Turmoil amid US-China trade war has investors pulling back from EM

Good morning, friends, and welcome to the slowest news morning yet of Ramadan. Business is moving at a snail’s pace between the heat and lack of caffeine, making the one big story of the day the still-unfolding mess in global markets. We have the full rundown in this morning’s Speed Round, below.

Meanwhile, the global stock sell-off has ensured Uber and Jumia spent another day in the dog house. Uber fell nearly 11% as it slid again on its second day of trading, leaving the ride-hailing app’s shares down nearly 18% since it went public last week. CEO Dara Khosrowshahi reassured staff that everything will be okay.

Jumia (and the very notion of consumer-focused tech in Africa) got a kick in the teeth from the FT’s influential Lex column yesterday. The column took note of a short-seller Citron’s claims that Jumia misled investors on customer and merchant numbers and hid the fact that “41% of its deliveries were either returned, not delivered or canceled,” as we noted earlier this week. Lex’s view on the potential of tech in Africa is facile, to say the least, but the column is widely read…

Keep it all in context (for Uber, at least): Both Amazon and Facebook struggled with their share prices after going public, with El Face taking close to 12 months to climb back above the price at which it went public.

WhatsApp can be used to inject commercially available Israeli spyware on your phone, whether it’s an Android or iOS model. The vulnerability — which still hasn’t been patched — allowed spyware to be installed via WhatsApp voice call whether you answered the call or not, the Financial Times reports. And here you thought we just like to polish our tinfoil hats with all these warnings about privacy…

Also worth knowing about this morning:

• Europe is warning the US and Iran not to inadvertently trigger a war as tensions escalated following an attack on four ships in a UAE port, including two Saudi oil tankers. (FT | BBC | Guardian | Washington Post)
• Good news for our energy export ambitions: Europe more than doubled its LNG imports in 1Q2019 despite an unusually warm winter, Bloomberg reports, citing “genuine underlying demand” and falling European production.
• At least four people are dead in Khartoum as violence flared following the announcement of a power-sharing agreement between the military council and opposition groups, Reuters reports.

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

• How to help your kids accept their future robot overlords. Or, as the WSJ puts it somewhat less breathlessly: Today’s middle-schoolers are the first generation of “AI natives.” Here’s how to teach them about algorithms and their effects.
• Shut up and get lost: The last thing a new CEO wants is her predecessor sticking around to offer advice, the Financial Times sagely suggests.
• Time to short trebuchet stocks? This WSJ profile looks at the future of taxidermy and film-set tourism in Ireland as Game of Thrones draws to a close.
• Hollywood star Doris Day passed away yesterday at 97.Reuters covers the illustrious acting career of one of the greatest box-office attractionsof the 1950s and 60s, and a brief preview into how she got there. The New York Times obit is also worth a read.

RAMADAN PSA- 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.

So, when do we eat? Maghrib is at 6:40 pm CLT today in Cairo. You’ll have until 3:23 am tomorrow morning to caffeinate / finish your sohour.

Turmoil in global markets had investors fleeing EM and other so-called “risky” assets yesterday. Shares in developed markets also took it on the chin after China said it would hike tariffs on some US 60 bn worth of US imports. Beijing was reacting to Washington’s decision last week to impose new duties on some USD 200 bn worth of Chinese imports.

The EGX30 closed down 1.5% yesterday in moderately heavy trading (by Ramadan standards) — total turnover came in at EGP 686 mn, or about 43% higher than the average since 2 May. US markets had their worst day of the year so far, with the S&P 500 down 2.4% and Nasdaq off 3.4%. European markets also closed in the red yesterday, while the FTSE All World Index was off 1.9%, sliding to its lowest level since March.

Asian shares were still sliding at dispatch time this morning in heavy trading, with equities in Japan, China, Hong Kong, Korea, India, Australia and New Zealand all in the red.

Emerging-market currencies got whacked: The MSCI EM currency index fell 0.5% to its lowest level since January early yesterday morning on concerns about what the trade dispute could mean for global economic growth, the FT reported. And JPMorgan shifted its position on EM currencies to a small underweight in response to the breakdown in talks, Reuters says. “A change of course in trade negotiation is against consensus and warrants reducing EM risk further given overweight positions,” analysts said in a note.

The “fear index” jumped 30% yesterday. The Cboe Volatility Index, or VIX, “tends to rise when stocks are falling and is one of several measures showing that heightened jitters are creeping through markets, with investors expecting big swings ahead,” the Wall Street Journal noted. Meanwhile, Morgan Stanley’s chief equity strategist (who correctly called the global equities sell-off of last year) says the state of affairs between the US and China has increased the likelihood of a prolonged economic downturn — and, possibly, of a recession, Bloomberg notes.

Keep an eye on the robots: As we noted yesterday, there is a risk that “computer driven funds [that] amassed big equity positions while markets were sleepy” could suddenly be “scrambling to sell their stocks and move into safer assets like treasuries” now that market volatility is back on the menu. See this Wall Street Journal piece for more — and remember that as much as USD 7.4 tn in stocks could be “subject to forced selling by passive funds during a sharp, prolonged downturn.

And on monetary policy: With no analyst willing to stick her neck out and prognosticate about when calm might be restored to markets, there is the chance that “further escalation in trade tensions could dent growth to the point where central banks consider taking additional steps to ease monetary policy,” the WSJ notes.

So it’s the end of the world, right? Probably not. As he often does, Mohamed El Erian serves as the voice of reason, writing for Bloomberg that a trade pact between the US and China is the most likely outcome. (With the caveat that tensions are less likely to dissipate the longer it takes them to agree to terms.)

EXCLUSIVE- Gov’t caps FY2019-20 public spending at EGP 1 tn: The government has placed a EGP 1.01 tn cap on public spending in FY2019-20 in a bid to hit its deficit- and debt-reduction targets, two government sources told Enterprise. The cap is equivalent to spending forecasts stated in the draft FY2019-20 budget, excluding debt service payments. The move could include a drive for more centralized purchasing for civil service offices and a tweak to spending limits for individual ministries. The House of Representatives cannot pass a further spending bill unless “absolutely necessary,” the sources said.

Context: The move is part of a fiscal strategy that aims to slow annual public spending growth to 3.5% by FY2021-22 from the current 11.5%. It also targets increasing inflows into the government’s coffers by 12-16% over the next three years. Cabinet has already greenlit the move as part of a package of “fiscal correction measures” to support economic reform, the sources confirmed. The government also recently placed a USD 14.33 bn ceiling on foreign borrowing in the coming fiscal year.

Budget targets: The government is looking to shrink the budget deficit to 7.2% of GDP in FY2019-20, from 8.4% in the current fiscal year, and cut the primary budget surplus to 2%, according to the draft budget. Public debt, meanwhile, is forecast to reach 89% of GDP in the coming fiscal year, down from a projected 93% in FY2018-19. The government’s debt control strategy aims to reduce the debt-to-GDP ratio to 80-85% and the ratio of interest payments to 32% of GDP by FY2021-22.

M&A WATCH- MM Group to acquire factoring company Tamweel by the end of May: MM Group for Industry and International Trade is planning to complete its acquisition of Tamweel Holding by the end of May in partnership with a group of unnamed investors, Chairman Khaled Mahmoud told the local press. MM Group, which focuses primarily on the distribution of consumer electronics and automobiles, is diversifying into financial services and wants to add factoring, reinsurance and mortgage finance as core business activities. The group launched its microfinance arm, Vitas Egypt, in February 2018; MM controls Vitas through a majority stake in Ebtikar for Financial Investment. It is also planning to launch a consumer finance entity “soon,” the report says.

LEGISLATION WATCH- Companies looking to do follow-on investment could qualify for the same incentives as a new project: The House Economic Committee has greenlit amendments to the Investment Act approved by cabinet in March, Investment Minister Sahar Nasr said, according to Al Masry Al Youm. The changes would add a clause to Article 12 making certain expansions at existing companies eligible for incentives granted under the law. Amendments to Article 48 of the law would cap notary fees on contracts worth up to EGP 10,000 in a bid to lower costs for investors. The proposed amendments will now head for a final vote in the House general assembly ahead of being signed into law by President Abdel Fattah El Sisi.

New Investment Ministry committee to advocate good morals in governance: The House committee has also approved a separate draft law to promote stronger moral values in company governance, Nasr told the newspaper. The draft would set up a permanent Investment Ministry committee to promote “fair-mindedness, transparency, and excellence.”

EARNINGS WATCH- Sarwa Capital’s net income after tax rose 130% to EGP 120 mn in 1Q2019, up from EGP 52 mn during the same period last year, the company said in a statement (pdf). “We are pleased to announce our record quarterly profits amidst an eventful period full of developments for the business,” the structured and consumer finance firm said. “Looking ahead, while the expected volatility persists in our underlying asset markets, a series of new investments and partnerships are building substantial momentum as they come into effect over the coming period across our business lines, further boosting our capacity, distribution, and product roll out,” Sarwa added.

Oriental Weavers posted a 1Q net profit of EGP 220 mn, a 7.8% increase from the same period in 2018, the company said in a statement (pdf). Revenues rose 3.8% y-o-y to EGP 2.6 bn.

MOVES- The Oriental Weavers board has named Medhat Hussein (LinkedIn) as the company’s new managing director, the company said in a statement (pdf). The company’s full board decisions are available here.

Formalizing micro businesses is the key to building a strong SME sector: Arab governments should make micro businesses the priority of their financial inclusion efforts, Amr Adly writes for Bloomberg. Micro-sized enterprises employing fewer than five people far outweigh SMEs in Egypt, making up more than 92% of all businesses and employing 58% of the country’s labor force, according to a 2016 report by the African Development Bank.

Almost all of these businesses are informal: They are unregistered, operate without licenses or permits, and use cash for most of their transactions. In comparison, SMEs account for just 7.9% of businesses and provide a quarter of the country’s jobs, while large businesses constitute just 0.1% of business and account for 17% of employment. This lop-sided private sector is what Adly calls the “missing middle syndrome”: A situation where a small group of very large companies exist alongside a vast number of micro businesses and a largely-absent SME sector. (For context, the concept isn’t new: It was popularized in Egyptian policymaking circles by the Finance Ministry as led pre-2011 by Youssef Boutros Ghali)

Building trust: One of the main obstacles to formalizing micro businesses is the lack of trust between the state and the private sector, Adly says. Developmental programs currently struggle to work with micro business owners, many of whom are wary of giving information to the state for fear of taxation and corruption. To overcome this, governments and donors should work to build stronger links between micro businesses and the government, the banking sector and special funds. Creating locally-based development associations would enable the government to simultaneously gather information, provide technical and financial assistance, and build trust. Formalizing micro firms in this way is “crucial for building a robust SME sector, and achieving the goal of more inclusive development,” Adly writes.

MUST READ if you’re looking to dig into the nitty-gritty: The small and medium enterprises landscape in Egypt: New facts from a new dataset (pdf), authored by now-Planning Minister Hala El Said (and colleagues) when she was dean of FEPS at Cairo University.

No single story is leading the conversation on Egypt in the foreign press this morning. A handful of pieces worth a skim:

• Political activists released after serving prison sentences still have to spend the night in the police station as a condition of their release, languishing from 6pm to 6am of every day at their local police station, reports the BBC.
• From the department of the obvious: The bottom line in a lengthy Reuters feature: Megaprojects sometimes come with mega-headaches, but Egypt’s political leadership is committed to bringing the new administrative capital to life.
• The parents of Giulio Regeni have called for the extradition of five men to Italy to face trial for their son’s murder, in an open letter to President Abdel Fattah al-Sisi, The Guardian reports.
• Pharaonic military castle uncovered in Sinai: The 11-meter wide castle dates back to the Psamtik era from 664-610 BC belonging to the 26th Dynasty, making it the oldest such castle discovered, reports Xinhua.

El Sisi pushes for improved waste management: President Abdel Fattah El Sisi urging his government to work on improving waste management to protect the environment topped the front pages of Egypt’s three state-run dailies (Al Ahram | Al Gomhuria | Al Akhbar this morning.

What, exactly, is impact investing — and how do you measure it? Impact investors, who invest for both social and financial returns, must strive for “positive net impact” by also accounting for the negative impacts of their investment when measuring its overall contribution, argues Toniic CEO Adam Bendell in the Financial Times. His remarks chime with the growing trend among industry leaders to call for more rigorous standards in measuring impact. Last month, the IFC announced its creation of nine principles designed to bring transparency and comparability to the market. EM private equity fund Actis, meanwhile, developed a measurement framework to assess improvements in key areas to find an “impact multiple,” enabling comparisons between projects in different sectors or locations. It’s all designed to counter the “baffling array of unverified, opaque and incompatible metrics” provided by the industry, to help impact investors make informed decisions.

Building investor trust should encourage greater inflows: With impact investing assets under management estimated at USD 502 bn held by over 1,340 organizations worldwide, there’s no question that money is available. But 76% of the investors surveyed by the Global Impact Investing Network (GIIN) in 2018 said that the sophistication (or lack thereof) of impact measurement practice was a significant challenge to investment. Egypt is seeing very little of the funding, with the MENA region as a whole holding only 4% of investment representation and general investor interest, according to the GIIN.

What can Egypt learn from this? Improved standards for social impact funds should lead to more effective impact investment by mainstream funds, OECD has said. While Egypt has a host of organizations, including angel investors, incubators, and the government, willing to provide initial capital and non-financial support to social enterprises and startups, the challenges of sustaining impact remain. Clear data about the quantitative impact of Egypt’s SMEs would attract more funding, as well as helping to build a more effective pipeline of initiatives to invest in, GSG argues in its Africa State of Impact Investing 2018 report. They also recommend leveraging some of the tools of the private equity/venture capital sector (such as a clear exit path), designing social impact bonds, and revising the policy framework.

Acwa Power has submitted the best offer in the Egyptian Electricity Transmission Company’s (EETC) tender to build a 200 MW solar power plant in Upper Egypt’s Kom Ombo, offering to sell electricity to the state-owned company at a price of USD 0.0275 per KwH, sources from EETC tell the local press. The two sides are expected to sign the final contracts by the end of August. We noted in March that Acwa is planning to invest USD 3 bn in Egypt’s energy sector this year.

Correction: 14/05/2019.

A previous version of this article incorrectly stated that Acwa Power has offered to sell electricity at USD 0.275 per KwH.

Egypt’s citrus exports have reached 1.2 mn tonnes thus far for the current season, head of the Agriculture Ministry’s Central Department of Agricultural Quarantine Ahmed Al Attar said, according to Egypt Today. Egypt exported 1.7 mn tonnes during the entirety of the season last year.

The Trade and Industry Ministry is mulling issuing four “exceptional” steel manufacturing licenses to resolve recent instability in the steel market resulted from a decision by the ministry last month to impose a 15% duty tax on steel imports, an Industrial Development Authority official said, according to Hapi Journal. The licenses would be issued under new conditions made for the resolution of the crisis, the source said.

Consumer technology company Riversong has signed a deal with the Egyptian General Commerce Company (GCC) to expand into North Africa, according to Channel EMEA. The China-based tech firm manufactures smartphones and other consumer tech.

Facebook has announced that Egypt-based advertisers without a valid VAT identification number will be charged an increased 18% rate of VAT, Think Marketing reports. VAT, which was introduced in Egypt in FY2016-17, is currently at 14%. The Finance Ministry is working to issue a law on taxing e-commerce, including imposing taxes on social media ads.

The National Authority for Tunnels (NAT) has asked the government to increase its allocation in the FY2019-20 state budget to EGP 44 bn, up from EGP 10 bn, Al Shorouk reported. Representatives from the authority told the House of Representatives yesterday that the increase is needed to complete the electric train project to connect Cairo with the New Administrative Capital and complete the third and fourth Metro lines. Both the health and education ministries have already asked for increases in their allocations.

Save the date: GB Auto’s very own Andre Valavanis squares off against veteran Thai boxer Narong Bunchan in the ‘Battle on the Nile’ next week. The World Boxing Federation Super Welterweight World Title fight will take place next Friday, 24 May, at the Greek Club in Heliopolis. Tickets are available here. Other fights will include the Arabian and Middle East Boxing Association bantamweight title and the Egyptian Professional Boxing Association’s super welterweight title, among others.

My table’s bigger than your table: The new administrative capital will be the site of an attempt to break the Guinness World Record for the longest iftar table during the last 15 days of Ramadan, according to Egyptian Streets. The Administrative Capital for Urban Development (ACUD) will attempt to break the record of 2,893.64 meters held by the UAE-based Ajman Municipality and Planning Department.