With yields second only to Argentina, foreigners are in love with Egyptian debt

Is anyone else a just a little surprised that January is almost over? As The Colonel hammered into us eons ago: Time accelerates as you age.

Foreigners are back to loving our debt: Foreign investors bought 100% of the EGP 1.16 bn worth of five-year treasury bonds offered in a Monday auction. “After pulling out about USD 10 bn from Egypt during a global selloff last year, foreign investors are back to capture the highest yields in emerging markets after Argentina,” Bloomberg notes. That appetite is quite likely one of the big reasons the EGP has been gaining strength against the greenback this week. We break it all down in this morning’s Speed Round, below.

Is there an Egyptian link to the global Huawei scandal? It’s just a single line in a story by the Financial Times, but the paper notes the US Department of Justice is alleging that the global telecoms company “sold equipment to a third party in Egypt which then sold it to Iran.” Huawei faces criminal charge in the US and its CFO is under arrest in Canada, accused of trying to circumvent sanctions on Iran. Huawei itself has significant business in Egypt, as we noted yesterday, but moved its MENA headquarters out of Cairo to Morocco back in early 2017. You can read more about the US case against Huawei in the Wall Street Journal.

Egyptian parliamentarians are in Addis Ababa today and will meet with the speaker of the Ethiopian house, reports Al Mal. Expect the Grand Ethiopian Renaissance Dam, which threatens to fundamentally change Egypt’s water supply, to be on the agenda.

Dominating front pages in the global business press: Investors sent Apple shares up 5.5% in after-hours trading overnight after Apple reported slightly better results than Wall Street had feared after Apple’s surprise warning earlier this month. Apple’s revenues were down 5% for the holiday quarter just ended, while profits were off 0.5%. “We see great upside by continuing to focus on then things that we can control … We wouldn't change our position for anyone’s,” Apple CEO Tim Cook said on his results call as he promised “some exciting announcements later this year. … Apple innovates like no other company on earth and we are not taking our foot off the gas.” See: FT | WSJ | Bloomberg | Reuters | CNBC.

The US is “narrowing its list of potential nominees to lead the World Bank,” the FT reports. The leading contenders include:

• Ray Washburne, who heads the Overseas Private Investment Corporation, which we’ve previously noted has long backed Egyptian companies and projects;
• Indra Nooyi, the former CEO of PepsiCo, who now chairs the company’s board;
• David Malpass, a senior Treasury official who has struck a “sceptical tone” on multilateral institutions.

Put politics aside: The World Bank’s staff association has warned directors that they need to “put politics aside” as they choose a successor to Jim Yong Kim, who leaves office on 1 February to become a private equity guy.

Worth reading: Kim’s farewell note, which he penned as a piece for LinkedIn.

In miscellany worth knowing about this morning:

• Three-way bank merger in UAE: Abu Dhabi banks ADCB and UNB will merge via a share swap and then acquire Al Hilal Bank to create an entity worth USD 114 bn. (Bloomberg)
• Saudi stimulus spending: Saudi Arabia unveiled a USD 426 bn industry and infrastructure development plan. (Bloomberg)
• Palestinian gov’t resigns: Palestinian Prime Minister Rami Al-Hamdallah and his government have tendered their resignations. (Reuters)
• Brexit neverending: “Theresa May was locked on a collision course with Brussels on Tuesday after the House of Commons backed her efforts to rewrite her own draft Brexit treaty.” (FT)
• America freezes as Australia burns: The US Midwest is going to see some of its coldest temperatures ever this week and wildfires are sweeping Australia. Because climate change isn’t real. (NYT)

Egypt’s econ cooperation with France dominated the airwaves last night. Finance Minister Mohamed Maait gave Al Hayah Al Youm’s Khaled Abu Bakr the lowdown on the agreements signed between the two countries in several fields during French President Emmanuel Macron’s visit (watch, runtime: 04:37). Abu Bakr also noted Orange’s intentions to step up cooperation with Egypt (watch, runtime: 02:56). We have more on Macron’s visit and the slew of agreements in this morning’s Speed Round, below.

Economic relations with France have only improved over the years, French Chamber of Commerce in Egypt General Manager Hossam Benham told Masaa DMC’s Osama Kamal (watch, runtime: 02:57). Benham said exports to France have gone up and hopes are high for other potential windows for growth, but challenges remain, including instability and bureaucracy (watch, runtime: 04:55).

We should expect human rights to keep coming up with European visits, Abu Bakr said,urging the Interior Ministry to make public the reasons certain bloggers have been arrested or detained to show Egypt is just applying the law (watch, runtime: 04:34).

A surge in appetite among foreign investors in Egyptian treasury bonds amid a sudden appreciation in the EGP also earned airtime last night (watch, runtime: 7:29 and runtime: 5:29). We also have everything you need to know about this in Speed Round.

A slowdown in automotive sales continues in light of recent decisions, including scrapping a discounted customs rate, head of the automotive division at the Federation of Egyptian Chambers of Commerce, Omar Balbaa, said (watch, runtime: 02:43). The topic earned some airtime on Yahduth fi Masr as well (watch, runtime: 02:55).

Carry traders are back in force, buying 100% of Monday T-bonds auction: Foreign investors, who have been increasingly showing up at government debt auctions, bought 100% of the EGP 1.16 bn worth of five-year treasury bonds offered on Monday, the Finance Ministry said in a statement. The central bank also held yesterday an auction on 10-year bonds. Foreigners have snapped up an average of 30% of T-bill auctions, and their average participation in five- and 10-year note auctions rose to about 55% this week. The story is getting plenty of play in the international business press: Bloomberg and Reuters have the story.

Why this matters: International investors pulled about USD 10 bn out of Egypt during the emerging markets zombie apocalypse, putting pressure on the central bank and the banking system at large.

Why are the foreigners back? We now offer the second-highest yield in emerging markets after Argentina, according to analysis by Bloomberg. We’re also a bit less likely to default than Argentina, our friend Reham El Desoki told the business information service: Investors “perceive lower risk in the medium-to-long term, which is positive.”

It’s probably why the EGP appreciated against the greenback this week: The central bank’s statement on the auction comes after the EGP has been appreciating this week. While some analysts and bankers see the invisible hand of the CBE at play here, others we have spoken to have said the move was down to carry traders participating in auctions. The results of the T-bond auction back that up.

Does this tell us anything about interest rates? “The demand is probably driven by an anticipation that the central bank could start cutting interest rates as inflation eases,” Bloomberg said, citing comments from El Desoki.

High demand is making it a bit less expensive for Egypt to borrow, Bloomberg said in another piece: “demand for the five-year securities allowed underwriters to shave 44 basis points off Egypt’s cost to borrow, the most at an auction in a year, to 17.59%,” it reported.

This is all great news ahead of Ramadan: The boost in inflows is good news: New foreign appetite, if sustained, could help shore up the EGP just as we head into a season of high domestic demand for FX as Ramadan approaches and China’s holiday lull ends.

Egypt will sell USD 2-3 bn plus EUR 1-2 bn in eurobonds: The Finance Ministry plans to issue USD 2-3 bn of USD-denominated eurobonds in its upcoming international issuance, slated for sometime before the end of the fiscal year this June. It also plans to issue EUR 1-2 bn in EUR-denominated eurobonds, ministry sources told the local press. The government picked its advisers for the international debt issuance earlier this week.

USD 1 bn in green, Yen-denominated bonds this year: The source reiterated that the ministry will also issue USD 500 mn in Yen-denominated bonds this year, in addition to a USD 500 mn green bond issuance. There was no mention of an RMB-denominated issuance, which the ministry had hinted at previously.

Emirates NBD boss sees USD 80-85 bn MENA bond issuance in 2019: MENA countries will issue USD 80-85 bn in USD-denominated bonds and sukuk this year, Emirates NBD Asset Management CEO Parth Kinani said, according to Zawya. The Emirates NBD boss gave the figure during the launch of a white paper that shows MENA countries issued bonds worth roughly the same value (USD 84 bn) in 2018. The report, co-authored by Fisch Asset Management and Kamco Investment Company, takes stock of the MENA bond market in 2018 (hint: There was plenty of demand, with issuances having been 2-2.5x oversubscribed) and gives an outlook for the remaining 11 months of 2019.

Deficit financing to drive new bond issuances: Many MENA states will turn to bond issuances to finance deficits in 2019, the paper says. Egypt, for example, will fund a “sizeable portion” of its USD 24 bn FY2019-20 budget deficit through eurobonds, while Saudi Arabia will rely on bonds and sukuk to finance most of its USD 35 bn deficit.

EM index inclusion to boost inflows: The report says that GCC countries stand to benefit from joining EM indexes in 2019, suggesting that an additional USD 30 bn may flow into GCC bonds by virtue of joining the JPMorgan EM bond index alone. The addition of GCC countries will also have positive effects on borrowing costs as improved credit quality pushes risk premiums down.

Uber drivers turn to VPNs to use the app: In another sign that Uber may be blocked here in Egypt, the domestic press is reporting that the company’s local agents have told drivers to use VPNs to access the app. VPNs are programs that, effectively, allow apps and web browsers to sidestep a local block by appearing as if they are accessing the internet from another country. This came as other reports emerged that the technical difficulties Uber has been struggling with have made their way into the agents’ internal driver-tracking systems. The agents use the systems to determine the location and outstanding balance of the drivers they’ve recruited.

What’s going on? Earlier this week, we started poking into possible explanations for why Uber has been largely unusable in the past week. A source with whom we spoke drew a line between the outage and what the source said is ongoing friction over unspecified “changes” to the still-not-released executive regulations to the ride sharing law.

A bit of light at the end of the tunnel? At one point yesterday, a number of users and drivers said the app was starting work as normal, according to Masrawy — which also picked up Facebook posts of drivers saying they no longer needed to use VPNs.

Still no word from Uber: Both Masrawy and a local contractor speaking to the domestic press said the company has yet to offer an explanation as to why the app was not working. We have reached out to representatives of Uber on multiple occasions, but have yet to receive comment or a statement on the record. We found the app still unusable heading into dispatch time this morning.

Fitch pours cold water on new administrative capital rail link: Plans to construct an electric railway line connecting greater Cairo to the new administrative capital (NAC) face “serious obstacles,” Fitch Solutions said in a report (paywall) last week. Egypt recently agreed to borrow USD 1.2 bn from China’s Export-Import Bank to cover part of the construction costs, the first tranche of which will be disbursed in February. Fitch says that it is uncertain about the economic viability of the line, given the fact that the new capital remains devoid of permanent residents, adding that there is not yet demand for such a major infrastructure project. Fraught negotiations and financing issues are also likely to result in “lengthy delays,” making the transport minister’s two-year timeframe look incredibly optimistic.

Fitch needs to re-think this one. Surely we’re not the only ones who remember, 20 years ago, the endless gnashing of teeth about how New Cairo and Six of October would never become viable municipalities because there were no mass transit links to the rest of Cairo? In worrying about financing and delays? Fitch is on point. But in questioning whether mass transport should be built in now? They’ve missed the boat.

Healthcare looking “increasingly attractive” to foreign investors, says Fitch: In a more optimistic evaluation (paywall), Fitch says that the government’s commitment to reform is making the healthcare and pharma sectors increasingly attractive to foreign investors and multinational companies. Plans for a universal healthcare system, the creation of a new pharmaregulator, and the 2017 investment law will “boost demand … improve the business environment and incentivize foreign investment,” they write. A word of caution: The country’s “restrictive” med pricing system and the aftereffects of the float of the EGP will continue to weigh on the sector’s profitability for foreign investors.

Macron has left the city. We take stock of the agreements signed during the French president’s three-day visit to Egypt, accompanied by a high-profile business delegation:

Elsewedy Electric, France’s MND partner on cable transport: Elsewedy Electric and French industrial group Montagne et Neige Développement (MND) announced that they are forming a consortium to develop urban cable transportation in Egypt, according to an emailed statement (pdf). The consortium aims to develop cable transportation as both a solution to intractable urban transportation problems and a way to further enhance access to tourist sites across the country, the statement read. The consortium is already in talks with local authorities over several projects. “The challenges in cities and touristic areas are important in a country like Egypt that has in 2018 more than 97 mn inhabitants, and who will reach 20 mn tourists per year in 2020,” said CEO Ahmed Elsewedy. “Cable transport is one of the mobility solutions that is the most adapted to this demographic dynamic.”

Schneider Electric is investing EUR 35 mn in Egypt in 2019, focused primarily on its east Cairo factory as it looks to double its production capacity by June, a company official told Al Mal. The French company, which currently exports about 30% of the factory’s production, wants to double exports as it uses Egypt as a regional export hub. Schneider Electric is also in talks with Russia’s Rosatom to provide electric equipment to the planned nuclear power plant in Dabaa.

Insurance provider AXA Egypt has also pledged EGP 1 bn of long-term investment in the healthcare sector on the back of a memorandum signed yesterday with the Health Ministry, the company said in a press release (pdf). The company gave no specifics on the investments.

Cairo Metro Line 3 contracts signed: The National Authority for Tunnels signed the initial contract for the operation and maintenance of Cairo Metro Line 3 with France’s RATP Dev, according to an emailed statement. Line 3 currently consists of nine stations, with a planned expansion to include a total of 13. The inauguration of the four-station Line 4 was planned for 25 January.

Misr Insurance Holding Company (MIHC) also signed yesterday an MoU with France’s Cerway “to support the quality of refurbishment projects in Cairo’s city center … and enhancing the quality of MIHC’s distinguished real estate portfolio,” MIHC Chairman Basel El Hini said.

Orange Egypt and Valeo Egypt were among the French CIT companies that signed agreements on training with the state’s ITIDA, the domestic press reports.

More from Orange: Orange, a high-profile sponsor of this summer’s African Cup of Nations, had global boss Stéphane Richard in town for the delegation. He met yesterday with Prime Minister Moustafa Madbouly. He pledged an EGP 250 mn commitment to renewables and said the company will expand its presence in Upper Egypt and do more with SMEs. Orange is also looking at e-healthcare services and cybersecurity in Egypt.

Wait, we’re still not done: Suez Canal Authority boss Mohab Mamish inked initial contracts yesterday with France’s Bolloré Logistics to build and operate a c. USD 200 mn roll on, roll off (RORO) specialized area on the new platforms of the East Port Said Port, Mamish said, according to Al Mal.

Macron ended his visit to Cairo by meeting with Coptic Orthodox Pope Tawadros II and Al Azhar’s Grand Imam Ahmed Al Tayeb,the French president said in a tweet. Macron toured St Mark’s Cathedral in Abbasiya to show France’s support for Copts. He also hailed Al Azhar’s role in standing against religious extremism during his meeting with Al Tayeb.

LEGISLATION WATCH- House signs off on USD 1 bn in SME financing from World Bank: The House of Representatives signed off yesterday on a USD 1 bn loan offer from the World Bank last year to support the next phase of economic reform, according to Al Mal. The facility is earmarked to support development of Egypt’s private sector and encourage entrepreneurship and SME development. The facility came with its own set of conditions, similar to those of the IMF’s USD 12 bn extended fund facility: improve the business climate, support SMEs and entrepreneurship, curb energy subsidies, and come up with a strategy for debt control.

Meanwhile, the House is coming up with its own SMEs Act to rival one backed by cabinet: The House of Representatives has in mind a law on incentives for small and medium-sized enterprises that’s substantially different than that of the Madbouly government. That’s our reading of remarks by Rep. Hala Aboul Saad, who drafted the bill, in a conversation with Al Mal. While the newspaper gives very little in the way of details, the bill appears very much focused on the independent authority that will be charged with SME policy. The authority would be headed by President Abdel Fattah El Sisi. The bill also proposes that land be given to SMEs at a sharp discount and on very favorable payment terms, while also making it mandatory for banks to set aside 10% of their loan portfolio for licensed SME finance organizations.

How does this differ from the government’s law? The government’s bill is substantially more sensible: Its starting point is that there are untold numbers of SMEs in the parallel economy that need to be given incentives to go legit. The House bill does use the CBE’s definition of SMEs, but that’s basically where the similarities end. For a more detailed look at how the government’s SMEs Act aims to integrate the informal and formal economies, check out past details revealed to us exclusively here.

Conflict resolution: When the government introduces its SMEs Act, the House will likely discuss both bills with a view to coming up with a single, unified bill, Aboul Saad noted.

LEGISLATION WATCH- House working on draft e-vehicles act: The House of Representatives’ Energy Committee is finishing a draft law that will regulate the import, sale, and after-sales services of all electric vehicles, Rep. Tarek El-Sayed tells Al Mal. The committee is seeking guidance from Electricity Ministry on how to calculate rates for power used in the charging of cars and regulating charging stations. It is also talking to the Trade and Industry Ministry on how imports and exports of EVS will be regulated, he added.

INVESTMENT WATCH- Empower to invest USD 250 mn in WtE plants in Egypt: Renewable energy company Empower is planning to build 36 waste-to-energy (WtE) plants in Egypt at a total cost of USD 250 mn, Chairman Hatem El Gamal said. The company signed a funding agreement with leasing firm BM Lease and other backers to finance 70% of the planned development, he added. The firm is planning to sell electricity from the plants under the independent power producer (IPP) framework. Electricity Minister Mohamed Shaker said last week that Egypt has received offers from regional and international companies to build renewable power generation facilities with a total capacity of 5.5 GW.

M&A WATCH- Alaa Arafa exits CI Capital: Businessman and Arafa Holding boss Alaa Arafa sold his last shares in investment bank CI Capital on Monday, CI Capital said in a regulatory filing (pdf). Arafa held a 1.88% stake before the last sale. Arafa initially bought a 9.9% stake from CIB as part of a consortium of investors that acquired the investment bank and took it public.

Egypt’s role as regional energy hub gets a spotlight on CNBC: Opportunities for employment, business and even maintaining peace will all grow as a result of gas reserves in the Middle East, Oil Minister Tarek El-Molla told CNBC in an interview on Monday. Speaking at the BHGE Annual Meeting in Florence, Molla talked about his pride at having united a diverse cohort of players at the East Med Gas Forum, hosted by Egypt earlier this month — which included both Israeli and Palestinian representatives — and said he sees natural gas as both “the cause of the revenues to generate opportunities” and a “catalyst” for peace. He also stressed that international oil companies have strong appetite for Egypt at the moment. “We've got momentum and with the success of the first phase of Zohr, [the offshore supergiant natural gas field], we are more confident that we can do much bigger, much better and similar projects,” he said.

Egypt improves rating in 2018 Transparency International Corruption Perceptions Index: Egypt’s rating in the 2018 Transparency International Corruption Perceptions Index inched up to 35 points this year from 32. The widely followed index, designed to give a sense of public sector corruption, rates countries on a scale of zero (highly corrupt) to 100 (very clean). This year’s index covers 180 countries and territories.

Egypt is ranked 105 out of the 180 countries surveyed. The top scorers in MENA were the UAE and Qatar. The worst scorers: Syria, Yemen and Libya.

Seven of the 10 top-ranked countries are in Western Europe, with only New Zealand, Singapore and Canada breaking the monotony. Check out the jam-packed landing page for the package or read the MENA-specific report.

Foreign Minister Sameh Shoukry will head to Jordan today to attend a ministerial consultative meeting on Thursday to discuss key regional issues, according to a ministry statement.

What’s the cost of financial corruption? As it turns out, much higher than we had initially guessed. This nifty interactive infographic from Bloomberg lets you track a few of the more outrageous heists that money launderers have pulled off in recent years — all enabled by banks and other mechanisms — along with the punitive measures taken against them.

Topping coverage of Egypt in the foreign press is the arrest of 54 people suspected of planning to take part in violent protests on the anniversary of the 25 January revolution.The Interior Ministry said the group was being directed by a Turkey-based Ikhwan member. The statement did not provide details on the identity of those who were arrested, but said “legal measures” were being taken in coordination with homeland security. The story has been picked up by Reuters and the Associated Press, among others.

Other stories worth noting in brief include:

• UK tourist Laura Plummer has spoken of her relief at being released after serving 14 months of a 3 year sentence at Qanater women’s prison, reports the Guardian.
• The art of khayamiya, or tentmaking, is at risk of extinction in Egypt,as slowing demand due to dwindling tourism drives prospective artisans to more stable sources of income, The Japan News reports.

Talks on strategic cooperation between President Abdel Fattah El Sisi and Russian Security Council Secretary Nikolai Patrushev dominate the front pages of the country’s three main state-owned dailies this morning (Al Ahram | Al Akhbar | Al Gomhuria).

Chinese state-controlled funds are being funneled into companies producing key microchip technologies, prompting questions on whether this state involvement is a matter of chance or a deliberate governmental knowledge-acquisition strategy, Emily Feng writes for the Financial Times. Beijing’s purchase of Swedish company Silex Microsystems, for one, was a highly intentional move gain Silex’s expertise in “micro-electromechanical systems (MEMS), the components embedded in chips that are increasingly central to everything from mobile phones and medical devices to self-driving cars.”

So… what’s the problem? Beijing’s aim to become less reliant on imported critical components has been stated clearly in its “Made in China 2025” strategy, and its purchase of technological know-how makes sense as it looks to become a “world-class producer of computer chips.” Where the whole issue becomes murkier is when companies with highly sensitive technology are acquired through, for instance, large venture capital funds managed by government-owned entities — but are presented as being the product of purely private investors.

If it isn’t clear where the money comes from, where do regulators draw the line? The piece frames the challenge succinctly: “The layering of funds and investment vehicles in semiconductor deals demonstrates the challenge faced by regulators in screening investments to protect sensitive or dual-use technology.”

No inflation, no cry: The Bank of Jamaica has turned to reggae to make its core message about inflation more accessible to the public. In a series of short, catchy videos, the bank aims to convey a clear takeaway to its customers: “Low and stable inflation is to the economy what the bass-line is to reggae music,” actor and musician Donald Anderson tells us jauntily in one of several videos featured here on Quartz (watch, runtime: 0:30). If this doesn’t brighten up your day, nothing will.

Central bankers reaching out to the people: This approach is part of a wider drive, as noted by Bloomberg, to make fiscal policy more palatable and easy to understand — to get citizens to buy into the policies and reduce any political fallout. The Norwegian central bank has had singing fisherman. The Minneapolis and Atlanta Feds are trying to cover customers’ Instagram and Twitter feeds with a mixture of policy and puppies. What can we hope for here in Egypt? The central bank releasing its own version of Oppa Egyptian Style?

Prime Minister Moustafa Madbouly has begun discussions with export councils on a new, and more efficient, incentives program the Trade Ministry is working on to replace the current one, according to a Cabinet statement. Madbouly will begin next week holding separate meetings with the councils amid efforts to boost exports to tighten Egypt’s trade deficit, and has instructed Trade Minister Amr Nassar to draft the new incentive program a month. The government has been looking at alternative solutions amid delayed export subsidy funds and complaints from traders.

El Sisi holds talks with Russian Security Council secretary: President Abdel Fattah El Sisi discussed promoting military and security cooperation in a meeting yesterday with Secretary of the Security Council of Russia Nikolai Patrushev, according to an Ittihadiya statement. Xinhua also took note of the meeting.

The Egyptian Electricity Holding Company has signed a c.EGP 544 mn contract with a consortium of South Korea’s Hyosung and China’s ZTPC to build a power transformer station in Kafr El Sheikh, Al Masry Al Youm reports. The project will take up to 12 months to be completed.

The Louvre and the British Museum are among a consortium of European museums participating in a EUR 1.3 mn revamp of the Egyptian Museum in Tahrir Square, reports The Art Newspaper. The renovation, funded entirely by the EU, will focus on collection management, communications, and audience engagement.

The Financial Regulatory Authority (FRA) issued regulations establishing the country’s first insurance policy holder’s bailout fund, the market regulator said in a statement. The FRA is drafting a new Insurance Act that would make it the primary regulator for the sector, governing everything from the establishment and licensing of insurance companies, to setting best practices and industry standards, and regulating transactions, contracts, and policies.

The General Authority for Supply Commodities (GASC) purchased 180k tonnes of French and 180k tonnes of Romanian wheat yesterday in Egypt’s first wheat tender under new payment terms, reports Reuters’ Arabic service. GASC paid an average price USD 2.14 lower than the price it paid three weeks ago, according to Agri Census (paywall), confirming expectations that the new payment terms, which now enable suppliers to be paid immediately rather than within 180 days, are going to lower offers and encourage participation.

Does Egypt have a baladi dog problem? If you were anywhere near Cairo or Cairene social media in the last few months, you remember the apoplectic furor over the government exporting vast numbers of street cats and dogs to countries where puppies are food. Cairo’s baladi dog population may number up to 15 mn, with poor garbage collection offering food for clever scavengers and resources to fight over, according to The Economic Times. The Agriculture Ministry contends that 2017 saw 400,000 cases of dog bites, up from 300,000 the year before, and various governorates have been accused of mass culls in response to complaints.