“Market overhang” cleared as GTH tax saga comes to an end

We have a nice long weekend ahead of us, as Sunday is off in observance of 30 June. Banks and the stock exchange will be closed. Enterprise will also be off on Sunday, and we’ll be back in your inbox at the appointed hour on Monday morning.

That doesn’t mean the president has the weekend off, though: President Abdel Fattah El Sisi left for Japan yesterday to attend this weekend’s G20 summit in Osaka, Japan, according to an Ittihadiya statement. The president will represent all 54 African Union countries at the gathering, which takes place Friday and Saturday. Look for US-China trade to be in the spotlight, with Donald Trump and Xi Jinping due to have a chinwag on the sidelines of the summit.

Coming up next week: Our friends at AmCham will be hosting Electricity Minister Mohamed Shaker at their monthly luncheon on Tuesday, 2 July. You can register for the event here.

The Pharaohs secured a place in the 2019 Afcon round of 16 last night after they comfortably beat DR Congo 2-0 at the Cairo International Stadium, Reuters reports. Ahmed Elmohamady opened the scoring in the 25th minute before Mo Salah doubled the lead two minutes before halftime.

Abu Dhabi Financial Group and Dubai-listed Shuaa Capital have agreed to merge, setting up the creation of an entity with USD 12.8 bn in combined assets under management, Shuaa said in a press release. The transaction is expected to wrap-up sometime in 3Q. The combined entity will be 42%-owned by Shuaa’s shareholders and 58% by ADFG’s.

Time to go bullish on emerging-market currencies? Morgan Stanley is going full bull on emerging-market currencies as an anticipated return to easing by the world’s major central banks puts pressure on the USD, according to Bloomberg. The MSCI EM Currency Index has risen to its highest level since April, as USD bears begin putting money into developing currencies.

While we’re on the subject: EFG Hermes’ Mohamed Abu Basha said yesterday that the prospect of a non-financial agreement with IMF bodes well for inflows into Egypt — which is currently riding high as the world’s most attractive carry trade. We have more on this in this morning’s Macro Picture, below.

Want to max out EM returns? Pray for the worst: Media frenzies over particularly bad pieces of news more often than not translate to higher returns on EM assets, according to research cited by the Financial Times. Why? The brain behind the study, Jan Dehn, head of research at Ashmore, theorizes that the media hyperbole often accompanying bad news causes a wave of irrational selling, thereby creating value.

Our Bitcoin goof earlier this week now seems (nearly) prophetic: The price of Bitcoin skyrocketed yesterday, hitting fresh 17-month highs of USD 13,485 before dramatically falling back to near USD 12k, CNBC reports. Analysts suggested that Mark Zuckerberg’s new pet crypto project has been responsible for the rapid appreciation.

Kuwaiti equities could be upgraded by MSCI to emerging market status in 2020,the equity index provider said in a statement on Tuesday (pdf) after conducting its latest market classification review. If approved, nine Kuwaiti stocks would be included in the MSCI EM Equity Index. MSCI will make its final decision by 31 December. Currently classified as a frontier market, Kuwait accounted for a quarter of the MSCI Frontier Markets Index in early June, the FT reports. The potential shift to EM status is expected to bring an extra USD 2.8 bn in passive investment flows into the Gulf country’s stock market.

Need a refresher on the key differences between frontier and emerging markets? We’ve got you covered.

The latest ‘Robots are taking over everything’ report: You better not be getting too comfortable with your skill set because the robots are coming and they will ki– … take your job, CNBC reminds us. A new study by Oxford Economics claims the next 11 years could see China lose as many as 11 mn jobs, the US 1.5 mn and the European Union 2 mn. We don’t know where Egypt fits in all of this, but let’s hope our status as a developing country will for once play in our favor.

PSA- Thinking about a startup and need affordable co-working space? Our friends at the CIT Ministry’s Technology Innovation and Entrepreneurship Center (Tiec) are providing a coworking space for entrepreneurs and startups at its headquarters in Smart Village (details here in pdf). Small startups can use the space at no charge for three months after registering and may be able to renew depending on availability. You can register here.

The talking heads took a break last night, presumably in recognition of the fact that they can’t beat football for entertainment value. We’ll be back with coverage on Monday.

GTH signs tax settlement agreement, regulator approves Veon’s MTO, ending the years-long saga: Veon subsidiary Global Telecom Holding (GTH) signed a USD 136 mn tax settlement agreement with the Egyptian Tax Authority, GTH said in a bourse filing (pdf). GTH has called for a shareholders’ meeting on 27 August to vote on delisting the company. Board meeting minutes are available here (pdf), here (pdf), and here (pdf). Veon’s statement, meanwhile, is here.

The settlement ends a long-running dispute that has prevented Veon from taking over GTH — and has embroiled both retail investors and a handful of “activist” institutional investors. Conventional wisdom on trading desks is that this has sapped the EGX of both sentiment and liquidity. “The settlement comes out of the state’s care for ending all tax disputes to help achieve a stable tax and financial positions for companies operating in Egypt,” the Finance Ministry said in a statement.

What does the settlement look like? The settlement covers the tax liabilities of GTH and its subsidiaries for the period from 2000 until and including 2018. GTH paid USD 53.7 mn to the Tax Authority, clearing tax dues for 2006 and 2007, and 2010 through 2018. Another USD 82.3 mn payment will be made by 31 December this year to clear dues for the remaining years.

The good news kept rolling in for GTH as the Financial Regulatory Authority (FRA) approved a modified mandatory tender offer (MTO) by lead shareholder Veon for the remaining 42.3% stake in GTH at EGP 5.08 per share, down from a previous EGP 5.30 per share, the regulator said in a bourse filing (pdf). The FRA had delayed and blocked previous attempts by Veon to acquire the GTH stake that it doesn’t already own

Veon has also made an offer to acquire “substantially all of GTH’s operating assets,” including USD 2 bn for Jazz, USD 300 mn for Banglalink, USD 600 mn for Djezzy (including Med Cable) and USD 93.6 mn for Mobilink Bank. The acquisitions are expected to close by the end of 2019, subject to approval.

Veon will also increase by USD 100 mn its existing revolving credit facility with GTH, bringing the total value of the loan to USD 200 mn. Shareholders will vote on using the facility upon the completion of delisting.

GTH’s chairman is relieved that the process is finally over: “Today’s settlement is a positive outcome for all GTH shareholders and would not have been possible without the cooperation of the Egyptian Ministry of Finance and the Egyptian Tax Authority, both of which I would like to thank, also on behalf of the entire board, for their support throughout this process,” said Chairman Andrew Kemp.

What happens now? GTH's board has appointed Grant Thornton Egypt as an independent financial advisor to update its valuation report issued in January in respect of the then considered capital increase of GTH. The independent directors not affiliated with Veon will review the MTO and the asset acquisition offer, and disclose any relevant information.

How did we get here? The Egyptian Tax Authority ordered a seizure of EGP 990 mn in funds from GTH’s local bank accounts in 2018 over a 2016 tax dispute. Some market observers have claimed the ongoing dispute obstructed Veon’s efforts to take over its unit and led it to withdraw an earlier MTO. We had reported that Veon has agreed on a settlement with the Egyptian government but talks took a little longer than expected as they reportedly focused on the payment scheme of the settlement, with the government wanting to receive the bulk of the payment before the end of the month.

Advisors: Shalakany Law Firm (statement here) represented GTH on the tax settlement and Veon on the MTO.

EXCLUSIVE- Egypt may offer Samurai and Panda bonds in 1Q2020: The Finance Ministry is aiming to secure approvals from Asian central banks by November to issue Panda and Samurai bonds in 1Q2020, two sources told Enterprise. The procedures may take up to two months, after which the government will hire investment banks that will decide on the timing and size of the offerings.

Promotions have already begun: Finance Minister Mohamed Maait will meet a number of investment banks on the sidelines of the G20 summit in Tokyo to promote Egypt’s economic reforms and the planned debt issuances, a source said. Talks are also underway with Asian and GCC investors, who have showed significant interest in the issuances, particularly those carrying long tenors. The Finance Ministry stated in April its intention to issue yen and yuan-denominated bonds in an attempt to diversify borrowing sources as part of its new debt strategy.

Egypt’s equities are attractively priced compared to current global averages and relative to their own historical averages, Shuaa Securities’ Ahmed Abdelnaby suggests in a research note (pdf). According to Abdelnaby, equities on the benchmark EGX30 index are the third-cheapest in the Arab world, and the sixth-cheapest globally. Across MENA, Egypt leads the pack both in terms of earnings with a compounded annual growth rate of 34% in 2018-2021, and has the highest return on equity in the region at 31%.

Internal and external macro conditions are undermining performance: “Egypt equities have recently been undermined by (1) a slower pace of further interest rate cuts by the CBE, (2) strong EGP vis-à-vis USD, (3) money migration from existing emerging markets globally and locally to Saudi Arabia and Argentina which were recently upgraded to emerging markets status by global index provider MSCI and index compiler FTSE, and (4) a wave of margin calls,” Abdelnaby writes.

EXCLUSIVE- Afreximbank to provide USD 1 bn of trade financing loans to Egypt in 2H2020: The African Export Import Bank is planning to provide USD 1 bn of financing in 2H2019 to boost intra-African trade and support Egyptian companies to invest in Africa, a bank official told Enterprise on the sidelines of its annual meeting in Moscow. The financing will be provided in cooperation with Egyptian companies and banks.

The latest loans will see Afreximbank providing a total of USD 2 bn to Egypt this year, lower than the USD 3 bn the bank provided in 2018. The bank is looking to reduce its financial commitments to the country this year as the economy continues to rebound, the official said.

Three Egyptian outfits going head-to-head for Mercedes-Benz partnership: Three local manufacturers have presented competing bids seeking to partner with Mercedes-Benz on the assembly of the German automaker’s cars in Egypt, unnamed industry sources tell Al Masry Al Youm. The story provided no timeline or additional details on the bids of Mercedes’ thinking on the process.

Background: Mercedes-Benz signed a MoU earlier this week with the government to set up an assembly plant in the Suez Canal Economic Zone (SCZone). The luxury car maker had shut down its Egyptian assembly line in mid-2015 amid FX shortages.

EXCLUSIVE- Customs Act parliamentary discussions kicked to FY2019-2020 legislative cycle: The House of Representatives is expected to vote on proposed amendments to the Customs Act after the summer recess, two government sources told Enterprise. The Finance Ministry decided to postpone the vote to give itself time to factor in the planned customs breaks to incentivize local manufacturers. The draft legislation made its way to cabinet this week after the Council of State (Maglis El Dawla) completed its review.

The incentives should be ready before the end of the summer recess. They would bring about a mandatory revision of custom rates based on the percentage of domestic content used by factories. We noted on Sunday that cabinet could announce auto industry incentives by the end of this month. As for other manufacturers, we know that incentives will follow the auto industry’s rational. It is unclear, though, whether they will be finalized and announced at the same time.

Background: The proposed amendments would expedite customs clearance, create a “whitelist” of trusted importers, and broaden the Custom Authority’s discretion, according to a final draft released by the Finance Ministry last year. The bill would bring customs legislation in line with international agreements and raise Egypt’s ranking in a number of global indices, including the World Bank’s Doing Business report, the ministry said.

REGULATION WATCH- FRA grants holding companies exemption from some shareholder structure rules: The Financial Regulatory Authority (FRA) is exempting holding companies from meeting ownership structure requirements when establishing new companies under the Capital Markets Act, the regulator said in a statement (pdf). The exemption is meant to streamline the process of setting up new companies, which in turn creates jobs and supports economic growth.

The US-led Mideast economic conference in Bahrain finished yesterday — and it could be back to the drawing board. Trump’s USD 50 bn Mideast economic plan failed to gather much political support during this week’s Bahrain conference, as the Gulf states and the IMF warned that a political solution to the Israel-Palestine conflict must be found before any investment program can be launched, Reuters reports. Saudi Arabia and UAE approved of the plan in principle but urged the US to work harder on finding a political agreement while Lagarde said that political stability is an “essential prerequisite.”

It was a no-show from the private sector: The US invited more than 1,000 business leaders to attend the event, but “only a fraction” actually turned up, Bloomberg says.

Mnuchin signals that changes are coming: US Treasury Secretary Steve Mnuchin said yesterday that the US is open to changing the plan in order to build more political support.

And the money? Mnuchin said that he would collect USD 4 bn during the conference. But as for the other USD 44 bn, that is still TBD.

Egypt is remaining tight-lipped: The Egyptian government, which sent a delegation to the conference but not a minister to lead it, is yet to issue a statement. Foreign Minister Sameh Shoukry said earlier this week that the government would carefully consider the proposals before forming an opinion.

The good times will continue to roll if Egypt secures a new pact with the IMF: Plans to sign a post-program non-financial agreement with IMF will help Egypt maintain its position as the world’s most attractive carry trade, Mohamed Abu Basha, EFG Hermes’ head of macro analysis, tells Bloomberg. Finance Minister Mohamed Maait said yesterday that the government is in talks with the fund over an agreement that could see it continue to support the country’s economic reforms after the USD 12 bn program ends later this year. This would likely bolster investor confidence in Egypt’s fixed-income assets and the EGP carry trade further, according to Abu Basha. “Egypt makes for a very good trade… signing the agreement would act as further reassurance and can guarantee a consistent stream of inflows and lower borrowing costs,” he said.

The world’s best: Large portfolio flows have entered Egypt this year as the government’s commitment to reform and the country’s relative insulation from the US-China trade conflict courted international attention. Investors have netted themselves a 23% return on EGP-denominated bonds this year — five times the EM average — while the value of the EGP has increased by 7.3% against the greenback. Carry traders investing in Egyptian debt with USD have made returns of around 15% in 2019, Bloomberg says.

And Trump’s USD 50 bn Mideast plan (if it ever materializes) will likely boost the EGP further: Marie Salem, FFA Private Bank’s director of capital markets, says that Trump’s plan to invest USD 9 bn in Egyptian infrastructure as part of his regional economic development plan would only be good news for the EGP. “With all the enhancement and support that Egypt is getting from the IMF and the US, the EGP has maintained its stability for the past year and we expect it to strengthen,” she told Bloomberg.

Amr Warda getting kicked off the national team over harassment tops Egypt coverage: The Egyptian Football Association (EFA) has barred Egyptian national team player Amr Warda from taking part in any further matches during the African Cup of Nations, the EFA said in a statement. Warda came under fire earlier this week after an Instagram model posted several snippets of their conversations, accusing him of [redacted] harassment and aggressive behavior. A complaint was filed against him at the prosecutor general’s office. The Pharaohs will continue the rest of the tournament with 22 players.

The story was widely picked up by foreign news outlets, including Reuters, AFP, BBC Sport, National Post, Kick Off, and Goal (French.

No, the Egyptian economy is not in danger of imminent collapse, argues EFG Hermes’ Ahmad Shams El Din in a riposte to Yehia Hamed’s recent FP hit piece on the Egyptian economy. Improving macro indicators and external debt levels that are comparatively favorable to EM averages show that it is actually undergoing a strong recovery, he writes in Foreign Policy, while delivering the following slam-dunk: “[Hamed’s] article will remain nothing more than a polite attempt at political positioning that seeks to muddy the waters of the current government’s financial successes, rather than offer a serious analysis of Egypt’s financial and economic conditions.”

The killing of seven police officers and four terrorists in north Sinai is also receiving attention this morning: Reuters | Associated Press | Xinhua | Al Arabiya.

El Sisi in Japan for G20 summit: Both Al Ahram and Al Gomhuria’s websites are still down (at this point we’re wondering if they will ever have functioning websites again). President Abdel Fattah’s Al Sisi’s participation in the G20 summit in Japan tops the front page of Al Akhbar, one of the country’s three main state-run newspapers.

Egypt signed seven cooperation agreements and MoUs with German companies yesterday, the cabinet said in a statement.

Prime Minister Moustafa Madbouly also met with German Railways’ chief Richard Lotus to discuss the challenges that the sector is facing in Egypt, according to a separate cabinet statement. The PM and several of his ministers also met with officials from Bombardier Transportation to showcase the government’s plans to modernize railway cars, the cabinet said in a separate statement. Madbouly also met with the head of Germany’s auto manufacturing union to discuss Egypt’s ambitions to improve its domestic industry.

The PM also held talks with German Minister of Economic Affairs and Energy Peter Altmaier and the head of the German-Arab Chamber of Industry and Commerce (AHK), cabinet said as well as with Economic Cooperation and Development Minister Gerd Müller (statement here) to talk transportation, car manufacturing and vocational training.

SDX Energy has made an oil discovery at its Rabul 7 well in the West Gharib concession, the company said in a statement. “The well was drilled to a total depth of 5,323 feet and encountered approximately 134 feet of net heavy oil pay across the Yusr and Bakr formations.” SDX has also connected the well to the central processing facilities at Meseda. SDX holds a 50% stake in the concession.

Sidi Kerir Petrochemicals Company (Sidpec) has signed the final contract to purchase a land plot from Alexandria Fiber Company to expand its new propylene and polypropylene plant, the Oil Ministry said in a statement. The value of the contract was not disclosed. We reported last October that Sidpec was in talks with local banks for a loan of USD 1.2 bn to finance the plant’s expansion and achieve a final production capacity of 450k tonnes.

BP will link this week 250 mcf/d to the production from North Alexandria’s Giza and Fayoum fields, an EGAS source told the local press. The two fields’ total production capacity this month is about 680 mcf/d, its highest level since it began producing in February. The two fields consist of eight wells in the Mediterranean.

Canadian mining firm Aton Resources has discovered two new gold mine prospects at Safaga South and Wasif in the company’s Abu Marawat concession in the eastern desert, according to a statement out last week. Preliminary sampling has returned positive results after the company identified “ancient mining settlements” at both prospects. Aton Sandstorm Gold signed last month a USD 2.1 mn financing package to fund more exploration and development at the concession.

State-owned Cotton & Textile Industries Holding Co has kicked off a EUR 1 bn government-funded restructuring program under the supervision of US-based Werner International, Textile World reports. The program seeks to modernize Egypt’s textile industry to improve its competitiveness and help it regain its position as a major regional sourcing hub. Program costs will include new spindles, looms, and other equipment.

The Industrial Development Authority (IDA) will tender next month 280k sqm of industrial land plots in Hurghada, said Salah El Gamal, investment director at the Red Sea governorate. The plots will be allowed to accommodate all but environmentally damaging industrial activities, El Gamal said. The number of land plots on offer is yet to be decided.

The Education Ministry has signed an MoU with IBM Egypt to launch the country’s first specialized IT school, following the universally recognized P-Tech model, the cabinet said in a statement. Sixty high school graduates will be able to enroll in the school in the first round this coming school year.

The Holding Company for Tourism and Hotels (HOTAC) aims to begin accepting tender offers from companies hoping to renovate Shepheard Hotel in July after it amended the booklet of conditions, Chairman Mervat Hataba said. The government has reversed a decision to set up a JV to develop the hotel and decided instead to contract a multinational company to do the job, Hataba said. Four companies have already expressed interest to take part in the bid, she added without naming them.

Ibnsina Pharma has increased its issued capital to EGP 205 mn from EGP 180.5 mn by issuing EGP 24.5 mn-worth of bonus shares, according to an EGX disclosure (pdf).

President Abdel Fattah El Sisi has ratified a bill to increase pensions and salary increases for civil servants by 15% starting 1 July, according to the official gazette. State employees subject to the Civil Service Act will get a periodic raise of 7% and a monthly bonus of EGP 150 starting 1 July. Employees that do not fall under the act’s umbrella would be eligible for a 10% raise. El Sisi has also ratified amendments to the Administrative Prosecution Authority Act and the Judicial Authority Act, giving himself the authority to appoint the head of each of the authorities from pools of the seven most-senior prosecutors or judges. Appointees will hold office for four-year terms or until they hit retirement age, and would be limited to one term in office.

Special forces officer-turned-terrorist Hisham Ashmawy is facing military trial over five terror attacks, including one in which he was sentenced to death in absentia in 2017, according to the National. Ashmawy is accused of killing a total of 54 people, and engaging in terrorism against the army, police forces, and civilians. Ashmawy was captured in Derna in 2018 by forces loyal to Libyan National Army chief Gen. Khalifa Haftar, and flown back to Egypt in May.

My Morning Routine looks each week at how a successful member of the community starts their day — and then throws in a couple of random business questions just for fun. Speaking to us this week is Omar El Fata (LinkedIn), CEO of AMECO, the oldest and largest single-use syringe manufacturer in the Middle East.

My name is Omar El Fata. I’m 29 years-old and I’m the CEO of the Arab Medical Equipment Company (AMECO).

Many people have a fixed idea of what it means to be a CEO, imagining someone who sits in a lavish office all day, delegating. Fortunately, my short experience in this area has been quite different. Time spent in the office is scarce, as I am always on the move. My job is to make sure the company has enough liquidity and resources to maintain smooth operations and sustain growth. This entails many meetings with bankers, suppliers, distributors and, most importantly, the company’s workers.

One of the main costs in manufacturing a syringe is the plastic,which fluctuates based on oil prices. So we need to pay close attention to current world events and strategize to maintain an efficient supply chain. In 2007, we started producing our own needles, to be able to control the quality fully. Every syringe is sold with a needle, and if you produce a high-quality syringe with a low-quality needle, then you are selling a painful product. That’s why we decided to produce our own needles, which is a very delicate component. All our products are CE marked (they conform to health and safety standards for products sold within the EEA). With the CE mark we are allowed to export our products to any EU nation without needing to register. So maintaining these standards is a very important part of our business model. More generally, it’s crucial that we keep a close eye on the sector for any interesting developments — the healthcare sector is becoming increasingly dynamic.

I start my day with a big breakfast, a freshly brewed double espresso and Bloomberg’s morning show. This is usually followed by feeding my dogs and my three-legged cat, who shower me with much-needed morning positivity in return. Before driving to work, I spend about 45 minutes going through emails and catching up on everything Egypt-related with Enterprise.

Working in an industrial zone doesn’t come with the social perks of working in, say, Zamalek, so I end up spending a lot of time with my workers, listening to everything from how to run a process more efficiently to complaints about the traffic on their commute to work. I enjoy it because it keeps me grounded and gives me very different insights into everyday struggles as well as opportunities for people in Egypt. As we work with companies operating in many different time zones, I usually end up working until the evening, but I always try and make it home before 10pm.

I’m a recent Game of Thrones convert, and a big fan of Black Mirror. Two books I’ve really enjoyed recently are The Power of Now by Eckhart Tolle and Enlightenment Now by Steven Pinker.

When AMECO started in 1984, painful and expensive glass syringes were used all over the world, and it was my late grandfather who established the company as the first plastic disposable syringe manufacturing plant in the Middle East and Africa. The same shift happened in the bottling industry (a move from glass to plastic), and it was a challenge because the public perception of plastic at the time was negative. The truth is, using medical grade plastic to manufacture syringes was more replicable, cheaper, and more hygienic than using glass. Perhaps most importantly, the needle is much less painful and the process of using it less intimidating with plastic syringes.

Many people don’t have a sense of just how much know-how and investment goes into producing any medical devices. We have sold bns of syringes in our 35-year history, and it isn’t an easy task to scale your production whilst maintaining your standards of safety for each and every syringe you sell. It’s possible to buy syringes for less than the baksheesh you would give to your local “sayes” when he helps you park your car, but the difference between syringe brands (which can be as little as a few piasters) can also be the difference between a syringe that delivers safely and a syringe that could contaminate the medication.

I always tell our employees to think twice if they are tempted to cut any corners, as one day it could be them lying in a hospital bed.

We have been working to develop new equipment that I hope will be at the forefront of change in the industry. Syringe reuse and accidental needlestick injuries are among the most common causes of the spread of blood-borne diseases — notably the spread of hepatitis and HIV. Egypt has the highest prevalence of hepatitis C in the world, and this is mainly because of the reuse of syringes. So we’re trying to address this problem by teaming up with an Italian healthcare technology company to develop a new kind of syringe, called Retrago. After a single injection, the Retrago syringe automatically retracts the exposed needle and prevents the syringe from being reused. We launched Retrago during the WHO Assembly in Geneva last month, and it was subsequently recognized as a top 20 global health innovation by UNAIDS.

Having free time during the week always makes me feel like there is something work-related that I should be doing, so I reserve my free time for the weekend when I know no one else is working. Fridays are for much-needed family time, and recently I’ve also started hiking, which I find a great way to recharge in preparation for the upcoming week.

How do I stay organized? I use OneNote for my notes and Outlook’s calendar to keep track of my appointments. Without these things, I would be hopeless.

‘Nothing good came from a 9-5’ is the best business advice I’ve ever received. The message I take from this maxim is not to get trapped in the mundane 9-5 cycle, but to work and think outside of conventional corporate structures whenever possible.