Release of IMF finding held up over fuel pricing mechanism

2018 is the year that refused to go quietly into that goodnight. We have a packed issue this morning after what had been, until yesterday, one of the quietest news days of any given year.

The question of the day: How much worse can it get on Wall Street, where shares tanked on Christmas Eve “as investors reacted negatively to US Treasury secretary Steven Mnuchin’s highly unusual effort to reassure investors about Wall Street banks’ liquidity” and as US President Donald Trump held firm on his attacks on the US Federal Reserve and an ongoing shutdown of US government “against the backdrop of a global economic slowdown and an extended world-wide stock plunge.”

How bad a stock plunge? The S&P500 is now in bear territory after its worst-ever Christmas Eve sell-off. Asian shares followed US equities lower in Christmas trading yesterday (the Topix in Tokyo was down 4.9%), as did indexes in Egypt, Saudi and Kuwait.

(For those of you keeping score: The EGX30 is down 15.6% for the year ahead of the opening bell this morning.)

MUST-READ of the morning: The risk today isn’t that America is wishing itself into recession, it’s that it is mismanaging itself there. “Sometime in the last couple of months, predictions of a major economic downturn or recession in 2019 went from being a crank view to the conventional wisdom,” writes the New York Times, arguing that the “gloom and pessimism has gotten ahead of the facts on the ground. … The real risk is not that insurmountable challenges knock the economy off course. It is that poor leadership converts moderate economic shocks into a crisis.”

Case in point: Trump renews attack on Fed as Mnuchin tries to calm markets.

Does it get any crazier than this? “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong [USD] or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” —The Donald, on Twitter, on Christmas Eve.

Which markets are open today? It’s business as usual in Egypt, while US markets reopen after yesterday’s holiday. The London Stock Exchange is closed today for Boxing Day. (Which, incidentally, is one of only two globally popular shopping-centric holidays that has yet to be adopted by Egyptian retailers, the other being China’s Singles Day. And one of us argues having seen signs of interest in Singles Day this year…)

Is The Donald really the biggest risk to global markets in 2019? We’ve written a couple of times this fall and winter about the risks of an algorithmic sell-off of assets. JPMorgan estimates that as much as USD 7.4 tn in assets “could be subject to forced selling by passive funds during the next downturn.” And Deutsche Bank sees an algo-led selloff as the biggest risk of the new year.

The WSJ has a solid, balanced look at what the deployment of machines in the market could mean in 2019. The kicker: “Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast. That market has grown up during the long bull run, and hasn’t until now been seriously tested by a prolonged downturn.” Read: Behind the market swoon: The herdlike behavior of computerized trading.

Add to your TBR pile: Quant investors face test of faith in 2019, from the Financial Times. “A year in which quant funds struggled to exploit any of their favourite patterns in markets saw many funds chalk up their biggest losses in years, ranking them among the hedge fund industry’s worst performers.:

In other news this morning

• KSA could get a megabank as the number-one lender National Commercial Bank is reportedly in merger talks with number four Riyad Bank. (Bloomberg)
• Israel is heading for early elections that will see voters go to the polls in April. (Haaretz)
• US holiday retail sales are the strongest in years, early data show. (WSJ)
• World economy to feel “delayed pain” of trade war in 2019. (Bloomberg)
• Slower catchup: Emerging economies will take longer to outpace developed markets. (Reuters)

The antidote to all the year-end drudgery: I’m Muslim, and the Christmas spirit moves me, by Omer Aziz, who deftly covers everything from being a third-culture kid growing up in Canada to why Muslims everywhere should be down with a bit of Christmas cheer. Yes, it’s saccharine. But in a good way.

With a little help from our friends: You enjoy Enterprise without charge each morning thanks to the generosity of Pharos Holding, CIB and SODIC. Two of our three besties have news this morning:

• Pharos Holding has been named International Finance Magazine’s “Best Equity Research Company” for 2018, the firm said in a statement (pdf). “We believe that investing human capital is one of the essential business decisions that reflects on productivity,” said Pharos Group Chairman and CEO Elwy Taymour, praising the company’s research team’s performance.
• SODIC is the proud sponsor of Tawasol’s handicrafts at the L’Artigiano in Fiero artisanal fair in Italy, the company said (pdf). The exhibition in Milan is attended by more than 1.6 mn visitors each year. Proceeds from exhibition sales will be used to fund student expenses at Tawasol’s community school in Istabl Antar.

PSA- Banks are closed next Tuesday in observance of New Year. Normal bank hours resume on Wednesday, 2 January, according to a circular from the central bank.

It was another humdrum evening on the airwaves, which had no noteworthy business news or discussions to offer us on Christmas. Al Hayah Al Youm (watch, runtime: 05:50), Hona Al Asema (watch, runtime: 32:07), and Masaa DMC (watch, runtime: 08:39) spent the better part of the evening focusing on what would have been late president Anwar Sadat’s 100th birthday.

Calling all taxpayers: Tax Authority head Abdel Azim Hussein phoned in to Masaa DMC to urge individual taxpayers to submit their tax returns by tomorrow to catch the window for exemption from late fees (watch, runtime: 04:51).

Prime Minister Moustafa Madbouly attempted to play nice with parliament by meeting with MPs and House Speaker Ali Abdel Aal after members of his cabinet rejected an invitation to attend some sessions (watch, runtime: 04:21).

The lack of real political competition in parliament was a topic of discussion for Mostakbal Watan head Abdel Hady Kasby and Al Hayah Al Youm’s Khaled Abu Bakr (watch, runtime: 01:18).

Release of IMF funding held up over fuel pricing mechanism? The delay in the IMF’s approval on the release of the next USD 2 bn tranche of its extended fund facility to Egypt appears to be a result of a disagreement over when the Madbouly government will announce plans to peg fuel prices to the global market, an unnamed source tells Bloomberg. The government “plans to announce the pricing mechanism for 95 octane gasoline by the end of the month, with implementation expected in March, the official said. That grade of gasoline is one which is no longer subsidized. It also plans to announce the mechanism for the other grades in June, after the lifting of the subsidies, and to implement the move in September.”

Background: Reports had emerged in the domestic press over the weekend that the Madbouly Cabinet is in talks with the IMF to delay certain parts of its reform agenda. A senior government official later denied the reports, telling us that the IMF and Finance Ministry have been coordinating on the state’s budget deficit projections and debt control strategy. The IMF should have all the necessary information by the end of this week, and the fifth tranche should be disbursed by mid-January, the source had told us.

The delayed release has sent up the cost of insuring Egypt’s bonds: The cost of insuring government bonds via credit default swaps (CDSs) hit 3.91% at an auction last week, its highest level in 17 months, signaling reduced investor confidence in the Egyptian economy. “The delay of the IMF tranche disbursal might have raised concerns amongst investors as to the upcoming pace for reforms and what details are being fine-tuned with the IMF. Any unanswered questions raise risk from the investor perspective and consequently CDS rates,” Pharos Holding’ Radwa El Swaify told Enterprise. “The increase in CDS rates is not significant, though,” El Swaify said, adding that turbulence in emerging markets and expectations of a weaker EGP are also key factors behind the uptick.

EXCLUSIVE- Proposed amendments to real estate tax could be a ‘temporary measure’ ahead of full re-write of bill: A bill now before the House of Representatives packed with piecemeal amendments to the nation’s real estate tax could ultimately be just a stop-gap measure as the Finance Ministry mulls drafting a new real estate tax act from scratch, a senior government official tells us.

The problem: The existing law’s reliance on civil servants to appraise the tax value of real estate appraisals has left the door open to inconsistency and corruption. Debate over the amendments has so far been messy: The House had rewrote government-proposed amendments and had drafted a revised version that significantly watered down the originally proposed amendments, which covered everything from the new real estate tax formula to how rented properties would be taxed and avenues for appeal.

Taxing factories, tourism properties, oil and gas sector: A rewrite of the law could set the stage for executive regulations that include new appraisal formulas for the tourism and oil and gas industries as well as industrial land, according to our source. The ministries of oil and finance had reached an agreement back in September that would set “clear guidelines” for the tax treatment of properties in oil, gas, and mining. The Tourism Ministry had also reached a similar agreement the previous month with the Finance Ministry for hotels.

Digitizing appraisal process for homeowners: Another feature of a rewritten law would be the introduction of a digital system through which real estate will be appraised. The Finance Ministry has enlisted Ain Shams University to appraise the value of real estate in the country based on location and prepare an electronic database of prices. Owners of residential compounds would be individually responsible for entering the total area of their properties into an electronic system that would then calculate the taxes due for each property according to its appraised value. The ministry has yet to determine how owners of single-family dwellings outside compounds would fit into this scheme.

IPO WATCH- Eastern Company won’t go ahead with its planned 4.5% stake sale until its share price reaches EGP 18.70, Public Enterprise Minister Hisham Tawfik told the local press in an interview. “There needs to be some kind of stability,” Tawfik said. Eastern Co’s shares stood at EGP 15.61 per share on Tuesday. Given heavy foreign appetite for Eastern, Tawfik says, a sale during the Christmas holidays doesn’t make much sense.

Timing of privatization program still TBD, which frankly makes sense: The sale of a 4.5% stake in already-listed Eastern was to have piloted the state’s reborn privatization program. A revised timeline for the first phase of the program has yet to be determined, Tawfik said, adding that it will depend on performance of both the EGX and of emerging markets generally in the coming period.

Eastern would be an easy sell: Eastern is presently trading at about a 25% discount to its global peers, according to a research from Shuaa out yesterday. Even at its target price, Eastern shares would go for 10% less than those of its global peers.

FinMin rejects exporters’ request for tax waivers: Finance Minister Mohamed Maait has turned down a proposal from exporters for tax and customs waivers as a way to compensate for the government’s failure to deliver on its export subsidy commitments, sources said on Monday. “The issue will be resolved at the nearest chance, just pay what you owe,” Maait was quoted as saying. The rejected proposal, which we had noted earlier was put forth by the Federation of Egyptian Industries, would have been an alternative solution to what exporters claim are EGP 9 bn in outstanding subsidies.

Background: The Trade Ministry has allegedly, for over two years, fallen short of its promise to pay out 8-12% of the value of exports to companies through its Export Subsidy Fund. The Finance Ministry disbursed EGP 504 mn last month after exporters released a statement urging the government to take action. Prime Minister Moustafa Madbouly had also vowed earlier this month to put an end to the delays.

Take this with a grain of salt, but: Will the official poverty rate rise in soon-to-be-released gov’t report? The poverty rate in Egypt could be as high as 30.2%, compared to the 27.8% last recorded, according to sources speaking to the domestic press who claim to have seen a still-unreleased CAPMAS income and expenditure survey. The figure doesn’t take into account the full sample of households the state statistics bureau will have surveyed by the time the results are out this February. “It usually scales up by a percentage point or two when the results are out,” the sources said. CAPMAS has also revised the poverty line upward to a monthly income of EGP 700-800 from EGP 482 in 2016. The income and expenditure survey, the latest results of which can be found here, is a nationwide census of household living conditions and consumption patterns.

M&A WATCH- Raya Holding founder Medhat Khalil has until 28 December to submit bid for 100% of the company he founded or sell down shares to get below the threshold that makes the offer mandatory, the Financial Regulatory Authority (FRA) said in an EGX statement (pdf). Last week, Khalil withdrew an appeal against the conditions laid out by the FRA and asked for a 60-day grace period to either submit the MTO or sell down the shares. The founder was reportedly considering two proposals from banks for financing to fund his take-Raya-private bid.

CBE still considering extending the debt relief program? The CBE is reportedly still considering extending its EGP 16.8 bn debt relief program, sources told Al Mal. In a conflicting report earlier this week, banking sources had claimed the CBE was not considering the extension. The central bank launched an initiative last June to offer interest relief to corporate and individual borrowers struggling with non-performing loans at nine state-owned banks.

LEGISLATION WATCH- You no longer need to invite shareholders by post: Investment Minister Sahar Nasr has amended the executive regulations of the Companies Act, according to a ministry statement (pdf). The amendments affect two articles governing joint-stock and limited liability companies. One change revokes a requirement to invite shareholders to general assembly meetings via physical mail. The other makes company managers subject to the same good-character requirements as board members. The changes are minor tweaks to the more major all-round amendments enacted earlier this year.

LEGISLATION WATCH- Gov’t issues Disabilities Act executive regulations: Prime Minister Moustafa Madbouly has issued the executive regulations for the recently enacted Disabilities Act, according to a Cabinet statement. The regs establish special government services, including in healthcare, education, employment and rehabilitation as well as guidelines on how to register for them. They also allow welfare payments for those unable to work due to their disability and mandate a 5% quota for the disabled in government-built housing. We had noted on Sunday that the House of Representatives approved a bill establishing a National Council for Persons with Disabilities to enforce the regs.

COURT WATCH- Court delays hearing in EUR 150 lawsuit against Peugeot Citroen to 3 February: A Cairo court has delayed its hearing in a lawsuit by a subsidiary of Arabian Investments, Development and Financial Investment Holding Co. (AIND) against Peugeot Citroen. CDCM brought the case after the French automaker ended a four-decade-old partnership, giving the local rights to the brands to a venture between Mansour Group and a Dubai-based company named Scope. The court had postponed the scheduled hearing from November to 23 December. The plaintiffs are seeking EUR 150 mn in damages.

EARNINGS WATCH- Maridive reported 24% y-o-y growth in its bottom line to USD 18.3 mn in 3Q2018, up from USD 14.7 mn last year, according to the company’s earnings release (pdf). Maridive’s revenues decreased 4.7% to USD 156.3 mn from USD 164 mn on the back of a drop in prices and lower utilization rates.

Hearing in term limits case postponed to January: The Cairo Court of Urgent Matters has adjourned a hearing on an amendment to the constitutional provision on presidential term limits until 20 January. Reuters has background, noting that any constitutional amendments must be approved by a popular referendum.

Driving the conversation on Egypt in the international press this morning: Egypt is among the three countries most at risk of genocide with a 24% chance of sometime this year or next, making it the third country most at risk of mass killings, according to analysis from the Simon-Skjodt Center for the Prevention of Genocide at the U.S. Holocaust Museum. At the beginning of 2018, the center saw the likelihood of genocide in Egypt significantly lower, listing us as the 15th most at-risk country.

President Abdel Fattah El Sisi’s televised remarks on obesity and physical fitness continue to make waves in the international press, with the president urging television houses not to feature presenters or guests who are overweight. Sisi’s admonishment to Egyptians to lose weight is attracting both support and criticism, the Washington Post notes.

Other news worth noting:

• Egypt is trying to de-escalate tension along the Israel-Gaza border following the killing of four Palestinian protesters by the IDF over the weekend, according to Haaretz.
• Forbes has declared now is the time to visit Egypt, citing the favorable exchange rate and stable security conditions.
• Chinese tourists to the Red Sea are expected to increase in 2019, according to a Xinhua interview with the governor of the Red Sea governorate. "We want 1 percent of Chinese tourists heading overseas every year," the governor stated, noting that the major hotels in the governorate will offer signage and services in Chinese.
• Security forces are tightening security ahead of New Year’s and Coptic Christmas celebrations, CGTN Africa and African Daily Voice report.
• “Egypt’s Sunken Cities” exhibition has arrived at the Minneapolis Institute of Art. The show features 250 antiquities from the ancient and now-submerged cities of Thonis-Heracleion.

Egypt’s strong relations with Saudi Arabia feature prominently on the front pages of the three main state-owned dailies this morning, after President Abdel Fattah El Sisi met yesterday with a Saudi parliamentary delegation (Al Ahram | Al Akhbar | Al Gomhuria). Also making the front page of Al Ahram and Al Akhbar this morning is El Sisi’s commemoration of late president Anwar Sadat’s 100th birthday.

Worried about AI? You’re not alone. While doomsdaying about AI is not new, Vox reports that advances in machine-learning techniques give these concerns an edge. The past few years have seen major leaps and strides both in the field of narrow AI (teaching computers to play chess, generate images, or detect cancer) and in generalized learning capabilities.

This all sounds well and good — where’s the downside? Fears about AI run the gamut from making vast swathes of the workforce obsolete to destroying humanity as we know it. In one case close to our hearts, AI algorithms are changing the way we consume news, using micro-targeting to curate search results or keep us on a particular platform.

Are the most extreme scenarios plausible? Apparently that’s down to us. AI systems “pursue their goals, whether or not those goals are what we really intended — and whether or not we’re in the way.” In other words, we could unwittingly program AI such that it gets rid of us pesky humans, precipitating the end of humanity. This might sound outlandish but the field of AI public policy is relatively new, leaving plenty of space for innovative solutions and murderous robots.

The UNHCR is expected to allocate USD 104.2 mn to its refugee programs in Egypt in 2019, up from last year’s allocation of USD 74.5 mn, according to the UNHCR’s Global Appeal 2019 Update. The agency will allocate around 10% of its total regional budget to North Africa, with specific focus on Egypt and Libya, which are working to control illegal migration via the Mediterranean Sea. Egypt currently hosts around 131k Syrian refugees and 6,920 Iraqi refugees, according to the report.

Italian contractor Saipem, 30% owned by Italian oil and gas major Eni, has landed a USD 1.2 bn contract for engineering, procurement, construction and installation work on Eni’s Zohr supergiant gas field in the Mediterranean, according to company press release. The contract is with Petrobel (a JV between the state-owned Egyptian General Petroleum Corporation and Eni’s Egyptian subsidiary IEO) and covers the installation of a 30-inch diameter gas export pipeline and the development of 10 deep water wells.

The Egyptian Electricity Holding Company (EEHC) is issuing a limited tender for three international companies to build five power transmission control centers across Cairo, Alexandria and the Suez, ministry sources told Al Mal. Offers from Siemens, General Electric and Schneider Electric will be considered since the companies had prequalified for the projects in a previous tender that was canceled last May. The EEHC will finance the projects using a EGP 19 bn loan it had received last year from a banking consortium led by the National Bank of Egypt and Banque Misr, with construction expected to begin by mid-2019.

The Oil Ministry expects natural gas production from North Damietta’s Atoll field to increase to 400 mcf/d by next October, once drilling on the fourth well is complete, Oil Minister Tarek El Molla said. The field currently produces 350 mcf/d of gas.

The Suez Canal Authority (SCA) is looking at cutting transit and mooring fees on cargo ships across all of its six ports, after doing the same for the East Port Said Port, SCA boss Mohab Mamish said. We had reported in October that the East Port Said decision came after an alliance of major shipping companies boycotted the port on the back of the authority’s 100% hike in fees. The authority had also reportedly reduced the fees for docking and transiting through Ain Sokhna Port. The SCA is moving to reduce prices in a bid to remain competitive in the region.

The Egyptian Transport and Commercial Services Company (EgyTrans) is looking to build a EGP 30 mn cargo transport railway line, Chairman Abeer Leheta told Al Mal. The company is currently conducting studies on the project, which will be partly self-financed and partly through bank loans. The transport solutions provider expects the railway project will be completed within three to five years.

Egypt has decided to establish a pharmaceuticals factory in Chad following feasibility studies that indicated the factory’s potential of becoming a regional distributor, Public Enterprise Minister Hisham Tawfik said earlier this week. Further details have yet to be disclosed.

Ismailia Development and Real Estate company is reportedly considering building an industrial complex for the production of jams and juices in Ismailia, reported Al Mal. Company sources did not disclose the project’s estimated cost.

The Military Production Ministry has reached an agreement with a Russian company to build a tractor manufacturing facility in Egypt sometime in 2019, Minister Mohamed El Assar said. The new factory is expected to export its output and has already received pre-paid orders from Libyan entities, which it intends to fulfill after it has met local needs, Assar said. Neither the name of the company nor the size of the agreement were disclosed.

SEDICO Pharmaceutical Company is planning to complete a EGP 300 mn antineoplastics factory by the end of 2019, Chairman Awad Gabr said. Antineoplastics are medicines used to prevent tumors. Gabr did not mention the location or capacity of the planned facility, but noted that production will begin in 2020.

An Administrative Court has suspended the Pharmacists’ Syndicate’s general assembly and the head of the syndicate, following the alleged assault of four journalists inside the syndicate’s headquarters last week, according to Youm7.

Serbia’s Nis Airport is expected to begin operating more flights to Egypt next summer, according to Serbian Monitor. EgyptAir subsidiary Air Cairo, AlMasria Universal Airlines and Air Serbia already operate year-round flights between Belgrade and Hurghada.

Careem has rolled out a trial run of its tuk-tuk service in parts of Cairo, according to Youm7. The report comes only weeks after the ride-hailing app launched bus services in the Egyptian capital and delivery services in Saudi Arabia and the UAE, and announced its intention to invest between USD 100-120 mn in the Egyptian market. The company is awaiting clarification on the legal status of tuk-tuks and the executive regulations of the Ride-Hailing Apps Act, which should be out by year-end.

Mass transit app Swvl has announced plans to expand to 10 cities outside Egypt in 2019, beginning with the Philippine capital of Manila and including Nairobi, Dakar, and Jakarta, CEO and co-founder Mostafa Kandil tells Al Mal. We had previously reported that Thai and Vietnamese cities would be added in 1Q2019. The Saudi Finance Fund had agreed to finance an agreement between Swvl and EFG Hermes’ valU for an unspecified amount of funding.

The Industrial Development Bank (IDB) has signed a EGP 50 mn agreement with microfinance company Tamweely to provide financing for low-income projects and micro-SMEs, IDB Chairman Maged Fahmy announced. The funding is expected to support 8,000 clients across Egypt.

The Investment Ministry has received proposals from two international companies to promote investment in Egypt, including McKinsey & Company, according to Al Mal. The ministry will be approaching other companies for the job before making a final decision. No further details on the promotional campaign were provided.

Trade and Industry Minister Amr Nassar issued a decision to extend custom duties on exported scrap metals, paper waste, and ores for an additional year, according to a ministry statement.

Good news at the end of a bleak year, environmentally speaking: Record numbers of activists are pushing environmental issues at all levels of government, dirty industries like transportation are introducing clean energy policies, and behemoths like Google and Walmart are committing to renewables, according to Fast Company. As part of the drive towards reducing climate change, food production — which accounts for a quarter of global emissions — is being revolutionized with bioreactor technology and plant-based alternatives.