Still the best carry trade in the world, Egypt is recalibrating its debt strategy

The first EU-Arab League summit gets underway today in Sharm El Sheikh. Senior European and Arab officials are set to discuss security, terrorism, investment and regional development. UK Prime Minister Theresa May and Saudi King Salman have already arrived for the summit.

Topping the agenda: The groundwork for a Turkey-style migration pact, in which Arab states would control the flow of migrants to Europe in return for financial aid. Don’t expect too much though: Officials have already began downplaying the likelihood of any concrete agreements due to ongoing political disputes, according to Reuters.

Also likely to come up: Forcing countries to take back their Daeshbags. The Washington Post suggests Belgian Prime Minister Charles Michel is pushing the idea of an international court to prosecute Daesh fighters European (and North American) countries try to figure out what to do with citizens who took up arms in Syria and Iraq.

Brexit will also make headlines in Egypt today as European Council President Donald Tusk is set to meet with UK Prime Minister Theresa May on the sidelines of the summit late this afternoon. Both sides are downplaying chances of a breakthrough.

The Saudi-Egyptian Business Council will meet in Cairo today, according to the domestic press. As many as 100 leaders of some of the largest Saudi companies are expected to attend.

Another notable summit will take place this week as The Donald and Kim Jong Un travel to Vietnam for their second round of face-to-face talks. Even if the meeting fails to produce an agreement, it will be worth it for the memes alone. The WSJ has more.

Egyptian officials are among a group of Geneva-based diplomats who traveled to China early last week, Reuters reports. The trip was part of a Chinese initiative to ward off criticism of its “re-education facilities” in the Muslim-majority Xinjiang province. The news comes as the WSJ gave front-page placement this weekend to The Muslim world looks on as China persecutes its Muslims.

Also making headlines in the region this weekend:

• State of emergency in Sudan: Sudanese President Omar Al Bashir has declared a 12-month state of emergency, dissolved the federal government, and replaced all state governors with state security officials, the BBC reports.
• “Thousands” protest Bouteflika: Demonstrators across Algeria marched on Friday against 81 year-old President Abdelaziz Bouteflika’s plan to seek a fifth term in office, Reuters reports.

Meanwhile: Saudi Arabia has appointed its first woman ambassador to the United States. Princess Reema bint Bandar is the daughter of Prince Bandar bin Sultan, the 1983-2005 ambassador to D.C. who was so close to the ruling elite in the US that he was known as Bandar Bush. Reema comes from a business background and replaces Prince Khalid bin Salman, who returns to Riyadh to become deputy defense minister. See coverage in the FT | Bloomberg | Reuters.

Warren Buffett turned in one of his biggest-ever quarterly losses after taking a writedown on Kraft Heinz and being forced by new accounting rules to book unrealized losses on his investment portfolio in the final quarter of 2018. (FT | WSJ | Reuters | Bloomberg)

It’s Oscar night: The Academy Awards get underway at 3am CLT tomorrow (Monday) morning, with a certain satellite network still appearing to be the only way to watch the broadcast if you dwell in our part of the world. Fill out your own ballot at the New York Times, read the Carpetbagge’s predictions (Egyptian-American Rami Malek FTW) check out the Hollywood veterans the WSJ is hoping will finally win (Spike Lee, please), or read the FT’s surprisingly good Oscar rundown.

PSA- We’re looking at a modest heatwave through Tuesday, according to the national weather service, reports the local press. Coastal and delta dwellers may also see some light showers. Look for daytime highs of 24°C today and 28°C tomorrow in the capital city.

Subsidies are back in the spotlight after the Supply Ministry announced it is going ahead with the second phase of its purge of subsidy rolls. The talking heads were surprisingly understanding of the move and rather less prone to grandstanding than they usually would on the topic.

Kramers are being purge from the welfare rolls: Longtime readers know that a “Kramer” is Enterprise-speak is anyone who is mooching off the state’s welfare program, which most prominently includes the subsidy program, but which extends to other welfare services, too.

Both live and undead Kramers are being purged: Live Kramers include folks who earn too much to qualify for social assistance (or who have moved abroad). Undead Kramers are folks who have shrugged off this mortal coil, but whose family members continue to claim their welfare benefits.

The ministry set out new (and sensible) criteria for what qualifies a person as a Kramer. These include those whose average monthly electricity consumption exceeds 650 KW and those whose monthly phone bill exceeds EGP 800. Those spending more than EGP 30,000 on school fees for their child at an international school can also expect to be cut from the welfare rolls, while those owning a luxury car made in 2014 or newer had best stock up on their last subsidized bread and tea. Are you a senior corporate officer? You’re off the list, too, ministry spokesperson Ahmed Kamal told Hona Al Asema (watch, runtime: 06:51).

Kramer’s cards will stop working on 1 March, and anyone looking to appeal can do that through the Ministry’s website, Kamal added. He made the rounds of the airwaves last night to discuss the purge. See, for example: Masaa DMC (watch, runtime: 09:23).

In a sign that the purge could hold widespread appeal, El Hekaya ‘s Amr Adib — known to take grandstanding positions against subsidy cuts — agrees with the decision and even attempted to shame Kramers (watch, runtime: 03:45). Adib phoned Amr Madkor, who consults for the Supply Ministry, who said that there is no deadline for appeals from those cut from the list (watch, runtime: 03:34).

Today’s EU-Arab League Summit is being widely anticipated by the talking heads, with Hona Al Asema (watch, runtime: 07:00) and Masaa DMC (watch, runtime: 01:26) taking note of the world leaders arriving. The summit speaks to Egypt’s standing in the world order, they said.

The launch of EGYPT SAT A received some coverage with Hona Al Asema noting the successful deployment of the satellite, which will be used — among other things — to figure out who is illegally building on state land (watch, runtime: 03:36).

Over in the political gutter, Amr Adib was transfixed by a Twitter beef between former International Atomic Energy Agency head Mohamed El Baradei and former Tamarod protest group member Mahmoud Badr. Adib phoned Badr, who said that he was shocked at what he says is El Baradei trying to distance himself from the 30 June 2013 protests (watch, runtime: 07:20). Moving along…

Still the best carry trade in the world despite surprise rate cut, Egypt is recalibrating its debt strategy ahead of March presentation to El Sisi: Pundits who worried that Egypt’s attractiveness to the carry trade would slide after a rate cut can take heart: “Egypt’s real interest rates remain elevated relative to emerging-market peers even after the central bank used its opening meeting of 2019 to loosen policy for the first time in almost a year,” Bloomberg reports. The business information service quotes CI Capital senior economist Hany Farahat as noting that, “Lower policy rates are not a threat to foreign inflows or inflation. Market expectations of an easing cycle will encourage fixed-income investors to lock in high yields before further drops.”

Inflows, including some USD 900 mn last month, are helping keep the EGP at its strongest level against the greenback in nearly two years, Bloomberg says, with the EGP changing hands for 17.54 against the USD.

Cutting the cost of debt service is now key: The CBE sent a message at last week’s bond auction that it’s not going to pay a premium, and the Finance Ministry’s focus is now on “reducing the cost of servicing debt and boosting the real economy.”

That’s why Egypt is now targeting a “gradual shift” toward longer-term debt, with Vice Minister of Finance Ahmed Kouchouk telling Bloomberg at the end of last week that the state is looking to “raise the share of longer-dated debt to about 70% of annual domestic issuance by 2022 from 5% in the last fiscal year.”

It’s the next logical step in the reform program, the story suggests, with Kouchouk explaining that, “We used to borrow to repay both maturing debt as well as to finance new debt. That exerted additional pressure on the market and pushed yields upward.”

Look for this story to have legs as the Finance Ministry prepares to present its debt control strategy to President Abdel Fattah El Sisi in March.

Keeping it all in context: Egypt is now one of the 20 top sovereign borrowers, according to S&P Global Ratings. Globally, sovereign debt will hit USD 50 tn by the end of this year, a 6% rise from 2018. The ratings agency said governments will borrow USD 7.78 tn from long-term commercial sources this year, around 3% more than last year. Debt refinancing will account for the bulk (around USD 5.5 tn) of the new borrowing. The agency forecasts that Egypt’s total sovereign debt will increase to USD 228 bn in 2019. Egypt’s recent focus on short-term issues means we have the second-highest debt rollover ratio in the world and will borrow the equivalent of 35.6% of GDP this year to refinance maturing debt, S&P suggests.

Other takeaways from the packed interview with Kouchouk:

• Egypt will sell USD 3-7 bn worth of international debt in 1Q19;
• Look for USD 250-500 mn in a maiden issuance of green bonds;
• New instruments could also include “variable-rate bonds linked to inflation and zero-coupon securities … [and] international bonds” denominated in EGP;
• FinMin’s revenue strategy will see it both clamping down on tax evasion and widening the tax base;
• “Tax stability” is still the order of the day.

EXCLUSIVE- Gov’t to issue new tender for advisers on EUR-, Asian currency bond issuance: The Finance Ministry is planning to select a new group international banks to advise on upcoming international bond issuances, a senior government official told Enterprise. The advisors will help quarterback an offering of EUR-denominated eurobonds and will advise the government on whether to proceed with a Asian currency-denominated issuance, the source added. They could recommend that the upcoming EUR-denominated eurobonds will be enough for this year, the source noted. The move comes after Citigroup, Goldman Sachs, HSBC, and JP Morgan advised the government on last week’s 5x oversubscribed USD 4 bn eurobond issuance.

EXCLUSIVE- Could an IPO, not a stake sale, kickstart the state privatization program? The government committee tasked with managing the state privatization has is mulling whether to proceed with the original lineup for the program — with Eastern Company selling shares in an accelerated book build — or to switch things up and go with an initial public offering straight out of the gate, a senior government official tells us. Those arguing in favour of an IPO are pointing to the EGX’s more than 16% gain since the beginning of the year, while others believe that staying the course with the stake sale is appropriate given the ball is already rolling on the original lineup. Public Enterprises Minister Hisham Tawfik most recently said the program would start with stake sales.

We could have news on this front as early as this week: Both Tawfik and Finance Minister Mohamed Maait told us that they could not speak on the lineup as the committee has yet to decide on it. The committee, which is headed by Prime Minister Moustafa Madbouly, will make a decision on the matter “soon,” they added. Tawfik had previously noted that a decision was to take place this week.

Top court strikes down challenge to legality of Uber, Careem: The Supreme Administrative Court overturned a ban on ride-hailing apps, allowing them to operate freely in Egypt, Reuters reported. The court accepted an appeal filed by Uber and Careem against a lower court ruling last March that saw the services banned after a group of taxi drivers claimed both companies were operating illegally by using private cars for commercial operations. Uber and Careem were allowed to continue under a Court of Urgent Matters ruling pending the Supreme Administrative Court ruling. Bloomberg also has the story this morning.

Ride-hailing companies can turn this page, but more awaits them: Uber, Careem and other companies are awaiting the executive regulations of the Ride-Hailing Act, which will likely introduce a new levy of EGP 2-5 per trip. Meanwhile, Uber and Careem are now charging and remitting VAT. They were also told by the Egyptian Competition Authority that a prospective combination of their businesses could violate Egypt’s competition act.

Egypt is a regional darling for both companies: Uber has said that it sees Egypt as one of its most promising markets in the Middle East and has launched a new bus service in Cairo. Careem said last year it was investing USD 100 mn in launching a bus service that it is currently expanding.

EXCLUSIVE- Trella raises >USD 600k in pre-seed funding round led by Algebra: Trella, the trucking marketplace that connects shippers to carriers, has announced that it has secured over USD 600k in a pre-seed funding round led by our friends at Algebra Ventures, who shared the announcement with us in a press release.

Founded in 2018, the tech platform has generated enormous investor interest, having tapped into the success of ride-hailing apps in the region to create a tailored solution for the freight industry, one that aims to reduce market fragmentation, improve efficiency and create a more transparent environment for both drivers and businesses. Among other services, it offers shippers and carriers access to an overview of pricing and payments, provides status updates and tracking, uses tech know-how to optimize dispatch, and analyzes transportation trends.

Also participating in this initial round of funding are seasoned angel investors Esther Dyson and Jambu Palaniappan, as well as global VCs and other strategic investors. Algebra Managing Partner Karim Hussein described the team behind Trella as “superstars … with proven execution ability.”

LEGISLATION WATCH- El Sisi ratifies new tax treatment for banks: President Abdel Fattah El Sisi has signed off on proposed amendments to the Income Tax Act that change how banks and corporations account for income from investments in government debt, according to a Finance Ministry statement (pdf). The ministry will immediately begin outlining the executive regulations, the statement notes, adding that the regs will take into account recent discussions in meetings with the Federation of Egyptian Banks. The House of Representatives approved the changes earlier this month.

Background: The measure will require banks and companies to separately account for earnings from their holdings of government debt and could see their effective tax rates rise. The measure will apply only to gains on debt bought after the treatment comes into effect.

Reminder: Electricity prices are going up again in July: Electricity Minister Mohamed Shaker reminded the House Energy and Environment committee that the government plans to raise electricity prices in July, the local press reports. A government official told us earlier this month that the state spending on subsidies is going to decline to EGP 321 bn in the FY2019-20 budget from EGP 332 in the current fiscal year. The government raised electricity prices by about 26% last July.

CBE amends how state-subsidized mortgages to low-income households will be disbursed: The central bank amended the terms for how the state will doll out mortgage subsidies under the Mortgage Finance Fund, nearly a month after announcing it would restrict these subsidies solely to low-income households. The note from the CBE (pdf), which was issued on Thursday, instructed banks to provide the mortgage at rates of 5-7% from their own reserves, without receiving the funds from the Mortgage Finance Fund beforehand. The fund will then remunerate the banks for the difference between the rate offered under the CBE initiative and the corridor rate. The CBE first launched the fund in 2014 with an initial EGP 10 bn disbursement and added a second EGP 20 bn disbursement late last year. Governor Tarek Amer previously stated the program caused the bank to incur significant losses.

M&A WATCH- AIND completes EGP 14 mn buyout of UE Finance: Arabia Investment, Development and Financial Investment Holding Company (AIND) has purchased Incolease’s 20% stake in UE Finance for EGP 14 mn now holds 99% of the company, the company said in an EGX disclosure (pdf).

LEGISLATION WATCH- GAFI drafting amendments to Investment Act? The General Authority for Free zones and Investments is planning to send draft amendments to the Investment Act to the government within days, Al Masry Al Youm quotes GAFI chief Mohsen Adel is saying. Adel gave no details of the amendments, but free zone investors have been saying that GAFI might be looking to give them a break from taxes and fees imposed in the 2017 Investment Act.

MOVES- Mark Morcombe, the former chief operating officer at Egyptian gold minder Centamin, has been named COO at Toronto Stock Exchange-quoted Endeavour Mining, according to a statement, according to a statement.

EARNINGS WATCH- TMG Holding reported a 28% increase in 2018 net profit to EGP 1.7 bn, the company said in its earnings release (pdf). TMG’s revenues were up 28% y-o-y to EGP 10.9 bn.

Meanwhile, fixed-line monopoly Telecom Egypt reported a net profit after tax of EGP 3.5 bn in FY 2018, up 14% y-o-y from the previous year, according to the company’s earnings release (pdf). Revenues for the year were up 23% y-o-y to EGP 22.8 bn, driven by “strong growth in the retail” and wholesale segments.

Analysis of the proposed constitutional amendments topped coverage in the foreign press. Reuters has this primer about the proposed changes, the bill’s supporters and opponents, and what will follow next. Meanwhile, everyone from the Jerusalem Post to the AFP is noting the duration of President Abdel Fattah El Sisi’s possible term limit following the amendments and opposition to it. Meanwhile, the UN Human Rights office expressed concern on Friday over the methods used to extract confessions in cases leading to the death penalty, Reuters reports.

Sharm El Sheikh highway barrier draws ire of citizens: Construction is underway in Sharm El Sheikh of a “mix of high concrete barriers and at least 37 km of razor-wire fence,” writes The Guardian’s Ruth Michaelson. The project, which the governor of South Sinai has asserted is definitely not a wall, has however drawn the ire of some of its residents, who complain that it will obscure the region’s natural beauty and alienate local bedouin communities, she states.

The EU-Arab league meeting topped coverage on the front pages of state-owned daily newspapers. While Al Akhbar appeared focus on the wave of world leaders landing in Sharm El Sheikh, Al Ahram is proclaiming that Egypt is leading a new phase in Arab-European international cooperation. Al Gomhuria honed in on the launch of the new Egypt Sat, with an interview with Higher Education Minister Khaled Abdel Ghaffar on Egypt’s new space capabilities.

Facebook joins race for AI chips: Facebook is playing catch up to Amazon and Google in developing chips that can handle the upcoming generation of AI technology, writes the FT. The social network’s AI goals are twofold: to imbue a computer with enough common sense to hold a conversation with a human and to use AI to monitor video in real-time and decide what content is fit to be disseminated. Let’s hope this doesn’t become a Nazi-bot like Twitter’s AI bot.

Inside job: Facebook is working with a number of chip companies but also developing the technology on its own. This isn’t unprecedented — Facebook has previously designed hardware before opening up those designs to open source. In addition to working on reducing latency, the focus is on building new “self-supervised” neural networks that mimic human intelligence more closely. The field is crowded, with not only Amazon and Google investing heavily in AI chips, but a plethora of startups as well. Historically, breakthroughs in AI were enabled only by big hardware improvements, so the tech giants’ spending spree could do a lot to push the science forward.

AfDB grants Egypt EGP 80 mn to support entrepreneurship: The African Development Bank (AfDB) has signed an EGP 80 mn grant agreement with Egypt to support entrepreneurship, especially in Upper Egypt and other impoverished regions, the Investment Ministry said in a statement. The grant will largely focus on supporting innovative ideas by youth and women, especially in the fields of renewable energy, agriculture and handicrafts. The bank had released its report detailing some of Egypt’s key macro indicators at the signing ceremony. Read AfDB’s 2018 report on Egypt (pdf).

A delegation of government officials will travel to South Korea this week to talk trade and investment, Trade Minister Amr Nassar said, according to Al Masry Al Youm. This comes a week after Egypt hosted a delegation of South Korean business leaders. The two countries have agreed to form a joint technical committee to find ways of boosting cooperation in fields including electronics, transport and renewable energy, Ahram Online reports.

A consortium comprised of Orascom Construction (OC), Engie, and Toyota Tsusho Corporation is on track to complete a 250 MW wind farm in Ras Gharib by October, two months ahead of the 24-month construction schedule, National Renewable Energy Authority (NREA) head Mohamed El Khayat tells local industry publication Power News. OC’s ability to deliver on the project helped shave 10% from the estimated time of construction, noted El Khayat. The consortium has already begun conducting wind tests ahead of the launch of construction on phase two of the project — which will see the development of a 500 MW wind farm. Phase one of the BOO project is expected to cost USD 312 mn, while phase two is estimated to cost around USD 700 mn, he added. The consortium had inked the agreements for the project in July of last year.

The Egyptian Electricity Transmission Company raised the cost-sharing bill of Benban’s solar park developers by about 25%, local press reported. The raise accounts for the increased cost of building materials the cost of control station and central station to be constructed for the park. Under the Feed-in-Tariff program, companies operating in Benban are to split the costs for developing the utilities and infrastructure for the park under a cost-sharing agreement.

US-based Honeywell has signed with the New Administrative Capital Company for Urban Development (NACCUD) contracts to develop a digital security system in the new capital. “Honeywell will deploy city-wide security and surveillance systems as part of the first phase of development, in collaboration with its partner MTI, to integrate security systems across the capital into a single point of control, known as an Integrated Command and Control Centre (ICCC),” the company said in a press release. NACCUD Spokesperson Khaled El Hosseini had told the domestic press the contract was worth USD 31 mn. More than 6,000 cameras will be installed as part of the agreement “to monitor crowds and traffic congestion, detect incidents of theft, observe suspicious people or objects, and trigger automated alarms in emergency situations,” the company said.

Russian crane building company SMM has signed an agreement with Egypt to set up a crane factory in the Russian Industrial Zone (RIZ) in cooperation with the Russian Export Center, the Suez Canal Economic Zone Authority (SCEZ) said in a statement. A delegation from the Russian company will visit the SCEZ in March to work out logistics. Eight Russian companies signed last week MoUs with the Russian Exports Center to invest in the planned USD 7 bn RIZ. An Egyptian-Russian company will be set up in April to operate and manage the planned RIZ, which spans 5.25 sq-km and will be implemented over three phases over 13 years.

Egyptian and Serbian authorities have agreed to resume direct flights between Cairo and Belgrade after a 13-year-long hiatus, Red Sea Investors Association member Tamer Nabil said, according to Al Shorouk. The first flight is scheduled to depart the Serbian capital on 4 June. We had noted last December that Serbia’s Niš Airport, located in the country’s third largest city Niš, is also expected to begin operating more flights to Egypt this summer. Serbian charter flights to Sharm El Sheik also resumed last month.

Ramses Youssef Atteya Group is planning to build its sixth hotel with an initial EGP 800 mn in investments in cooperation with Concord Hospitality and two other Egyptian and Saudi companies, Al Mal reports. Construction of the Hurghada hotel will begin in 2H2019 and be completed by the end of 2021, managing director Youssef Atteya said. The names of the two companies and the size of their contribution have yet to be disclosed.

Egyptian and Saudi authorities have reopened the Port Tawfiq-Jeddah ferry route after 13 years of inactivity, Red Sea Ports Authority head Ayman Saleh said, according to Al Ahram. The route was suspended in 2006 after the MS El Salam 98 ferry disaster saw the loss of over 1,000 Egyptian expats, Hajj pilgrims and crew members.

The General Authority for Investments (GAFI) has agreed to build a freezone in Aswan with the aim of attracting USD 2.1 bn investments, according to an Investment Ministry statement. The initiative aims to attract 160 projects in various fields, including fish manufacturing and packaging, programming and ready-made garments. The freezone will primarily export products to Sudan and Nile basin countries.

A criminal court sentenced two monks convicted of murdering a bishop to death on Saturday, reports Reuters.

Not quite the smartest guy in the room: As the architect of one of the biggest corporate collapses in US financial history is released from prison, Bloomberg is out with a photo gallery documenting the rise and fall of Enron’s notorious chief executive. Relive the life and times of Jeffrey Skilling: from smart guy to bad guy.