The IMF has released its fourth review of Egypt’s reform program. It’s mostly good news.

Happy Sunday, ladies and gentlemen: It’s PMI Day: The Markit / Emirates NBD purchasing managers’ index for March is due out at 6:15am CLT. You can download the summary report here when it arrives. The indicator, which measures non-oil business activity in Egypt, hit its lowest level in 17 months in the February survey.

It’s also the start of what is shaping up to be a very busy week on the domestic news front…

• President Abdel Fattah El Sisi meets US President Donald Trump on Tuesday, 9 April.
• Renaissance Capital’s annual Egypt Investors Conference takes place in Cape Town Tuesday and Wednesday. EGX Chairman Mohamed Farid will deliver the keynote address on expanding the role of capital markets in Egypt’s economy. Tap or click here to view the preliminary agenda for the event (pdf).
• Monthly inflation figures are due out on Wednesday. Annual headline inflation accelerated to 14.4% in February, up from 12.7% the previous month.
• AmCham is holding its annual HR Day at the Cairo Marriott Hotel on 10 April.

…and abroad:

• The IMF and World Bank are holding their spring meetings on 12-14 April in Washington, DC.
• The UK will, theoretically, leave the European Union on Friday, 12 April. Prime Minister Theresa May has asked for a three-month extension to 30 June.
• First quarter earnings season gets underway in the United States at week’s end as JPMorgan and Wells Fargo report results. The expectation, as we noted last week, is for corporate earnings in the US and Europe to fall in 1Q for the first time since 2016.

Fifteen of the startups the WEF thinks will make a dent in the Arab world are from Egypt. That is according to its list of “the 100 Arab start-ups shaping the Fourth Industrial Revolution.” We can’t say we agree with every choice, but still… The list came out to mark the group’s annual meeting on the Middle East.

The Donald’s nominee is the new president of the World Bank: David Malpass was named to the post this weekend by the institution’s executive directors, according to a statement. Malpass, previously undersecretary for international affairs at Treasury, starts his five-year term on Tuesday. Despite his easy run for the position, Malpass has been met with skepticism from many over his views on the bank’s traditional goals and policies, including multilateralism and combating climate change, James Politi writes for the Financial Times.

Malpass could visit Egypt, we were told in Washington, DC, at the end of AmCham’s annual Doorknock mission. Malpass has identified Egypt as a “priority country” and the World Bank is in talks with Egypt for a “digital infrastructure development loan” and a separate USD 200 mn to support SMEs. We have chapter and verse on that and more in this morning’s Spotlight, below.

The Donald has called on the US Federal Reserve to cut rates and restart its ‘quantitative easing’ stimulus program, according to the FT. Trump also raised eyebrows over the weekend as he suggested he wants to nominate loyalists Herman Cain and Stephen Moore to the Fed’s board. The move would undermine the Fed’s position as one of the world’s most powerful independent financial institutions, the NYT argues, while the FT notes elsewhere that Friday’s jobs report in the US — which found cooler wage growth in March and more job growth than expected — will leave the Fed in a “patient mood.”

March may have marked the end of the tightening cycle for emerging market central banks after the month saw just three net rate cuts in 37 markets, Reuters says. March was the second consecutive month of net rate cuts, after “policymakers battled the fallout from a strong USD, rising inflation and softer currencies which dominated most of 2018.”

SIGN OF THE TIMES- Norway’s sovereign wealth fund is backing away from emerging market bonds in a move that’s getting attention from both the FT and the WSJ. Christian Maggio, the head of EM strategy at TD Securities in London says the change “won’t cause won’t cause seismic waves in EMs and, under certain circumstances, may even go mostly unnoticed” because the anticipated USD 12 bn cut to holdings is “a mangeable sum in the multi-tn USD market.”

In regional news this morning:

• Saudi Aramco is preparing for a “jumbo” bond issuance this week that could be worth at least USD 10 bn, according to Bloomberg.
• Clashes are taking place south of Tripoli after eastern commander Gen. Khalifa Haftar ordered his forces to advance on the Libyan capital last week, the BBC reports. Egypt, which backs Haftar’s Libyan National Army, has called for him to end the offensive (more on this in this morning’s Diplomacy, below).
• Thousands of people returned to the streets of Algeria over the weekend demanding further government resignations, Reuters reports. The continued unrest is beginning to threaten agreements between state petroleum company Sonatrach and international oil firms, Bloomberg says.
• Protests in Sudan “reached army headquarters for the first time” yesterday, the FT reports.

Bobby Axelrod has lunch with the FT. Or at least Damian Lewis, the British actor who portrays one of the two lead characters in our favourite TV series, does.

Save your tears: Not all hedgies and fintech bros will be cut off from Patagonia fleeces, but good luck getting one if your company doesn’t already work with the socially conscious brand, this piece from the NYT suggests.

Last night was yet another mixed bag of nuts on the airwaves.

Amcham’s Doorknock lobbying tour of Washington got some airtime. The annual pilgrimage wrapped up yesterday after a delegation of 35 top executives of companies operating in Egypt held 89 meetings with US officials, members of Congress and their staffers, international financial institutions and think-tank types. Hona Al Asema’s Reham Ibrahim noted the event comes ahead of President Abdel Fattah El Sisi’s trip to DC this week (watch, runtime: 2:13).

Gov’t wishes you a happy Ramadan: The same talking head then moved on to discuss Supply Ministry efforts to the price of consumer staples ahead of the holy month in an interview with Internal Trade Development Authority Chairman Ibrahim Ashmawy. It’s all about logistics, he said (watch, runtime: 11:57).

Meanwhile, avid Zamalek fan Amr Adib was on Ahly’s 5-0 loss to South Africa’s Mamelodi Sundowns in yesterday’s CAF Champions League quarter final(watch, runtime: 7:35).

IMF releases fourth review of Egypt’s reform program: The IMF was out yesterday with its fourth and penultimate policy review of Egypt’s economic reform program, which saw a marked improvement in Egypt’s macroeconomic situation to date. “The program performance has been broadly on track,” the fund writes, noting that the public debt was the only target missed. The outlook remains remains favorable in the medium-term “supported by strong policy implementation,” the IMF noted. The fifth review is scheduled for completion on or after 20 June, paving the way for the disbursement of the sixth and final USD 2 bn tranche of the USD 12 bn loan. The team conducting the review will be in town in May, Egypt Mission Chief and Assistant Director for Middle East and Central Asia Department Subir Lall said last week.

Read the report: Tap or click here for the landing page or download directly here (pdf).

You can expect 92-octane gasoline prices to rise sometime in September: Fuel subsidy reforms are on track, the IMF writes, with the government expected to lift all subsidies (apart from on liquified petroleum gas and fuel oil used for electricity and bakeries) by the end of FY2018-19. The recent indexing of the price at the pump to global fuel prices for 95-octane petrol will be rolled out to fuel stocks on 5 June, and the first price adjustment is scheduled for the end of 3Q2019. Plans to fully eliminate electricity subsidies by the end of FY2020-21 are also on course.

The IMF still sees Egypt’s economy growing at a 5.9% clip in the coming financial year and at a 6% pace in FY2020-21. The government debt-to-GDP ratio has also markedly improved amid fiscal consolidation and is expected to continue falling over the coming years. The fund sees debt-to-GDP falling to 86% by the end of FY2018-19, and continuing to decline to reach 71% in FY2023-24. Meanwhile, the government is on track to hit its 2% FY2018-19 primary surplus target, and the overall deficit is expected to narrow to 8.3%.

Inflation forecasts have fallen slightly since the third review, with the IMF now predicting 10.7% consumer price inflation by the end of the upcoming fiscal year compared to a previous forecast of 10.9%.

Don’t expect single digit inflation until the end of the 2020-2021 fiscal year, by which time inflation should be at a 7.7% clip before falling further to below 6.9% in FY2022-2023. In the interim, the fund is expecting 13-14% inflation by the end of the current fiscal year as subsidy cuts and seasonal factors produce upward pressure on prices. The single-digit inflation target will continue to heavily factor in monetary policy decisions, the IMF says, adding that policy will “remain restrictive to contain possible second-round effects.”

The EGP-USD exchange rate has remained stable but the against other trading partner currencies the EGP has appreciated in nominal and real effective terms. The fund warns that further appreciation could hurt the government’s attempts to tackle the current account deficit.

Foreign currency reserves are currently above the fund’s reserve adequacy metric, and are expected to rise to USD 44.9 bn by the end of the current fiscal year before hitting USD 50.8 bn in 2022-23.

Net foreign direct investment meanwhile will grow moderately over the coming years rising to USD 11.3 bn from USD 9.5 bn in FY2019-20 before reaching USD 16.9 bn in FY2022-23.

Global financial conditions are worsening and the Madbouly government will need to maintain “consistent policy implementation” if it is going to continue to benefit from the reform program. Public debt levels could come under pressure by an increase in real interest rates or a sharp fall in the EGP. Limited flexibility in the exchange rate continue to hamper inflows into the local treasury market while banks remain exposed to the EGP due to their short positions on foreign currency. Although the government’s record of commitment to reform somewhat mitigates these risks, deteriorating external conditions make it all the more important that Egypt pursues greater exchange rate flexibility, the fund says.

Egypt closes EUR 2 bn eurobond issuance in final international debt auction for FY2018-19: Egypt sold EUR 2 bn worth of six- and 12-year EUR-denominated bonds in an issuance that went to market on the London Stock Exchange on Thursday, according to a Finance Ministry statement (pdf). The offering was more than 4x oversubscribed, attracting EUR 9 bn in requests from more than 450 investors. The issuance was made up of EUR 750 mn in six-year bonds and EUR 1.25 bn in 12-year notes, carrying yields of 4.75% and 6.375%, respectively, according to Reuters. Egypt’s recent eurobond issuance in February, which saw the ministry sell USD 4 bn in USD-denominated eurobonds, was 5x oversubscribed, attracting USD 21.5 bn in bids from 250 investors.

Egypt will not tap the international debt market again before the next fiscal year, which begins on 1 July, the Finance Ministry said in the statement. The government announced last week it has raised the limit of Egypt’s eurobond program to USD 30 bn from USD 20 bn, according to the prospectus (pdf) published on the Luxembourg exchange.

Advisors: Banca IMI, BNP Paribas, Natixis, and Standard Chartered Bank were bookrunners for the issuance. Dechert LLP acted as international counsel, while Al Tamimi & Co. was domestic legal counsel.

Egypt’s fiscal consolidation in upcoming budget is credit positive, says Moody’s: Egypt’s plans for continued fiscal consolidation in FY2019-20 is credit positive and “conducive to reducing Egypt’s general government debt/GDP ratio to 82.3% from an expected 86.3%” in FY2018-19, Moody’s said in an issuer comment last week (pdf). The ratings agency expects GDP to grow at a 5.8% clip — a slightly lower figure than the 6% set by the government — and accordingly sees the fiscal deficit at 7.5% and the primary surplus at 1.7% of GDP. The draft state budget, which is currently under review at the House of Representatives, puts these figures at 7.2% and 2%, respectively.

Fiscal consolidation means cutting expenditure on energy and food subsidies, which will create some breathing room for the government to slightly increase its spending on social welfare and pensions, Moody’s notes. Petroleum spending will be cut back to 0.7% of GDP, down from 1.7% in FY2018-19 on the back of the new fuel pricing mechanism, which came into effect at the beginning of the month.

Minimum wage increase for state employees will keep wage spending from decreasing as initially planned: The increase of the national minimum wage to EGP 2,000 per month from EGP 1,200 — which will come into effect with the start of the next fiscal year — “will result in the wage bill remaining at about 5% of GDP as compared to a further reduction to below 5% of GDP under IMF program parameters, and significantly lower than the 8.5% of GDP registered in fiscal [year] 2014.”

Moody’s thinks we’re going to see calls for a private sector minimum wage, writing that “in light of the significant real wage and purchasing power erosion that middle- and low-income households have faced following Egypt’s currency flotation in November 2016, we expect calls for similar minimum wage adjustments in the private sector to follow.”

M&A WATCH- Egyptian Media Group has acquired satellite television network D Media, which owns DMC Channels, Al Shorouk reports. EMG CEO Tamer Morsi has been appointed to head D Media. No further details on the transaction were provided. EMG previously acquired a 51% stake in Future Group Holding — which owns satellite news channel CBC — as well as Al Hayat TV Network.

M&A WATCH- OIH board agrees to fair value for Nile Sugar acquisition: Orascom Investment Holding’s board of directors has given a green light to an EGP 2.84 per share bid for Nile Sugar Company, the local press reported. The board had previously given the green light to the acquisition at an estimated cost of EGP 3.76 bn; OIH hired last year BDO Corporate Finance to conduct a fair value report on Nile Sugar Company. The company had initially planned to complete the transaction by end-2018.

LEGISLATION WATCH- Gov’t looking to scrap controversial 2017 NGO Act? The government plans to replace the controversial 2017 NGO law with new legislation, Social Solidarity Minister Ghada Wala said in a statement. The new law will permit the formation of new organizations and create a single body charged with supervising civil society groups. Foreign NGOs will be allowed to operate in the country following approval by the relevant minister, and local organizations will be able to open offices in other countries and receive donor money. Up to 25% of organizations’ boards of directors can be foreign residents. The new legislation will also scrap prison sentences for violations of the act.

Human Rights Watch called the scrapping of prison sentences a “positive move” and urged the government to make the draft law available to the public. “The government should quickly publicize this draft so that civil society, which will be most affected by the law, has an opportunity to review and comment on its contents,” it said in a statement.

Background: The NGO law passed in 2017 placed severe restrictions on Egyptian civil society, and was roundly criticized by local and international NGOs and in the global press. The government has been working on amendments to the law since the Supreme Constitutional Court judged one of its clauses unconstitutional in June 2018.

Madbouly issues new rules for industrial land allocations: Prime Minister Moustafa Madbouly has outlined new guidelines for allocating state-owned industrial land which rank applicants using a point-based system overseen by a newly formed committee, according to a cabinet statement. Existing manufacturers will be awarded points for criteria such as presenting three years-worth of financial statements for one of their manufacturing operations and having a valid license. Newcomers, meanwhile, will need three years of experience in a relevant sector, bank statements registered with the Egyptian Credit Bureau (I Score), and solid business plans. The new guidelines will also price land based on its market value and location, and allow the government to revoke allocations in cases of project or payment delays, sudden changes in activity, or signs of rent-seeking behavior.

Arab countries are looking at a water supply emergency that they need to urgently address, Jose Graziano da Silva, director-general of the UN Food and Agriculture Organization (FAO), told reporters in Cairo on Thursday, according to Reuters. The MENA region is expected to have its per capita water resources slashed in half by 2050 and needs to switch to water-efficient irrigation methods and step up coordination to avoid a crisis. “[In Egypt] they have 32 ministers. Most probably of those 32 ministers, 30 ministers [handle] water — water is a problem for them. And they don’t have ways to coordinate very efficiently,” Graziano da Silva told the newswire on the sidelines of a meeting of around 20 Arab countries to discuss the issue.

EARNINGS WATCH- Orascom Investment Holding reported a net profit of EGP 865.6 mn in 2018, up from EGP 453.1 mn in 2017, according to the company’s earnings release (pdf). The company’s revenues for the year came in at EGP 1.75 bn, up from EGP 1.49 bn in 2017.

AmCham wraps up its “easiest” annual Doorknock mission in Washington, DC: After holding 89 meetings with US administration officials, members of Congress and staffers, international financial institutions and think tanks, AmCham President Tarek Tawfik described the mission as “the easiest compared of all the past years because a leap has taken place on many aspects which was widely accepted and helped ease concerns.”

Key messages from the mission to the US: The delegation relayed Egypt’s growing political role in the region, its soft power and influence, and success stories — including the economic reform program, our emergence as a regional gas hub, and the maintenance of friendly relations with Israel.

Key messages from the US to Egypt: Human rights and the proposed constitutional amendments remain a concern for Democrats in Congress — but not so much for the Trump administration. Critics of the proposed changes to the constitution expressed concern that the judiciary’s independence would be undermined. Corporate America is also welcoming of a US-Egypt trade agreement, which Egypt-US Business Council Chairman Omar Mohanna said could come to fruition under the current US administration.

Egypt needs to “retell its story” to improve its image in Washington, Republican Congressman Jeff Fortenberry told reporters during the mission. Egypt-US relations have been “outsourced” to military brass on both sides — which has come at the expense of other aspects, including cultural and media cooperation, Fortenberry said. Egypt must do a better job of highlighting its efforts to create conditions for stability and promote healthy nationalism, he added. Everyone should be made aware of the “incalculable” consequences of Egypt’s stability being shaken, but “Egypt has to get over its entitlement mindset that it deserves to be the leader of the Arab world and has to go re-earn that position,” he said.

At the World Bank, there is nothing but love for Egypt: Egypt’s position in the Doing Business Report is expected to improve this year as we push ahead with “the first reform program that Egypt completes successfully,” Alternate Executive at the Board of the World Bank Ragui El Etreby told reporters. Our risk conditions are improving, but the ballooning population remains a point of concern, El Etreby said. Executive Director Merza Hasan was also full of praise for Egypt’s “smart” use of debt to build infrastructure and improve the business environment.

Speaking of debt: The issue of rising levels of global debt is expected to feature heavily on the World Bank’s agenda during its upcoming spring meetings, Hasan said. The bank is also set to discuss a new strategy to give more loans to more vulnerable countries or those in conflict and incorporating women and immigrants while keeping in mind climate change in the projects and financing they provide.

Newly-elected World Bank President David Malpass could pay us a visit soon, particularly as he has singled out Egypt as a “priority country” with which he wants to strengthen the bank’s relationship, El Etreby said.

Egypt and the WB are also in talks for a digital infrastructure development loan, and should reach an agreement this year, El Etreby said, without disclosing the size of the facility. A separate USD 200 mn could also make its way to Egypt to support SMEs, but the government has yet to request any loans to plug the state budget financing gap.

Key takeaways from a panel held by the Middle East Institute on the Egyptian economy, which featured AmCham President Tarek Tawfik, Shahid Law Firm Managing Partner Girgis Abdel Shahid, CID Consulting Chairman Dalia Wahba, and ECOnsult Architecture Chairman Sarah El Battouty:

• Implementation of regulatory reforms and getting rid of red tape are the biggest challenges facing the economy;
• The private sector’s contribution to the economy should eventually grow to 70% of GDP from 45% today;
• The military is not crowding out the private sector and its involvement in the economy is to fulfill infrastructure needs at a high speed;
• The natural gas and railway monopolies are slowly being undone;
• Efforts are needed to enhance women’s employment and stymie the brain drain;
• Egypt is the hub for startups in the Middle East but needs to be more accommodating to remain competitive;
• Liberalizing electricity and gas, the Industrial Permits Act and the Cyber Crimes Act are key to the transformation of Egypt’s business environment;
• The cost and speed of law enforcement are key concerns with the judicial system.

Human rights led the conversation on Egypt in the foreign press over the weekend, with Human Rights Watch issuing several statements. The organization denounced what it said were reprisals against actors Khaled Abol Naga and Amr Waked after the two spoke critically of the Egyptian government and claimed that five Egyptian nationals have disappeared after being deported to Egypt. HRW Washington Director Sarah Margon also penned a piece in New York Daily News urging Americans to pressure US President Donald Trump to bring up rights concerns with President Abdel Fattah El Sisi during his visit to Washington this week.

Reuters also put out a special investigative report alledging that some alleged terrorists killed by security forces in shootouts had actually been in custody at the time of their deaths.

The Egyptian-American Enterprise Fund (EAEF) is an example of successful US foreign policy, particularly considering the uncertainty with which some Egyptian citizens view diplomatic ties with Washington, David Ignatius writes for the Washington Post. “U.S. foreign policy often focuses on giving countries political advice — which in Egypt and many other countries has created a backlash of popular resentment. The Enterprise Fund idea is instead to give them capital to start new businesses. The balance sheet presented by Enan suggests this is one U.S. strategy that actually works,” Ignatius says.

Also worth a quick read this morning:

• Oil and gas: Petroleum Minister Tarek El Molla has called increasing foreign investment in Egypt’s hydrocarbons a “certificate of success” in an interview with CNBC.
• Egypt’s floral industry has the potential to blossom, but needs support: Despite annually hosting the largest flower exhibition in the Middle East, a lack of government policy support could be hindering the industry, Al-Monitor writes.

President Abdel Fattah El Sisi’s Libya-heavy discussions with Russian Foreign Minister Sergey Lavrov, and his upcoming visit to Washington on 9 April topped the front pages of government dailies this morning (Al Ahram | Al Gomhuria | Al Akhbar). We have more on El Sisi’s talks with Lavrov in Diplomacy + Foreign Trade, below.

What role-playing video games can teach us about monetary policy: Designers of massive multiplayer role-playing games (MMORPGs) have lately started applying economic theory to tackle in-game inflation, as broken down in a YouTube video by Extra Credits (watch, runtime: 8:43). MMORPGs (think World of Warcraft) are games where players are constantly generating unlimited quantities of currency through feats such as killing monsters or completing quests. This is a sure route toward hyperinflation and would send any real world economy to ruins.

The solution: keep FX reserves. Real world economies have for years kept foreign reserves in the bank to prevent their local currency from plummeting beyond a certain level. This is equally true in MMOs, where some developers now allow players to buy “real-world value” using in-game gold coins. They created a channel for a stash of a bn coins in WoW, for example, to be worth some amount in USD. The realization that in-game economies essentially mirror the real world ended the previously used “money sinks”, which worked by forcing players to pay in-game taxes and fees to drive money out of the system. The gamers realized there is no way to build a sink that is wide enough without making the game less enjoyable, and so got creative.

El Sisi, Russian FM discuss resuming Russian flights to Red Sea: President Abdel Fattah El Sisi discussed resuming direct Russian flights to Red Sea destinations with Russia’s Foreign Minister Sergey Lavrov, who was in Cairo yesterday, according to an Ittihadiya statement. The return of the flights, still banned since the downing of a Metrojet in 2015, has been in limbo for a while due to Russian reluctance to agree to a deadline.

El Sisi called for international action to end the conflict in Libya, pledging Egyptian support for the country’s reconstruction and offering to help reunify its military.

El Sisi and Lavrov also discussed railway cooperation, as well as the planned Dabaa nuclear plant and the USD 7 bn Russian Industrial Zone (RIZ) in the Suez Canal Economic Zone.

Egypt and Jordan signed on Friday a long-term contract to operate and maintain Jordan’s natural gas pipeline, according to an Oil Ministry statement. State energy companies Enppi and Petrojet are also currently working on a project to expand the natural gas network in Jordan, which should be inaugurated this October, Minister Tarek El Molla previously said.

Elsewedy Electric’s industrial development arm has obtained 15.4 mn sqm from the Industrial Development Authority (IDA) and the Suez Canal Authority, CEO Mohamed El Kammah told Al Mal. The company is also in talks over an additional 2.6 mn sqm to use for industrial development.

Minister of State for Military Production Mohamed El Assar received on Friday a delegation by the Italian Pietro Beretta Gun Factory to discuss the possibility of manufacturing Beretta M9 9mm pistols in Egypt, reports Al Mal.

A government-sponsored drive to screen women for breast cancer will kick off in early June, Health Minister Hala Zayed said, according to Al Shorouk. The campaign will target women aged 30 and above, and will be administered in a similar way to the ongoing Hepatitis C scheme.

The New Administrative Capital Company for Urban Development (NACCUD) is in talks with unnamed investors to develop a 150 feddan sporting complex in the city, a source from the engineering department said, according to Amwal Al Ghad. NACCUD is planning to announce a line-up of foreign investments in “infrastructure and sporting projects” in the coming months, and is expected to award contracts by the year-end, the source added.

Misr Hotels Company has announced it will divest from the Holding Company for Tourism and Hotels (HOTAC) as a result of HOTAC failing to pay VAT on revenues from the Nile Ritz-Carlton, according to reports in the local press. HOTAC has paid EGP 1.5 mn of the EGP 34.8 mn owed and the case has been referred to the prosecutor general for tax evasion.

A team of British engineers has completed the restoration of the step pyramid of Djoser, Egypt’s oldest pyramid, which had been unstable and at risk of collapse since the 1992 earthquake, the Telegraph reported. The team, which had started working on the 62-meter high pyramid in Saqqara almost a decade ago, was awarded the EUR 1.8 mn contract thanks to their experience with restoration projects.