running overtime as the regulator has not yet made the irregularities of which Beltone stands accused.

M&A WATCH- Almarai to launch USD 75 mn bid for Greenland? Saudi dairy product producer Almarai is reportedly looking to acquire Americana Group subsidiary Greenland Group for Food Industries in a transaction worth as much as USD 75 mn, according to a domestic press report citing sources with knowledge of the matter. Almarai has begun due diligence on Greenland. The report claims Greenland had been in the red for seven years but returned to profitability in 2015 and is currently expanding its footprint in Egypt and the region. Almarai had tried back in 2016 to acquire Qalaa Holdings’ Dina Farms’ dairy and fresh milk operation. Almarai owns and operate the Beyti brand in Egypt as part of a joint venture with PepsiCo.

Advisers: Greenland has reportedly hired Sharkawy & Sarhan as its legal adviser, while Baker McKenzie has reportedly been tapped as buyside adviser.

EFG Hermes could land Nigerian investment banking license by early next week: EFG Hermes frontier unit chief Ali Khalpey told Bloomberg that the investment bank is now waiting for regulatory approval and plans to hire five people in Lagos this year. EFG Hermes had announced in July that it had bought Nigerian brokerage and research firm Primera Africa Securities Ltd., which will be rebadged under the EFG brand.

Heading into 2019, EFG Hermes plans to use Nigeria as a regional hub for its operations in Africa. Last year, it obtained a stockbroking license in Kenya. The firm is now focused on consolidating in its African markets as well as recent expansion territories Pakistan and Bangladesh. Khalpey also said the firm remains interested in expansion into Vietnam.

UberEats is accepting cash in Egypt, Saudi Arabia and South Africa as it looks to grow in cash-based economies, Rodrigo Arévalo, head of UberEats in the EMEA region, told Bloomberg as part of a wider-ranging story. Some 94% of Uber’s transactions in Egypt are in cash — compared with 90% through e-payment service iDeal in the Netherlands. The unit plans to triple its EMEA staff to 900 from 300 by next year.

EXCLUSIVE- Gov’t aims to issue green bonds next fiscal year: The Madbouly government is considering its maiden green bond issuance in the coming fiscal year as part of its plan to diversify its base of funding under its still-emerging debt control strategy, a senior government official told Enterprise. Green bonds could make their debut next to other new-to-Egypt instruments including sovereign sukuks, a form of Islamic bond, the official noted, saying the policy framework for green bonds is still on the drafting table.

What’s a green bond? Effectively, a lower-yield form of bond that finances “climate-smart” projects including renewable energy and energy-efficiency projects in emerging markets. The International Finance Corporation and the Financial Regulatory Authority have been discussing since June what guidelines for Egyptian green bonds might look like. You can read more about green bonds here courtesy the IFC, which notes that more than USD 155 bn has been raised via green bonds globally.

Green bonds have not been performing well this year: Green bonds sales fell 18% y-o-y in 3Q2018 amid a decline of interest in the environmental finance market, the Financial Times reports. Issuers sold USD 31.6 bn in 3Q2018 down from USD 38.5 bn in the same period last year. Moody’s had originally forecast that total green bond sales this year would hit USD 250 bn, a considerable increase from last year’s record USD 163 bn total. Moody’s then revised that prediction down to USD 175-200 bn after sales slowed in 2Q2018.

Egypt could attract more than 2x its present investment in solar though 2022 –IRENA boss: Egypt has landed about USD 2 bn in investment in solar energy projects, largely in the world-scale Benban solar park, but could see that figure grow to as high as USD 6 bn by 2022 with a stable policy frameworks and straightforward regulations, said Adnan Z. Amin, the director general of the Abu Dhabi-based International Renewable Energy Agency (IRENA). “Egypt is a very promising market for investments thanks to the political leadership which has adopted an ambitious plan for electricity production from renewable sources, and reduced the reliance on traditional fuel in production plan — a trend that many countries have adopted in order to achieve sustainability,” Amin said.

CBE tells banks to start preparing for ‘Meeza’ national debit card : The central bank has told banks to put in place the technical infrastructure to support a national payments scheme that will roll out by year’s end, an unnamed bank official told Masrawy. The CBE asked banks to ensure that their ATMs and chip-and-pin machines would accept the “Meeza” debit card, the official said. Meeza is the national debit card the central bank is rolling out by year’s end as part of its push on financial inclusion and a cashless society. A CBE official had said that pensioners would be among the first to access state benefits through the cards, which would also be used to electronically deliver payments to civil servants and subsidy recipients.

LEGISLATION WATCH- MPs want pensions on par with those of cabinet members: House Legislation Committee member Rep. Khaled Hanafy is drafting a bill that would grant members of parliament pensions equivalent to those ministers receive, Hanafy tells Al Mal. If passed, MPs would receive pensions ranging between 10-25% of the public sector maximum wage, with payments disbursed on a monthly basis as a “bonus” for their services. Hanafy notes that MPs are required by law to quit day jobs, directorships and other posts to become members of parliament, which means many of them are left without pensions. President Abdel Fattah El Sisi had ratified in July legislation to reduce the pensions of ministers, governors, and their deputies. Under the law, pensions for these positions will be reduced to 25% of their pre-retirement wages, down from an original 80%.

MOVES- Our friend Ahmed Farghal (LinkedIn) has joined Bahaa-Eldin Law Office in cooperation with BonelliErede as a senior associate. The former Sharkawy and Sarhan senior associate has nine years of experience in with a focus on corporate, M&A and capital markets work.

The government will announce by mid-November the date of its first auction of ‘unused’ state land, Public Enterprise Minister Hisham Tawfik has said. As many as 10 mn sqm of state-owned land in 10 governorates will be up for sale to developers.

The Egypt M&A and Private Equity Forum will take place on Wednesday, 14 November at the Nile Ritz Carlton in Cairo.

Interest rate watch: The central bank’s monetary policy committee meets on Thursday, 15 November to review interest rates. The emerging consensus is that the bank will leave rates on hold.

Emerging markets’ net liabilities, not gross debt levels, are what really matter. Even though debt levels have surged among emerging markets, fear of a potential borrowing bubble are overblown, Goldman Sachs suggests. Net international investment positions (NIIPs), which take into account a country’s external financial assets and liabilities, are “more often associated with emerging markets crises and were better predictors of output losses following the global financial crisis than gross debt levels.” The key is to see the need to borrow from abroad decline over time. “As an economy develops, its institutions strengthen and its financial system typically expands, leading gross debt to GDP ratios to increase. Moreover, as the domestic financial sector becomes more able to meet domestic demand for credit, the need to borrow from abroad declines, potentially causing net liabilities to decrease,” Goldman Sachs senior economist Kevin Daly argues.

A mishmash of archaeology stories dominates news on Egypt in the international press this morning, including continued interest in the idea that a newly discovered ramp helps explain how the Pyramids of Giza were built. Other examples:

• The British Museum should return the Rosetta Stone to Egypt and replace it with a virtual reality replica, General Egyptian Museum (GEM) supervisor Tarek Tawfik said, according to The Telegraph
• Archaeologists working at a site near Matariya found fragments of stone slabs dating back to over 4,000 years, the Associated Press reports.
• Budget challenges are hindering Islamic Cairo’s restoration plans, according to AFP.

Much more interesting: The potential of Islamic finance remains untapped in Egypt. “Hesitant policies” in Egypt are keeping the country from fully tapping the potential of Islamic finance, Arno Maierbrugger writes for the Gulf Times. Regulations for the industry have been slow in materializing, while Finance Ministry officials have been “indecisive” on whether or not to begin relying on sukuk for financing despite their benefits and the industry’s overall potential. “To put the potential into perspective: As per end-2017, Islamic finance assets in Egypt added up to about USD 12.8 bn, which is a market share of less than 6% of all banking assets in the country, according to the Egyptian Islamic Finance Association, which forecasts growth to slightly over USD 14 bn in Shariah-compliant assets this year.” Islamic banks have significant potential to serve SMEs and corporate clients and could play an important role in raising Egypt’s banking penetration by convincing “the unbanked to use professional Islamic banking services through low-income banking products or Islamic microfinance,” Maierbrugger says.

The rise and rise of “business development companies”: In the yield-hungry US investment climate, the private loan is booming, with business development companies (BDCs) seeing substantial growth since they first emerged in the ‘90s. Their assets have more than doubled over the past five year, with some 90 BDCs sitting atop USD 97 bn worth of assets, according to Bloomberg. Growth has been spurred on by attractive yields that go well beyond the typical 3% yield from bond funds, with some paying out dividend yields as high as 10%.

What are BDCs, anyway? BDCs are essentially portfolios of loans made to companies, similar to closed-end mutual funds or real estate investment trusts, that are usually traded as stocks. They cut out the middlemen that are banks — many of whom have been pulling back on loans — by lending out funds directly from pension funds, endowments, hedge funds, and the like, who have plenty of money to spare.

The big dogs are all getting in: Private equity heavyweights such as Blackstone, Wells Fargo, Carlyle Group, and KKR are all forming BDCs and doing more direct lending.

The catch? It could create the same fertile grounds that brought about the financial crisis, according to some analysts. Since the Trump administration came to power, underwriting standards in general are weakening as money floods in and more loans are made. Furthermore, Congress has raised the threshold for BDCs to borrow to make more loans, possibly incentivizing them to make riskier loans. Some rating agencies have been placing blanket downgrades on the industry. Players in the industry, however, argue that access to bigger funds will allow them to make larger loans to bigger companies that are able to pay the loans back. Most beneficiaries of BDC loans have been mid-cap to smaller companies.

We cannot believe we missed it again — Narcos season 4 is coming this month: The long-awaited fourth season of the Netflix hit Narcos is back, with the binge watching extravaganza starting on 16 November. The new season is a reboot set in Mexico at the start of that country’s narcotics war. Not taking anything from Pablo or the Columbia storyline, but we have very high hopes for the next couple of seasons. You can view the trailer here (watch, runtime: 2:28).

The Madbouly government needs to strike a balance between security and an environment that allows civil society organizations to grow, opinion writer Emad El Din Hussein writes for Al Shorouk. President Abdel Fattah El Sisi has acknowledged the law could change, and the challenge now is to ensure that amendments deliver a bill that can hold to account organizations that engage in illegal activities without the state needing to use blanket tactics that restrict civil society as a whole.

The Trade and Industry Ministry is aiming to increase exports under the Qualified Industrial Zones (QIZ) program to USD 1 bn in 2019, head of the ministry’s QIZ unit Ashraf El Rabie told Amwal Al Ghad, adding that the QIZ unit is targeting USD 850 mn in exports by end-2018. Exports to the US under QIZ registered c.USD 591 mn at the end of August, El Rabie said. He had previously said that the unit was targeting USD 900 mn by the end of the year. Ready-made garments account for some 98% of QIZ exports, which enjoy tariff-free access to the US provided they meet a minimum required amount of Israeli content. Egypt and the US have been in talks to include tech products and leather-made goods in the QIZ program.

President Abdel Fattah El Sisi met yesterday with Sudanese President Omar Al Bashir in Sharm El Sheikh on the sidelines of the World Youth Forum, according to an Ittihadiya statement. The two leaders touched on enhancing bilateral relations in fields of electricity and transportation, as well as boosting economic cooperation and trade. The two also discussed political issues of mutual interest and issues challenging the Arab region. El Sisi also met with the UAE’s head of the Abu Dhabi Crown Prince Court Hamed bin Zayed Al Nahyan and Oman’s Foreign Minister Yusuf bin Alawi bin Abdullah.

El Sisi also addressed regional politics and Egypt’s stance on several issues during his speech at the forum yesterday. The president vowed to mobilize Egypt’s army to protect allies in the Gulf if their security comes under direct threat, and stressed the need for Arab countries to remain united for stability purposes, according to Youm7. He also called for the lifting of a UN embargo on the Libyan army to allow it to “strengthen its capabilities” and bring an end to the country’s instability, according to Libyan Express.

Our friends at SODIC have established a new sales office on Road 90 in East Cairo, according to a company press release (pdf). The company been pushing on eastern expansion of late, launching Eastown Residences earlier this year and planning to launch fully finished homes in Villette this month, alongside its flagship SODIC East.

El Mostakbal for Urban Development has signed an EGP 11 bn agreement with Misr Italia to develop a 268-feddan mixed-use project in Mostakbal City, Amwal Al Ghad reports. The new development is expected to include retail, commercial space, office parks, sports facilities and residential parts.

Tourism revenues are expected to contribute 15% of Egypt’s total GDP this year if tourist arrivals continue rising at their current pace, Tourism Minister Rania Al Mashat said, according to Reuters. Total tourist arrivals could surpass 10 mn for the first time in six years, the minister said. Al Mashat’s projections are based on estimates, the newswire notes.

The Tourism Ministry has disbursed all overdue payments owed for enrolled foreign charter airlines under the first phase of the incentives program, which expired last month, Tourism Minister Rania Al Mashat said, according to Al Mal. The authority had disbursed payments covering until April 2017 last January. The second phase of the ministry’s incentive program, which offers payouts and fee exemptions to flights and tour operators that bring in a certain number of tourists, was launched this month and will continue to the end of April 2020.

Luxury tour operator Abercrombie & Kent is considering increasing its floating hotels in Egypt on the back of high demand on trips to Cairo, Luxor, and Aswan, an official from the operator told Tourism Minister Rania Al Mashat yesterday, El Watan reports.

The Egyptian Holding Company for Airports and Air Navigation has allocated EGP 500 mn to upgrade security checks at Cairo International Airport’s Terminal 3, a source told Al Mal. The timeline for the upgrades is unknown.

British holiday company Thomas Cook announced in a statement that it will begin conducting independent hygiene check at the hotels it offers to customers, following the death of two British tourists at the Hurghada Steigenberger Aqua Magic Hotel last August after contracting e-coli. Thomas Cook’s new hygiene checks will look at food safety, hygiene and the prevention of contagious infections, Reuters reports.

Egypt’s 134% increase in guest bookings over 2017-2018 is helping to drive the growth of tourism in Africa, Euromonitor International said in its report on travel megatrends (paywall) on Tuesday. Egypt’s 8 mn tourist arrivals from last year still pale in comparison to the 14 mn recorded in 2010, the Associated Press reminds us. Other African tourism markets picking up steam include Kenya and South Africa, both of which recorded a 60% increase in guest bookings, and Morocco (up 50%). Worldwide, Euromonitor expects travelers to make a total of 1.4 bn trips this year, with China set to overtake France as the world’s number one travel destination by 2030.

The state’s Egyptian Countryside Development Company (ECDC) is expected to sign agreements with foreign investors to allocate 35k feddans of land for olive and date production and olive oil extraction, Chairman and Managing Director Atter Hannoura announced. The projects are part of the ECDC’s work on the Sisi administration’s initiative to reclaim 1.5 mn feddans of desert land for agricultural use. ECDC is also planning to meet with investors from Saudi Arabia, the UAE, Libya, Sudan, and Jordan to look into other potential agricultural projects.

The recent proposal by Rep. Ghada Agamy to ban the niqab in the public sector workplace was met with wide disagreement, Rep. Mohamed Abu Hamed said, according to Egypt Independent. Many MPs said they believe the ban to be in violation of personal freedom and rights, and could lead to further division in Egyptian society. The bill will be up for discussion at the House of Representatives on Sunday.

Egyptian and French naval forces took part in joint military drills focusing on security of offshore natural gas platforms off the Eastern Mediterranean coast, according to an Armed Forces statement. This comes as Turkey has been throwing its weight around and throwing tantrums of over the new energy cooperation order in the EastMEd.

Olympic weightlifter Sara Samir snagged two silver medalsand one bronze medal in the women’s 71 kg category at the World Championships in Turkmenistan, according to Al Mal. Samir’s wins come one day after fellow Egyptian weightlifter Mohamed Ihab won another three medals — gold, silver and bronze — in the men’s 81 kg category.