Proposed Banking Act will impose industry development fee, new capital requirements -Report

It’s a big day as we prepare to slide into the weekend, with blockbuster news for the banking industry, confirmation that electricity price hikes will be (slightly) more modest than some had expected, a quiet fintech M&A, and word the government is looking to possibly float infrastructure bonds.

What’s more: The notion of a new (tech?) “cold war” between the US and China has caught fire in the global business press.

Need convincing that business thinks we’re in the early days of a New Cold War between the world’s two superpowers? Look no further than CNBC’s homepage this morning (above) — it’s one of the best barometers for what’s bedeviling Wall Street at any given moment. The emerging narrative is that the Washington-Beijing clash over trade and technology are actually fronts in a new cold war.

ESSENTIAL READING on the subject:

• The beginning: Most folks are linking to “The Tech Cold War has begun” in Bloomberg Opinion this week as the origin of the notion, but a better starting point is this piece in the New York Times, which we picked up in spring of 2018.
• Nouriel “Dr. Doom” Roubini sees prolonged trade conflict between the US and China triggering a process of de-globalization as it divides the world into two competing blocks. A “full-scale cold war will ensue [if the two sides don’t manage for the long term] and a hot one (or a series of proxy wars) cannot be ruled out,” he writes for the Guardian.
• America’s allies need to start contingency planning, suggests Martin Wolf in the Financial Times, pointing out that while the US and China account for around 30% of world imports, that means 70% of the global market is where other nations should be looking.
• This isn’t new: The new “Iron Curtain” in the Tech Cold War has been a long time in the making, Li Yuan argues in the New York Times.
• We’re all going to suffer: The escalation of the trade war could wipe out USD 600 bn from the world’s economy, the OECD warns. (Business Insider) (We have more in this morning’s Macro Picture, below.)

Markets can’t rely on the Fed to pick up the pieces: Market complacency about the escalating trade fight between the US and China is unnerving JPMorgan’s chief EMEA strategist Karen Ward, who warns in the Financial Times that the Federal Reserve will not be able to support growth if China intensifies its trade restrictions. “If the Fed were to keep pumping demand while political risks are discouraging investment, the result will be unbearable pressure on the labor market and further upward pressure on wages. US corporate profit margins, a huge contributor to the growth in US earnings, will come under pressure,” she writes.

Is there any non-China, non-US news out there? Not really. The only headline of consequence in the global business press outside of the US-China ‘cold war’ is news that the UK may be heading for a second referendum on Brexit. (Financial Times | Reuters)

Closer to home: It’s interest rate day tomorrow: The central bank’s Monetary Policy Committee will meet tomorrow to review key interest rates. Our poll showed on Sunday a consensus among 12 economists that the CBE will leave rates on hold. Meanwhile, three of the 14 economists polled by Reuters yesterday predicted the bank would move to cut rates by 50-100 bps. The MPC cut the overnight deposit and lending rates by 100 bps to 15.75% and 16.75% in February.

Dates to pencil into your diaries:

• AmCham will hold its annual general meeting and iftar on Tuesday, 28 May, with US Charge d’Affaires Thomas Goldberger delivering a speech on the US’ relationship with Egypt. AmCham members can register for the event here.
• The Saudis are in town next month to talk real estate investment: The Egyptian Businessmen’s Association will be hosting next month 20 Saudi-based real estate development companies exploring investment prospects.
• The UAE and Saudi Arabia will attend Trump’s Manama summit, which is being billed as an “economic gathering to roll out the White House’s Mideast peace plan, Axios reports. The meeting will take place 25-26 June.

No first-day pop? No worries: The performance of a company’s shares in its trading debut is rarely indicative of its future performance, analysis by the FT suggests. The paper examined data from all US IPOs raising more than USD 1 bn since 2000 and found that first-day performance isn’t a reliable gauge of a stock’s lifetime performance. Facebook, for example, had an uninspired first day of trading but its market cap has since risen fivefold. Infineon meanwhile jumped 127% on debut but has since plunged to around half of its IPO price.

It’s a big first day for: KSA’s Arabian Centres, which is scheduled to make its debut on the Tadawul this morning after closing the kingdom’s third-largest IPO ever — and its first with a stabilization mechanism to support aftermarket performance. Inktank Communications, the region’s leading investor relations firm and our parent company, is IR advisor to Arabian Centres.

What We’re Tracking Today, the Ramadan edition:

MUST READ- It’s never too late to start a brilliant career, in the Wall Street Journal, which argues that “our obsession with early achievement shortchanges people of all ages. Research shows that our brains keep developing deep into adulthood and so do our capabilities.” Creativity, innovation and lasting achievement are possible at every age, argues the accomplished business journalist, author and late-bloomer Rich Karlgaard in a piece adapted from his book Late Bloomers: The power of patience in a world obsessed with early achievement. The piece is worth reading for this list alone:

• Famous movie villain Alan Rickman owned a graphic design studio for years before he got his first taste of fame at 42 for his role as Hans Gruber in “Die Hard”;
• Tom Siebel founded his first big tech company, Siebel Systems, at 41, and his second, C3, at 57;
• International star Andrea Bocelli began singing opera when he was 34;
• Martha Stewart was 35 when she started her catering business in a friend’s basement, and 42 when her first book of recipes was published.

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

• CEOs share their most helpful (and unconventional) career advice should be required reading not just for fresh grads, but for the olds, too. Among the gems from CEOs of companies including Hyatt Hotels, Lyft, Clif Bar: Empathy is the must-have skill — and “No one likes a phony. Don’t be a different person at work.” (Wall Street Journal)
• 8 Simple Tips to Live Longer and Healthier, among them: Move, eat real foods, call your friends, skip the supplements, get eight hours of sleep a night, don’t smoke and don’t drink so much. (Outside magazine)
• Let go of your grudges. They’re doing you no good. They’re bad for your brain, your blood pressure, your immune system… (New York Times)

Bankers: Ever fantasize about starting your own boutique firm? You’re not alone, as this short YouTube video from the Financial Times suggests (watch, runtime: 1:59). There’s also a brief companion piece here in the salmon-colored paper.

TECH PSA- Apple is making changes (again) to its MacBook butterfly keyboard after user complaints of missed keystrokes and double-pressed keys. The change is part of a model upgrade that also brings eight-core processors to MacBook Pros for the first time. (9to5 Mac | WSJ)

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 6:45pm CLT today in Cairo. You’ll have until 3:16am tomorrow morning to caffeinate / finish your sohour.

LEGISLATION WATCH- Capital requirements for commercial banks could rise tenfold to EGP 5 bn under proposed amendments to the Banking Act, Masrawy reported, quoting an unnamed CBE official’s statements to state news agency MENA. Foreign banks operating in Egypt will see their capital requirements triple to USD 150 mn. Banks will have three years in which to raise the required capital.

Is a wave of new M&As on the horizon? “We’re likely to see mergers and acquisitions for some small banks which are unable to raise capital,” National Bank of Egypt Deputy Chairman Yehia Abouel Fotouh told Bloomberg. Listed banks, though, could meet the requirements “through their retained earnings via stock-dividend distribution,” Bloomberg quoted head of financials for MENA at Renaissance Capital Nancy Fahmy as saying. Fahmy also told Enterprise “that there are several options on the table, as some foreign banks could for example seek funding their capital increase form the parent bank. Higher capital requirements also opens room for sector consolidation.”

That industry development fund? It’s back. The draft law seen by Masrawy confirmed plans to set up a development fund for the banking industry. Banks would reportedly pay a maximum of 1% of net profits towards the fund, a provision that stirred controversy it was first leaked back in 2017. Look for pushback from publicly traded banks here: The tithe is effectively a tax hike to endow a fund that publicly traded banks figure they can easily continue to do without.

No terms limits for boards? We noted yesterday a report that the act would likely impose a three-term limit for board members of state-owned banks. That may not be the case after all: “The new draft law [does] not set certain number of terms for banks' officials, including the heads of the banks and board members,” Ahram Online reports in a rundown on the MENA story. (The draft leaked in 2017 would have imposed term limits for bank managing directors.)

Forex bureaus will also need to raise more capital: Capital requirements for foreign exchange bureaus will rise fivefold to EGP 25 mn, according to Masrawy. Newly-established bureaus would also be required to pay an EGP 100k licensing fee and EGP 50k for each subsequent branch.

Where do we currently stand on the legislation? The current draft has been with the Madbouly Cabinet for review since January and is due to be introduced to the House of Representatives by the end of the month. If passed, the draft would not go into effect until it is signed into law by President Abdel Fattah El Sisi.

Electricity prices to rise an average of 15% in FY2019-2020: Average electricity prices will rise by 15% from 1 July, Electricity Minister Mohamed Shaker told reporters yesterday. Prices for ultra-high voltage electricity used by steel and iron factories will increase by 10% on average in the coming fiscal year, while low voltage prices paid by households, stores, and small and micro businesses will increase by 19% on average. Average electricity prices increased last July by 26% for all tiers of industrial, residential, and commercial buyers as part of the Sisi administration’s plan to gradually phase out electricity subsidies.

Tap or click here for the full price breakdown or here (pdf) for a review of the administration’s plan to phase out electricity subsidies entirely.

The ministry has pushed back plans to phase out subsidies for one more year: Electricity subsidies will be phased out by the end of FY2021-2022, a year later than expected, Shaker said during the press conference. Electricity subsidies were originally due to be fully lifted in the coming fiscal year, but the date was later pushed back to FY2020-2021 to avoid placing too much pressure on consumers. The latest delay means that the government’s subsidy removal plans will take two years longer than originally planned.

EXCLUSIVE- The government is planning to issue its first international infrastructure bonds in 2H2019-2020, two senior government officials told Enterprise. The bonds will have long maturities and their proceeds will be directed to infrastructure projects, the officials said. The government has begun talks with the China-led Asian Infrastructure Investment Bank over the issuance, which is meant to help the government to diversify its sources of finance. The government plans to borrow USD 6.9 bn from international markets in the coming fiscal year starting July, of which USD 5 bn will be in USD-denominated eurobonds. The first green bond issuance is planned for 4Q2019, the officials said.

What is an infrastructure bond? According to the World Bank (pdf), infrastructure bonds are issued with the purpose of financing infrastructure projects of public interest. Bonds issued by private sector companies are usually subject to concession contracts with the public sector (PPP). The funding is acquired through project finance, with public guarantees often involved.

M&A WATCH- Fawry to acquire EME International’s fintech division: E-payment platform Fawry is fully acquiring mobility solutions provider EME International’s fintech division, according to an emailed statement (pdf). The value of the transaction was not disclosed. EME, which was founded by Nader Iskander in 2004, “has three separate mobile development divisions, one of which has been dedicated to mobile fintech development for Fawry the past ten years.” EME is now planning to invest its resources in launching new divisions while growing its core divisions, including “innovative mobile sales, distribution and operations solutions for FMCG customers as well as its signature division focused on mobile marketplaces in transportation, healthcare, microfinance and human capital management.”

INVESTMENT WATCH- Elsewedy Electric to establish utilities JV with SCZone authority: Elsewedy Electric has signed a partnership agreement with the General Authority of the Suez Canal Economic Zone (SCZone) to set up the Economic Zone Utilities Company, Elsewedy said in a bourse filing (pdf). Elsewedy will own a 49% stake in the venture, which will have EGP 1 bn in capital. The JV will be responsible for designing, building and maintaining infrastructure projects in the economic zone. It will also update the zone’s utility master plan.

Egypt’s domestic debt rose 20.25% y-o-y to EGP 4.1 tn at the end of December 2018 compared to EGP 3.4 tn in the previous year, according to central bank data (pdf). The country’s domestic debt-to-GDP ratio reached 78.2%, up from 77% a year earlier. Figures released last week showed that 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.

Background: The Finance Ministry rolled out earlier this year a “more realistic” version of its comprehensive debt strategy, in which it aims to reduce the debt-to-GDP ratio to 80-85% and the ratio of interest payments to 32% of GDP by FY2021-2022. The government would be allowed to issue USD 12 bn of USD-denominated eurobonds and another USD 10 bn-worth of bonds in other currencies through FY2021-2022. The strategy, which the ministry began implementing in March, “aims at issuing gradually larger volumes of longer-dated treasury bonds by means of constant issuance and re-openings to lengthen the average life of the debt stock, to consolidate the government securities yield curve, and to reduce refinancing risk.”

REGULATION WATCH- Regulator to give Misr Clearing key role in short selling: Misr for Central Clearing, Depository & Registry (MCDR) will provide a platform for traders and brokerage firms to use for short selling under changes to recently-issued short selling regulations, Egyptian Capital Markets Associations (ECMA) Chairman Mohamed Maher said. The service will allow brokers and traders to quickly locate shares open for short positions. Officials from the Financial Regulatory Authority are set to meet with MCDR executives soon to discuss the platform, sources familiar with the matter told the press.

The changes will also provide contract templates for brokerages to use when entering into agreements with short sellers. The contracts will only involve the brokerage firm and the short seller, leaving out the lender to simplify the process.

Background: The FRA issued earlier this year regulations for short selling on the EGX, allowing brokerage firms to act as market makers by finding lenders and borrowers of stocks. Investors will only be able to short 20% of a company’s freefloat shares under the regulations, and any one shareholder won’t be able to lend more than 5% of a company’s shares. The EGX published the criteria for selecting securities eligible for short selling shortly after the regulations were issued.

MOVES- Omar Gaafar named VP investment banking at RenCap: Renaissance Capital named Omar Gaafar (LinkedIn) as vice president of investment banking in Cairo covering Egypt and MENA, Renaissance Capital said in a statement (pdf).

OECD: Trade disputes to hamper global growth: Trade tensions have caused a global economic slowdown in the past year and threaten future growth, according to a report released yesterday by the Organization for Economic Cooperation and Development (OECD). Trade growth is predicted to weaken to around 2%, its lowest rate since the global financial crisis. Meanwhile, global GDP is predicted to fall to 3.2% this year from 3.5% in 2018, before rising to 3.4% in 2020.

Where are the biggest threats to investment? Prolonged trade restrictions between the US and China, weak capital goods production in the major OECD economies, policy uncertainty, shortages in skills, and poor infrastructure are all hindering global investment. The report estimates that business investment will fall as a result, growing at an average rate of only 1.75% in 2019 and 2020, compared to 3.5% in 2017 and 2018. Continued trade policy uncertainty is one major risk to investment, which in turn impacts jobs and living standards. In particular, the possibility that the US might impose restrictions in specific trade-sensitive sectors, such as the automobile industry, is sending ripples of anxiety to Europe and throughout the world, because of its potential impact on the value chain.

How are emerging markets faring? Financial conditions have stabilized for emerging markets, the report says, but we remain vulnerable to a decreasing risk appetite among investors. Policy recommendations from the OECD vary from economy to economy. Monetary policy tightening to retain investor confidence is recommended for Argentina and Turkey, where concerns persist about the sustainability of fiscal positions and the health of the banking sector. India and Mexico, however, have more scope for easing monetary policy as inflation declines, due to their flexible exchange rates and lower exposures to foreign currency-denominated debt.

On the government’s mind today: Improving Egypt’s business environment. President Abdel Fattah El Sisi urged his government to make the best use of state resources, expedite efforts to implement financial inclusion, and upgrade the tax system for an improved business environment, the country’s three main state-run newspapers tell us on their front pages this morning (Al Ahram | Al Akhbar | Al Gomhuria).

Startups are fueling a ‘dark kitchen’ industry: Venture capitalists and startups are putting significant money and time into establishing so-called ‘dark kitchens,’ which only serve delivery customers, Tim Bradshaw writes in the FT. With the increasing demand for food delivery services resulting in the proliferation of companies like UberEats and Deliveroo, investors are now shifting their focus to look at how to make the supply side of the equation more efficient.

Different startups take very different approaches. Some, like Karma Kitchen, set up and hire out kitchens, partnering with other startups, like KitOpi, that actually make and deliver the food. Others, like Taster, identify areas of unmet demand and use algorithms to forecast sales, then rent kitchen space from somewhere like Karma Kitchen to prepare and deliver orders in lightning-fast time. Still others, including Deliveroo, have started preparing food in converted shipping containers in car parks, saving on space, manpower and overhead costs, and maximizing efficiency. The market potential seems huge, with investors like SoftBank having acquired a stake in ParkJockey, a Miami-based start-up that has been experimenting with car-park kitchens since 2016, and is currently valued at over USD 1 bn.

This trend seems made for the Egyptian market. Delivery culture here is huge, with Egypt being the first country in the region to set up a delivery website, Otlob, in 1999. Although there has been talk of the market being saturated, it continues to grow, with delivery platforms like Carriage and UberEats having recently entered the space. Add to this the growth of Qubix — already manufacturing the portable restaurants you see in Sahel every summer out of shipping containers — and the rapid growth of Egypt’s startup sector as a whole, all the key ingredients appear to be here for this idea to take off. Watch this space.

The US embassy’s Office of Agricultural Affairs has criticized a decision by the Egyptian authorities to reduce the number of halal meat accreditation centers for imports of US meat from eight centers to just one, the local press reports. The office said that the decision would disrupt the market, cause confusion among traders, and lead to an increase in the price of accreditation and consequently imported meat prices.

The Industrial Development Authority (IDA) is planning to tender 13 industrial complexes to investors between 30 June of this year and April 2020, according to the local press. The complexes will be spread across 12 governorates, seven of which are in Upper Egypt. Prime Minister Moustafa Madbouly had issued instructions earlier this week for the government to speed up the allocation of industrial land to investors as part of a strategy to promote and develop industrial activity across the country.

Sunday’s terrorist attack in Giza is “a setback” for tourism in Egypt, Chairman of the Association of Independent Tour Operators (AITO) Derek Moore said, according to TTG Media. Moore stressed, however, his confidence that Egyptian authorities were doing everything possible to reduce the likelihood of repeat incidents. “The truth is, we think, the public has become more aware of the statistically very low chances of being involved in such an incident,” he added. AITO is a UK-based tourism trade group representing 120 independent tour companies, 12 of which currently organize trips and holidays in Egypt.

Revolta Egypt is planning to install EGP 100 mn-worth of electric vehicle charging docks by the end of 2020, CEO Mohamed Badawy said, according to local press reports. This will increase the number of docks the company operates to 345, from a current 130.

The Arab Organization for Industrialization (AOI) has signed an MoU with Chinese electric bus manufacturer Shanghai Wanxiang Automotive Co to set up a JV to begin producing electric buses in Egypt, Al Shorouk reports. The partnership will also see the two sides establish research and training centers for the industry.

Telecom Egypt WE is planning to set up a real estate arm once a firm it has contracted completes a study of the company’s land portfolio, CEO Adel Hamed told Youm7. When last evaluated in 2005, the state-owned landline monopoly’s land portfolio was worth EGP 2 bn, Hamed said.

Egyptian and French naval forces held a joint drill in the Mediterranean Sea, as part of efforts to boost military cooperation, the Armed Forces said in a statement. The drill included trainings to counter hostile attacks, airstrikes, and atypical threats, as well as inspection methods of suspected vessels, the statement said.

AUC’s Model United Nations delegation earns record number of awards at annual New York conference: AUC’s Cairo International Model United Nations (CIMUN) delegation earned a record 19 awards, including the prestigious “Outstanding Delegation” award, at this year’s National Model United Nations conference in New York City, according to Ahram Online. This is the highest number of awards for a single delegation in CIMUN’s history, and marks the tenth consecutive year for CIMUN to snag the Outstanding Delegation title.