Changes to income tax act are coming, but rates won’t change

Welcome to another workweek, ladies and gentlemen — and to week two of Ramadan.

Driving the agenda this week (caffeine withdrawal aside):

• Earnings season will hit a crescendo. Results from those companies that have so-far reported have been generally solid;
• The prognostication begins ahead of the central bank’s meeting on Thursday, 23 May to set interest rates;
• Will turmoil in global equity markets spill over into EM and to Egypt, where trading volumes are already thin thanks to the Ramadan slowdown?

GLOBAL MARKETS QUOTE OF THE WEEK: “Have you ever seen the movie ‘Airplane’? It was just a bad week to stop sniffing glue.” (See the punch-drunk traders story, below).

International markets are looking rather messy at the moment. The new week begins after what can only be described as a hell of a run as Wall Street posted its worst week so far this year.

Uber made history with its trading debut — as one of the worst-performing ever, Fortune reports. The ride hailing giant’s shares fell 7.6% on its first day of trading in New York, making it the ninth-worst stock market debut of all time. This makes collective losses of USD 618 mn for investors who bought the 180 mn shares at the USD 45 IPO price — the worst for a US listing since 1975 (excluding foreign listings via American Depository Receipts).

Who’s to blame? Basically everyone. Analysts tell the Financial Times Uber’s business model, the underwriters, the market and the retail investors are at fault. Reuters looks at what’s next for other startups planning to IPO this year, including Slack, Casper, and the owner of WeWork, while Bloomberg bluntly declares the IPO as having “joined the ranks of Wall Street’s flops.”

Late to the conversation? Go read Dan Primack’s rundown for Axios of how Uber got caught in the perfect storm.

POST-UBER MUST READ if you drink VC Kool-Aid: Was Uber’s IPO the end of an era of “mediocrity and small thinking” in Silicon Valley? That’s the contention of Matt Rosof writing for CNBC.

There just might be a lesson for investment bankers in Jumia’s share price collapse. Jumia, the self-styled “African Amazon” that made headlines by going public on the New York Stock Exchange in early April, saw its share price fall nearly 25% on Friday after a short-seller accused it of fraud. Citron Research claims significant discrepancies between a confidential presentation to investors in October 2018 and the company’s IPO filing. Jumia, it alleges, “inflated its active customer and active merchant numbers by 20-30%, and [hid the fact] that 41% of its deliveries were either returned, not delivered or canceled,” the Financial Times reports.

Maybe it’s time to short them all and let a higher power sort them out? That’s the basic contention of Horsman Capital’s Russell Clark in A short seller bets it all on a spectacular market crash.

IN THE BACKGROUND of it all: Trump is still playing hardball on trade with China. Trump has ordered the government to begin raising tariffs on the remaining USD 300 bn of Chinese imports, according to a statement by the Office of the US Trade Representative. The US president last week hiked tariffs to 25% from 10% on USD 200 bn worth of Chinese imports. Amid the suggestion that neither side may actually want an agreement, The Donald is now said to be edging toward imposing tariffs on all Chinese imports.

Just don’t get us started on his claim that tariffs are a direct cash transfer from China to America. Tariffs just don’t work that way, dude.

WHERE DO WE GO FROM HERE? It’s anyone’s guess. Punch-drunk traders stop guessing as Trump runs markets ragged, declares Bloomberg in a piece best read alongside the Financial Times’ Investors sweat as game of chicken over Sino-US trade heats up.

Other headlines worth knowing about this morning as you muddle on without coffee:

• Naguib Sawiris was one of the folks who bailed out Mustafa Abdel-Wadood, according to the Wall Street Journal.
• The US is bolstering its military presence in this part of the world in response to what it says is a “growing threat from Iran,” the Associated Press and Reuters report.
• The ANC has retained power in South Africa, albeit with a smaller majority and after a poll that saw low voter turnout.

SIGN OF THE TIMES: Negative fee asset managers. “The cut-throat fee war in asset management has become so intense that companies are thinking the unthinkable: paying investors to manage their money.” A boutique asset manager effectively wants to give customers USD 5 for every USD 10k they invest, the Financial Times reports.

What we’re tracking today, the Ramadan Edition:

A pre-iftar reading list to kill time between your post-workout shower and the breaking of the fast:

• There’s a 49% chance the world as we know it will end by 2050, says Jared Diamond, the celebrated author of Guns, Germs and Steel and Collapse in an interview with New York magazine to support Upheaval, his new book.
• The surprising boost you get from strangers argues that “sometimes a stranger — not a friend or a loved one — can significantly improve our day, providing comfort or helping to broaden our perspective.” (WSJ)
• How to raise successful kids according to a mom who raised kids who went on to become the CEO of YouTube, the co-founder of 23andMe, and a professor of pediatrics. (CNBC)

RAMADAN PSA #1- Mo Salah is expected to play today in Liverpool’s Premier League title-decider against the Wolverhampton Wanderers, press reports suggest. Also: You can expect half your staff to ask for the day off on Sunday, 2 June so they can catch up on sleep after staying up the night before to watch Liverpool take on Tottenham in the Champions League final.

RAMADAN PSA #2- Bank hours are at 9am-2pm for employees; doors are open from 9:30am until 1:30pm for customers. The trading day at the EGX runs 10:00am until 1:30pm.

RAMADAN PSA #3- The mercury is going to keep rising all week. Look for a high today of 36°C rising to 40°C by week’s end, according to our favorite weather app — with no respite in sight. Welcome to summer, folks.

So, when do we eat? Maghrib is at 6:39 pm CLT today in Cairo. You’ll have until 3:25 am tomorrow morning to caffeinate / finish your sohour.

WANT TO HAVE IFTAR WITH US? So we goofed a few weeks ago and accidently revealed what we’ve been cooking up in the kitchen: our first dedicated industry vertical, a weekly publication that will cover everything to do with the nation's infrastructure segment that we’ve dubbed the Enterprise Hard Hat. We're delighted to be presenting Enterprise Hard Hat in association with our friends at Orascom Construction. We look forward to the official launch of Enterprise Hard Hat soon and promise all of you that you'll see the zero issue before long.

But it won’t be our only one. Among other products, we’re launching a series of industry verticals. We’re asking you — the readers who make this all possible — to help us decide which industries are next.

How? Take our very short survey, in which we ask you which sector you would most like to see us explore in a dedicated vertical. You can choose from the seven sectors we have included or name a sector yourself. We would also like to know what it is you enjoy and like about Enterprise and what it is you don’t. The survey will run all week.

We’ll be drawing the names of 10 survey takers and inviting them to join us for iftar on Wednesday, 29 May at the Four Seasons Cairo at the First Residence. Think of it as a chance to get to know some of you and discuss the survey questions, your views on Enterprise, the economy, life and the universe, so please mark the date. We’ll announce the winners on Tuesday, 21 May. (Yes, we know — iftars are less fun than sohours. But sohour hours are in the middle of our work night, so…)

IF YOU WANT TO ENTER THE DRAW, you need to make sure to give us your name, company, phone number and email at the end of the survey.

Become a sponsor of an industry vertical: If you would like to be a sponsor of an Enterprise vertical, contact Fady Sherif on fsherif@inktankcommunications.com. We’ll talk about your interests and our editorial goals and see if we can’t do something amazing together.

EXCLUSIVE- Gov’t studying significant tweaks to income tax legislation: The government has begun drafting changes to the Income Tax Act to bring the legislation in line with international standards, Tax Authority boss Abdel Azim Hussein tells Enterprise. Don’t expect higher taxes: Hussein was careful to note that no changes are in the works to tax rates or brackets in a bid to ensure the country remains attractive to foreign direct investors. The government will consult with business and industry associations, including the Egyptian Businessmen’s Association and the Federation of Egyptian Industries, as well as with major accounting firms during the drafting process, he added.

The changes might be extensive enough to require drafting entirely new legislation, a senior official told us, suggesting that the 2015 Income Tax Act could be scrapped or significantly overhauled. The changes under study could impact how tax appeals are handled, the ministry’s internal tax committees, and procedures for filing one’s tax returns. The latter would be finalized after enacting the proposed law on new unified tax procedures, which is expected to pave the way for an electronic tax platform. The changes aim to support the government’s goal to grow tax revenues by 0.5% a year to reach the fiscal year 2019-2020 draft budget’s target of a tax base equivalent to 18-20% of GDP.

Other changes now on the drawing board:

• Another look at how capital gains and shareholder dividends are taxed, which could pave the way for the return in 2020 of the capital gains tax on stock market transactions;
• Introducing a new chapter in the tax code for the treatment of “internet-based markets” (i.e. the digital economy);
• New tools to help clamp down on tax evasion;
• A review of how tax incentives are structured.

It’s the latest in a basket of potential changes that could keep your finance department busy in the coming year. We were told last month that the Finance Ministry is looking to impose a mix of VAT, income, stamp, and developmental taxes on social media, e-commerce platforms and internet search ads. This move would require changes to a number of laws including the Income Tax Act. Reports also emerged in February that the House Planning and Budget Committee was discussing tweaks to the act which could change the tax code and rates on salaries. The act was most recently amended in February with changes to how banks and corporations account for income from investments in government debt.

Inflation unexpectedly cooled in April: The annual headline rate of inflation fell to 13.0% in April from 14.2% in March, the lowest rate since the start of the year, according to central bank figures (pdf). Data shows that month-on-month inflation fell to 0.5% last month from 0.8% in March, while annual core inflation fell to 8.1% in April after hitting 8.9% in the previous month.

Thank state intervention pre-Ramadan? “The monthly inflation figures were lower than our expectations, probably driven by the discounted food items the government released in the market pre-Ramadan,” Pharos said in a report. Food and beverage prices fell to 12.8% from 15.1% on an annual basis, and to 0.3% from 1.5% month-on-month, CAPMAS data showed (pdf). Rising demand pre-Ramadan generally helps drive inflation in the run-up to the holy month.

Expect inflation to rise once again in the coming months as the Sisi administration scraps fuel subsidies and introduces a new fuel pricing mechanism; both will put upward pressure on prices. Pharos is forecasting a 3% m-o-m rise in both June and September on the back of these policies, as well as the annual back-to-school season which usually produces a 1% rise during the month. On an annual basis, the investment bank sees inflation sitting between 12.5% and 13.5% between now and September.

Could the unexpected cooldown precipitate a rate cut? The latest figures are unlikely to have an impact on the central bank’s monetary policy decisions going forward, Pharos says, maintaining its prediction of a 100-200 bps interest rate cut in 4Q2019. The central bank next meets to review rates a week from Thursday.

Egypt’s foreign debt rises to USD 96.6 bn in 2Q2018-2019: The nation's foreign debt rose 16.5% y-o-y to USD 96.6 bn in 2Q2018-2019, up from USD 82.9 bn in the same period a year earlier, according to central bank data. External debt rose 3.7% on a quarterly basis from USD 93.1 in 1Q2018-2019.

M&A WATCH- EAEF makes its first investment in Egypt’s education sector: Our friends at the Egyptian-American Enterprise Fund (EAEF) have acquired a significant minority stake in education management company Advanced Education for the Establishment, Management, and Ownership of Educational Facilities, according to a press release (pdf). The company, which manages and operates blended learning and tech-focused private school platform Dr. Nermien Ismail Language Schools (NIS), currently operates nine schools in Egypt. The transaction is structured primarily as a capital increase, with the “growth capital will be used to fund the company’s expansion of its schools’ footprint across Egypt.” Final close on the transaction is expected before the end of 2Q2019. “This investment marks EAEF’s first investment in Egypt’s education sector and demonstrates EAEF’s strong commitment to supporting the Egyptian private sector as well as promoting high quality education,” EAEF Chairman James Harmon said.

Advisors: Al Tamimi Law Firm acted as legal advisor to EAEF. Matouk Bassiouny & Hennawy was sell-side legal advisor, while Intelligent Way Capital Partners acted as sell-side financial advisor.

LEGISLATION WATCH- Medical tourism legislation could lay the groundwork for a USD 1 bn industry: A proposed law to promote and regulate medical tourism in Egypt could bring in at least 250k more tourists and USD 1 bn in hard currency each year, Egypt Medical Tourism head Abdel Aaty El Manaei said, according to Al Shorouk. The draft bill would set up a national authority for health tourists, which the bill defines as those who come to receive hospital treatment, “ecotourists” visiting natural-healing sites, and disabled individuals entering the country for “accessible tourism.”

Where do we stand on the legislation? The proposed law saw committee-level discussions at the House of Representatives late last year, and was reportedly drafted by the House Tourism Committee in March. If it doesn’t make it to the general assembly for a vote this legislative session, we would have to wait until after the MPs return from their summer break for the start of the 2019-20 session, which should begin early October.

INVESTMENT WATCH- New Aswan SEZ receives 48 investor requests worth USD 60 mn: The planned special economic zone (SEZ) in New Aswan has attracted 48 investor requests to develop USD 60 mn-worth of industrial land, according to an Investment Ministry statement (pdf). The early requests are expected to cover 44.6% of the 187-feddan zone’s investment plan, which involves dedicating the customs-exempt SEZ to fish processing, agriculture, agrifood, tech, and jewelry-making projects. The zone will be primarily export-oriented, with good destined to Sudan and other neighboring Nile Basin states. The cabinet last week approved the SEZ, which is expected to attract USD 2.3 bn in private investment. The zone will host around 160 private sector projects, creating as many as 15k jobs.

** WE’RE HIRING: We’re looking for a podcast producer with a strong track record with audio production. The ideal candidate will have experience and background in audio production and journalism. This includes familiarity with audio production software, such as Adobe Audition. A background in business / economics / finance, and/or entrepreneurship and technology is also preferred, but not a requirement. Check out the job posting here for more information. The producer should be highly fluent in the English language.

To apply, please submit 2-3 audio samples and a solid cover letter telling us a bit about who you are, why you’re a good fit and what interests you in Enterprise. A CV is nice, but we’re much more interested in your clips. Please direct your applications to jobs@enterprisemea.com.

NEW BUZZWORD: Could ‘sharp power lending’ reduce the need for further IMF bailouts? Sharp power lending is the latest buzzword for emerging powers handing out large bilateral loans to countries facing economic crises — and could be an alternative to traditional multilateral lending, sovereign debt analyst Timothy Ash writes in the Financial Times. Countries which have recently received bailouts by the big three lenders — China, Russia, Saudi Arabia and the UAE — have reduced both the risk of default and the need for the IMF to extend emergency credit, Ash writes.

Egypt itself has benefited from SPL: Between them Saudi Arabia and the UAE provided Egypt with USD 8 bn in loans after Morsi was removed from power in 2013. The loans signaled Egypt coming back in from the political cold of the Morsi era and were a critical factor in Egypt’s ability to raise the USD 12 bn extended fund facility from the IMF. Both the UAE and Saudi have stepped up direct investment in Egypt in the time since.

What does increased SPL mean for economic reform programs? Ash says the conditions that China, Russia and the Gulf states attach to their loans differ widely. One clear concern is economic: Assistance to Bahrain from Saudi Arabia was conditioned on Manama undertaking fiscal reforms and strengthening their economy. But conditions attached to Chinese loans have neither been uniform nor consistently monitored. The risk is that this will see countries accruing unsustainable debt loads — unsustainable debt that will eventually demand the IMF step in. The discussion comes amid warnings that Chinese funding is a “debt trap.”

Twenty years of Egyptian agricultural development seen from space: This video produced by the European Space Agency provides a timelapse of the development of Egypt’s crop circles, located in East Owainat in the Western Desert. The footage is comprised of more than 150 satellite images taken between 1998 and 2019.

Heated debate over “dress codes” for Coptic Christians: Comments made by Coptic priest Daoud Lamei about women attending church in clothing that is too revealing have drawn both praise and criticism from Egyptian Christians, AFP reports. The remarks, which were made in an Easter sermon, come in the wake of a controversial online campaign that urged women to “cover up, so we people can pray.”

The US’ proposal to designate the Ikhwan as a terrorist group would be welcome in Egypt, Saudi Arabia, and the UAE, but not as much in other countries, David Kirkpatrick writes for the New York Times. The Ikhwan, which Kirkpatrick says is “far from monolithic,” includes political parties that are pro-American in some other countries.

Other headlines worth a skim this morning:

• Illegal immigration: Egypt has deported 79 Sudanese migrants attempting cross into Libya, the Associated Press reports.
• A number of Egyptians who were onboard a migrant boat are missing after the boat, which was en route to Europe from Libya, capsized on Friday, reports the AP.
• Censorship: Cairo-based outlet al-Mashhad is the first entity to have been penalized under a new media law issued by the Supreme Council for Media Regulation (SCMR) that will now see it blocked for six months, according to the Committee to Protect Journalists.
• Dog ban: The US Centers for Disease Control (CDC) has issued a temporary ban on dogs imported from Egypt due to rabies concerns, ABC News reports.
• Egyptian woman on hunger strike: Marwa Kenawy has been on hunger strike since 31 March after her son was killed by celebratory gunfire at a wedding, but two of the responsible culprits remain at large, reports ABC News.

The government wants you to know it’s keeping commodity prices in check this Ramadan, if the top headlines in the three main state-owned dailies are any indicator. Al Ahram, Al Akhbar, and Al Gomhuria are all running with President Abdel Fattah El Sisi’s instructions to Prime Minister Moustafa Madbouly and key members of Cabinet to crack down on price gouging throughout the month.

Flexible monetary policy: A buffer against government debt? Central banks need to be flexible in their monetary policy, rather than dogmatically pursuing higher prices in the face of lower-than-expected levels of inflation, argues Marie Owens Thomsen, global head of investment intelligence at Indosuez Wealth Management, in the FT. While the 2% inflation target widely adopted by central banks worldwide has been effective in creating stability, recent low inflation has also been a driver of economic growth by increasing real wages and consumption, he argues. But low inflation masks another economic reality: government debt is at a high, and if a sudden increase in inflation were to occur, debt sustainability crises could follow.

Is fiscal and monetary policy coordination the key to success? Monetary policy needs therefore to be both flexible enough to combat such risks and well aligned with fiscal policy. Balance sheet interventions, including quantitative easing, credit easing, and emergency lending assistance, could be used for this purpose. They are effective tools for influencing aggregate demand, interest rates, and amounts of money and credit in order to affect overall economic performance. There is evidence that several major central banks are already employing these more flexible monetary policy tools, even though many maintain that shorter-term policy rates are preferred. The trend, however, is one to welcome. A degree of coordination between central banks and debt-management offices, institutions that traditionally work separately, would also be an effective way of utilizing expertise and offsetting risk, Thomsen argues.

El Sisi meets Libyan general Khalifa Haftar for second time in a month: President Abdel Fattah El Sisi discussed the current situation in Libya in his second meeting in less than a month with Egypt-backed General Khalifa Haftar, according to an Ittihadiya statement. El Sisi hailed the Libyan National Army (LNA) commander’s counterterrorism efforts, and his role “in restoring the foundations of legitimacy in the North African nation,” says Bloomberg. The LNA controls the east of the country and recently launched an offensive on Tripoli against UN- and EU-backed Prime Minister Fayez Al Serraj.

The Egyptian, Jordanian and Iraqi industry ministers agreed to cooperate on building common industrial zones and boost trade between their countries at a summit in Amman over the weekend, the Jordanian Industry Ministry said in a statement. The ministers agreed to work on eliminating non-tariff trade barriers between their countries, boost investments, establish joint industrial zones, and cooperate in the reconstruction of Iraq.

The Housing Ministry has begun trial operations on a newly constructed highway running parallel to the Suez Canal, reports the local press. The project cost EGP 5.2 bn and is intended to service development projects near the canal, while connecting the area to Egypt’s highway system.

The Arab Organization for Industrialization (AOI) and the Greater Cairo Water Company have signed an agreement to manufacture water pumps in Egypt, Ahram Online reports. A factory will be constructed to build pumps for the National Authority for Potable Water and Sewage, the New Urban Communities Authority, and a number of developmental projects across the country, AOI Chairman Abdel Moneim Al Taras said.

The Holding Company for Tourism and Hotels (HOTAC) will inaugurate a hotel it is developing in Dahab at the beginning of 2020, CEO Amr Attia told the local press. HOTAC is investing EGP 150 mn in the hotel, Attia said, without disclosing further details on the new establishment.

Local Mercedes agent National Automotive Company (NATCO) will now accept a wider range of payment terms for its vehicles, the Egyptian Competition Authority said in a statement (pdf). The competition watchdog said it had received complaints that NATCO was restricting Mercedes customers to installment payment plans through a single intermediary.

United Brothers Group, owner of the Professional Taxi ride-hailing service, has submitted a proposal to the Transport Ministry to allow white taxis to be hailed through the Professional Taxi mobile application, reports the local press. The Ride-Hailing Apps Act, which was passed last year, required ride-hailing companies to prepare a strategy to incorporate white taxis in their fleets.

The European Bank for Reconstruction & Development (EBRD) and the EU have extended a EUR 7.3 mn financing package to frozen vegetables exporter Farm Fresh to build a new factory in Alexandria, the EBRD said in a statement. The bank will provide a EUR 2.1 mn loan and Ahli Bank of Kuwait will lend EUR 2 mn. The EU, meanwhile, will provide a EUR 300k investment grant in addition to a EUR 2.9 mn equity contribution from existing shareholders. The financing package will allow the company to triple its production, most of which is exported to the EU and the US.

Ex-interior minister Habib El Adly was convicted on Thursday of charges of unintentional “abuse of public funds” and fined EGP 500 (USD 29) by an Egyptian court, Reuters reports. The size of the fine has generated some controversy, especially as the former head of the ministry’s Central Administration of Finances and Budget Nabil Khalaf received a three-year prison sentence and a EGP 61.1 mn fine, and was ordered to pay back another EGP 62.1 mn (USD 3.6 mn). Thursday’s verdict cleared Adly of embezzlement and illegal seizure of funds.

Immigration Minister Nabila Makram discussed potentially organizing an international conference on immigration management with a visiting delegation from the World Bank, according to a ministry statement. The two sides also discussed efforts to curb illegal migration.

Egypt’s three major churches are preparing to sign off on a final draft law regarding personal status for Christians in a month’s time, reports Al Masry Al Youm. The law is intended to handle matters of marriage, divorce, and separation across all sects of Christianity.

Egyptian freelance visual journalist Mostafa Darwish has won this year’s Thomson Foundation mobile journalism competition, held in partnership with Mojofest, which celebrates journalists who tell stories through the medium of the smartphone, the organization reports on its website. Darwish used an iPhone 5s and the iMovie mobile video app to tell the story of significant fare increases to Egypt’s train system and the impact they have had on residents, a story he produced for Mada Masr. His entry was described by judges as a “piece of art” and praised for its "interesting and unexpected shots.”