Welcome to the new fiscal year

Welcome back, ladies and gentlemen — and welcome to the new fiscal year. We hope you all enjoyed the much-needed extended weekend as much as we did. We know that it’s only been a little over three weeks since Eid, but that seems like a long time ago now — especially with the heat in the capital making us all wish that we were somewhere cooler.

It was a busy weekend for international politics, as global leaders gathered in Osaka, Japan, for the annual G20 summit. President Abdel Fattah El Sisi attended the event, where he represented the African Union. We have more in this morning’s Diplomacy + Foreign Trade, below.

We’re officially into the second half of 2019 — and with a brand new month we have plenty of news triggers coming up over the next several days:

• Foreign reserves: The CBE is due to release Egypt’s net foreign reserve figures for June sometime this week.
• PMI: The purchasing managers’ index for Egypt, the UAE and Saudi Arabia will be released on Wednesday, 3 July.
• Inflation: Monthly inflation figures are due out next week. Inflation rose unexpectedly to 14.1% in May from 13% in April.

Our friends at AmCham will be hosting Electricity Minister Mohamed Shaker tomorrow at their monthly luncheon. You can register for the event here.

Dominating the global press this morning: US President Donald Trump’s unexpected decision to enter North Korea to meet Kim Jong Un, making him the first sitting US president to visit the country. The two leaders agreed to kickstart talks on denuclearization, but “are no closer to narrowing the gap between their positions since they walked away from their summit in February in Vietnam,” Reuters reports.

The Donald also dialed back tensions with China: Trump and Chinese President Xi Jinping agreed to re-enter trade negotiations after meeting on the sidelines of the G20 summit on Saturday, the BBC reports. Trump pledged not to introduce further tariffs on Chinese goods, and in a significant U-turn said that US companies will continue to be allowed to sell Huawei phones.

Things are looking better, but don’t expect an agreement anytime soon: “The quality of the transaction is far more important to me than speed. I am in no hurry, but things look very good,” Trump wrote on Twitter following the meeting. “The United States and China have been here before,” reads the pessimistic opening line of an article in CNBC, in which analysts predict that the G20 2019 agreement will end up much like the one struck during G20 2018. Investment gurus seem to agree, viewing the outcome as no more than a “short reprieve” for risky assets.

Flows into EM spiked prior to the G20 summit, indicating that investors were positioning themselves for a trade breakthrough, the Institute of International Finance (IIF) said on Thursday.

An extension to oil supply cuts at least until the year-end in the offing: OPEC+ are looking set to extend oil supply cuts following this week’s meetings as Iraq has joined forces with Saudi and Russia in backing a policy to prop up prices in the face of sluggish global growth, Reuters reports. The “non-cartel” of oil producers has been slashing output since 2017 to keep prices up as production from the US soared to make it the world’s largest producer this year.

The Pharaohs reign supreme in Afcon group stage: Egypt’s national football team remains undefeated in the African Cup so far after beating Uganda 2-0 last night, topping their group with nine points and a five-goal difference. Mo Salah curled in a near-post freekick at the 36th minute, after which Ahmed Elmohamady hit the far post with a power shot just before the halftime whistle. Our next match is on Saturday, but our opponents have not been determined yet.

President Abdel Fattah El Sisi’s sideline meetings during the G20 summit in Japan were in the limelight on the airwaves yesterday. El Sisi’s talks with Toyota Tshusho head Ichiro Kashitani was a highlight on Al Hayah Al Youm (watch, runtime: 1:13). Al Hayah Al Youm’s Lobna Assal also took note of a report by the State’s Information Service (SIS) on El Sisi’s other “high-level meetings” (watch, runtime: 1:53). We have the full story in Diplomacy + Foreign Trade, below.

Also earning some attention last night was a Travel Trade Gazette (TTG) article about tourism in Hurghada, which the magazine said is Italian tourists’ favorite destination this summer. The trend in demand remains stable with a marked tendency for travelers to book early for the Red Sea town (watch, runtime: 2:39).

Finish your plate before asking for a new program, IMF tells Egypt: The International Monetary Fund (IMF) will not open talks with Egypt over new support until the government has finished implementing the current program of economic reforms, IMF assistant communications director Camilla Andersen told a press briefing. “We’re not currently negotiating a new IMF-supported program; the priority at this junction is to successfully complete the current program,” she said. “Discussions regarding the nature of any future engagement would come after that.”

Does this write off Egypt’s hopes for a post-program agreement by October? Finance Minister Mohamed Maait told Bloomberg TV last week that Egypt has begun probing a potential non-financial post-program agreement that it hopes to have in place by October. Egypt reached a staff-level agreement with the fund back in May to release the final USD 2 bn installment of the USD 12 bn facility, but as of right now we don’t know when the executive board will sign off on the payment and allow Egypt to exit the program. Egypt is not currently on the published agenda for the IMF’s board.

Government plans fuel hedging for FY2019-2020, confirms hedging took place in FY2018-2019: Egypt is planning to hedge against rising oil prices for the second year in a row, Finance Minister Mohamed Maait said in an interview last week, Bloomberg reports. This comes two weeks after a government source told the press that the finance and oil ministries were negotiating new fuel hedging contracts for the new fiscal year. An informed source told Bloomberg that JP Morgan and Citibank provided the current contracts. The government is considering hiring additional banks in FY2019-2020, the source added.

This is the first official recognition that the government has completed a fuel hedging program. Much of what we know about fuel hedging has come through anonymous government sources, with the ministry never directly confirming or denying the information. We were told last year that the government was in talks with two banks (believed to be JP Morgan and Citibank) to sign contracts for FY2018-2019. These plans appeared to be shelved after crude prices fell below the USD 67/bbl Egypt had projected in its yearly budget. However, an official told us in February that the government was once again thinking about entering into hedging contracts, this time during FY2019-2020. Budget figures then revealed in April that the government had indeed purchased hedging contracts in the last fiscal year.

How much are the contracts worth? The exact details of the programs are unknown, but an analysis of market activity cited by Bloomberg indicates that we may have purchased call options (a contract allowing the holder to buy fuel at a predetermined price) at around USD 70/bbl for December 2019, along with several maturities in 2020. It also looks likely that we took part in large trades booked using fence structure (which sets up a range around a commodity) for USD 50-70/bbl. It is not clear how much of this trading activity is linked to Egypt, Bloomberg notes.

Egypt remains a net importer of oil and is especially vulnerable to price increases: A Bloomberg analysis last year showed that every USD 1 increase above the budgeted oil price of USD 67/bbl added EGP 4 bn (USD 222 mn) to the state’s annual outlay, putting additional pressure on the government as it sought to reach its budget deficit target of 8.4% for FY2018-2019. This year’s budget uses a benchmark price of USD 68/bbl.

Hedging against wheat remains unlikely for now: Maait confirmed that Egypt decided not to hedge against global price fluctuations in wheat in FY2018-2019, and that it is unclear whether we will do so for FY2019-2020. Egypt is the world’s largest importer of wheat.

M&A WATCH- Eipico looking to acquire 9.77% stake in Medical Union: Pharma player Eipico’s board of directors has agreed to acquire a 9.77% stake in Medical Union Pharma (MUP) for over EGP 200 mn, sources told the local press. The stake belongs to Egylease, which is looking to increase the sale to 10.4%. Eipico is working on hiring an independent financial advisor to value MUP’s shares, said the company’s IR officer Abdel Rahim Elmorly. CIB signed last week an EGP 400 mn medium-term financing contract with MUP, bringing the company’s total credit facilities to EGP 1 bn.

M&A WATCH- SPE Capital buys 30% stake in Future Pharma: SPE Capital Partners has acquired a 30% stake in Future Pharma Industries (FPI) for EGP 500 mn, SPE Chairman Gamal El Leithy said, according to the local press. The Middle East-focused private equity firm reported in March that it made an undisclosed equity investment in FPI through its SPE AIF I fund. SPE was originally eyeing up to a 40% stake in the Egyptian pharma company. FPI plans to use the proceeds from the transaction to establish six new production lines.

INVESTMENT WATCH- Mena Health Partners (MHP) plans to invest EGP 1 bn to build three new hospitals in Cairo and Giza in the coming period, Managing Director Hossam El Essawy told local press. MHP has inaugurated the first phase of Katameya Clinic and plans to build Welcare Hospital and October International Hospital within the next couple of years. The three hospitals will have a combined capacity of 355 beds.

Egypt wants to almost quadruple the value of natural gas exports to USD 2 bn in FY2019-2020: The government is looking to export 12 mn tonnes of natural gas worth USD 2 bn in FY2019-2020, compared to USD 580 mn in the past year, the local press reported, citing an unnamed EGAS source. Egypt is seeking to increase average daily exports to 1.56 bcf/d through LNG terminals in Idku and Damietta, and the Jordan pipeline. Natural gas exports averaged 500 mcf/d in FY2018-2019.

Higher gas production equals more gas to export: Additional gas flows from Zohr and other fields in the Mediterranean will allow energy companies to meet their supply obligations for the government and export the surplus, the official said.

Over a quarter of MENA-based fund managers are planning to increase their allocations to Egypt over the next three months, according to a Reuters poll. One of those surveyed singled out the country’s growth prospects as the region’s best. Inflation and interest rates, however, “need to subside,” senior portfolio manager at Dubai’s Al Mal Capital Vrajesh Bhandari said. The EGX, up 8.2% year-to-date, outperformed other markets in the region including Dubai, Abu Dhabi, and Qatar.

Kuwait is the regional darling, with its market gaining 20.7% YTD and index compiler MSCI saying it could upgrade Kuwaiti equities to emerging market status in 2020. Six of the 11 managers polled by the newswire said they would raise their investments in the GCC country over the next three years. Qatari equities, meanwhile, were one of the region’s worst performers. As for the rest of the region, the majority of managers said they will keep their investment in the UAE, Saudi, and Turkey unchanged.

Former Abraaj exec Mustafa Abdel-Wadood pleads guilty to racketeering, fraud charges: Former Abraaj managing partner Mustafa Abdel-Wadood has pleaded guilty to racketeering and securities-fraud charges at a court in New York, Reuters reports. Abdel-Wadood admitted to lying to investors at the behest of Abraaj founder Arif Naqvi, and agreed to cooperate with US authorities. “When things turned bad in 2014, I should have walked away,” the Wall Street Journal quotes Abdel-Wadood as saying in a prepared court statement. “I considered it but didn’t. My commitment to Abraaj compromise the integrity of my judgment, and I ended up drifting from who I really am.”

Both Abdel-Wadood and Naqvi were arrested in April and released on bail the following month. The US is attempting to extradite Naqvi from London, who is currently under effective house arrest after paying USD 19 mn conditional bail. The US attorney’s office for the southern district of New York stepped up the probe into Abraaj two weeks ago, announcing that three more executives would face fraud charges. Abraaj was the largest emerging-markets private equity firm in the world before it collapsed last year amid concerns that funds were being misused.

STARTUP WATCH- WideBot raises six-figure pre-series A funding: Egyptian chatbot building platform WideBot raised a six-figure sum in its pre-series A round, CEO Mohamed Nabil told Menabytes, without disclosing further details. The funding was led by Business Valley, a “regional angel group network.” According to Nabil, the funding will be directed towards developing the platform and to launch WideBot.AI, “which will give data scientists and developers access to WideBot’s AI engine to build their own Arabic [natural language processing] models.”

EFG Hermes topped the EGX’s brokerage league table for June with a market share of 24.7%, according to figures released by the EGX (pdf). CI Capital came in second with a 10.3% market share, followed by Beltone Financial (4.8%), Sigma Securities (4.5%), Arqaam Securities (4.3%), and Pioneers Securities (4.1%).

CABINET WATCH- The Madbouly Cabinet has greenlit proposed legislation that would introduce a series of reforms aimed at simplifying the tax payment process, according to a statement. The legislation would introduce a unified system for filing income tax, stamp duty and VAT, and pave the way for a new electronic billing and tax payment platform that would help the ministry monitor our tax accounts. The legislation, the details of which have yet to be revealed, will now be referred to the House of Representatives for review and approval.

DISPUTE WATCH- Amer Group, Porto Group begin procedures to receive USD 39.9 mn compensation: Amer Group and Porto Group have hired Zulficar & Partners law firm to begin procedures to collect the USD 39.9 mn compensation from Antaradous for Touristic Development in Syria granted to them in an arbitration ruling in February, both companies said in bourse filings (here (pdf) and here (pdf)). The claims were brought to commercial arbitration by the Syria-based company in 2014 following a dispute over its partnership with Amer to develop the Porto Tartous tourist resort. Antaradous then brought the dispute to litigation at the Cairo Regional Center for International Commercial Arbitration in February, only to see the arbitrator rule in Amer’s favor.

MOVES- El Sisi appoints new financial advisor: President Abdel Fattah El Sisi has appointed Mohamed Ibrahim Abdel Naby Nasr as his financial advisor, MENA reported.

MOVES- NBK Egypt gets new managing director: The CBE has approved the appointment of Yasser El Tayeb (LinkedIn) as managing director of NBK Egypt, according to the local press.

Coffee with Nestlé North East Africa Chairman and CEO Moataz El Hout: For over 100 years, Nestlé has been present in Egypt, giving it a unique insight among foreign companies operating here on the Egyptian economy and consumer. Some of its goods and products are household brand names, including Maggi, Pure Life, and Nescafé. Through the good and bad times, the company has held on to its presence as a leader in the market and continues to expand upon it. In January, the company inaugurated its EGP 250 mn 6 October factory for its coffee brand Bonjorno, and has pledged EGP 1 bn in investments over the coming five years. Nestlé’s Egypt operations are led by Moataz El Hout, who recently sat down with us for the latest instalment in our Coffee With… series.

Who is Moataz El Hout? As someone who has been with Nestlé for 24 years, you would be hard pressed to find someone who knows the ins and outs of the Swiss multinational and its presence here more than El Hout. His long career with the company includes heading up its ice cream business in Egypt and Malaysia, before going on to become country manager in Ghana. He became chairman and CEO of Nestlé North East Africa in January 2018, where he has been overseeing the company’s ambitious growth plans as volumes in the fast moving consumer goods sector head towards recovery.

Key takeaways from our conversation:

• Most of the EGP 1 bn in new investments pledged over the next five years will go towards building up capacity;
• Nestlé Egypt will see volumes across all product lines going back to pre-2016 levels by the end of the year;
• Production and logistics efficiencies have made Egypt a key node in Nestlé’s global supply chain;
• Coffee is Nestlé’s biggest product category in Egypt;
• As a multinational, capex spending was not really impacted by the high interest rate environment;
• On the macro level, Egypt’s economic reforms have been conducive to growth, but issues with red tape remain.

Enterprise: You had said that Nestlé is planning to invest around EGP 1 bn in Egypt over the next five years. Is that still the number and can you elaborate on those investments?

Moataz El Hout: Yes, I can confirm the figure. Nestlé has been in Egypt for a long time — over a hundred years — through the good and bad times. The company has considered the country one of its growing markets and currently, Egypt is a strong contributor to growth in the Europe Middle East and North Africa (EMENA) region. We see openings here for us that we plan to capture by investing on our capacities (people, warehouses, facilities, etc.). We have an ambitious growth plan that will need to be supported by the right investments.

E: How are these investments spaced out and are they going towards operational expenses or capital investments?

MH: We’ve spaced out that EGP 1 bn over five years to give us maneuverability in deploying the investments where and when they are needed. Depending on market conditions, we will need to prioritize certain categories of products. In our work it is tough to look far ahead and pin down which category would need investing, so it would be tough to set a timetable to deploy it.

Some of these investments will also go towards developing new products. But the majority will go towards capacity increases and raising our utilization rates for certain product categories. We also push for these capacity increases to go towards exports. This year, for example, we began exporting Cerelac to Morocco and Tunisia. Why did Nestlé assign those markets to us? Because here in Egypt, we have a factory that is world class and is one of the top two factories in our zone. This is our 6 October factory which produces goods in multiple product categories. It’s where we also produce Nescafé and Nido.

E: What was your strategy for growth in 2019 and what will it be in 2020?

MH: 2019 was about volumes. Volumes for fast-moving consumer goods took a big hit with the EGP float in 2016, and it was hard for those companies to grow their volumes in 2017, because of the price increases. The target for most of those companies was to go back to the volume levels we had before the devaluation. We at Nestlé Egypt are on track to do that this year. We’ve already gotten volumes for some product categories up to pre-float days prior to this year, but in 2019 we are on track to get volumes across the board back to 2016 levels.

How did we achieve this? We expanded the distribution of what we at Nestlé call our popular positioned product (PPP) range. These are mainstream products that are marketed to all income levels. Take the Maggi cubes for example. We sell three of those cubes for EGP 1 and we’re making good money on it. Part of our strategy this year was maintaining our prices on certain product categories and not pass those on to the consumer, who took a huge hit with inflation. We have managed to maintain our pricing even in the face of rising fuel and electricity prices, because these were expected and predictable. These were not surprising, and on the contrary, have been helpful as we could strategize and adapt through cost-saving measures and improving efficiency. This strategy is now being helped with the appreciation of the EGP.

Concurrently, we have also been focused on launching new products across various categories, such as Nescafé Milky, Bonjorno Talkima, etc.

You can catch the full interview here.

Decision to reinstate Amr Warda on Egypt’s national football team tops this morning’s coverage: Amr Warda has been recalled to Egypt’s Afcon squad just two days after being dismissed by the Egyptian Football Association (EFA) after accusations of [redacted] harassment. Warda released a video on Facebook, apologizing to family, friends and teammates (but notably not to any of his female accusers). Both the EFA and teammate Mohamed Salah, who defended Warda in a tweet, have come under fire for being harassment “apologists” (BBC | Reuters | The Associated Press | AFP | The Guardian).

Family members of four high-profile Ikhwani detainees say they fear for the health of their parents, following the death of former president Mohamed Morsi last week, Reuters reports. This comes just as Al-Qaida is the latest to crawl out of the woodwork to accuse the authorities of killing Morsi, in a statement released through their media arm, the AP reports.

The web was flooded with Ancient Egypt news this weekend. Linens belonging to ancient Egyptian mummies were seized by US border officialsbetween Michigan and Ontario, Canada, the AP reported. Meanwhile, Parker Richards warns in the Atlantic that the fate of an ancient Egyptian city should serve as a warning, as the threat of rising sea levels increases. National Geographic tells the story of Thutmose III, and asks whether he was ancient Egypt’s greatest military leader.

President Abdel Fattah El Sisi’s national address yesterday to commemorate 30 June topped the front page of Al Akhbar, one of the three government-owned dailies. Both Al Ahram and Al Gomhuria’s websites were still down at dispatch time. You can read a transcript of El Sisi’s speech in Arabic here or watch it here (runtime: 6:40).

President Abdel Fattah El Sisi had a busy weekend at the G20 summit in Osaka, where he met with heads of states and top multinational organizations and companies. The meetings kicked off with talks with Japanese Prime Minister Shinzo Abe, with a focus on education, culture, technology, energy, and transport cooperation, according to an Ittihadiya statement.

Putin meeting sees no decision on restoring flights: El Sisi also met with Russian President Vladimir Putin to discuss efforts to resume Russian flights to Egypt’s resorts, the Dabaa nuclear power plant, cooperation on Africa, and the Russian Industrial Zone, according to a statement. The two also discussed preparations for a joint summit slated for October.

The ongoing investigation into the death of PhD student Giulio Regeni was the pivotal point of discussion between El Sisi and. El Sisi reaffirmed Egypt’s commitment to uncovering the truth as well as support for the unprecedented cooperation with the Italian side on the case. The two sides also discussed the situation in Libya and cooperation in development and economic sectors.

Other leaders El Sisi met with at the summit:

• Saudi Crown Prince Mohamed bin Salman to discuss the situation in Syria;
• German Chancellor Angela Merkel to talk Egypt’s economic reform program, counterterrorism efforts, curbing illegal immigration, and Libya;
• Italian Prime Minister Giuseppe Conte, with whom the ongoing investigation into the death of Giulio Regeni took precedence;
• UN Secretary-General Antonio Guterres to discussUN efforts for international peace;
• Argentine President Mauricio Macri for trade talks on potentially through using Egypt as an entry point for Argentinian goods into Arab and African markets.

On the business front: El Sisi pitched Egypt as a potential “gateway for Japanese products into Africa” in a separate meeting with Toyota Group’s trading arm Toyota Tsusho President Ichiro Kashitani, who gave El Sisi a rundown of projects his company would be interested in.

The president also participated in the Chinese-African mini summit alongside the leaders of China, South Africa, and Senegal and the UN chief, according to an Ittihadiya statement. The mini summit focused on development-oriented cooperation between China and Africa in light of the former’s Belt and Road initiative and Egypt’s Suez Canal Economic Zone.

Egypt has paid Dana Gas USD 38 mn in overdue arrears in June, the company said yesterday. The Emirati company’s total revenues from its month’s operations in Egypt reached USD 48 mn as it has also made USD 10 mn from selling natural gas condensate. Dana Gas received a total of USD 78 mn in payments from the government during 1H2019, reducing its outstanding receivables to USD 125 mn, the lowest level since 2011. Egypt has pledged to fully repay amounts owed to international oil companies by the end of 2019.

A delegation from the Saudi Food and Drug Authority will be in Cairo from 30 June to 11 July to visit 43 Egyptian food producers, Al Mal reports. The visit comes in preparation to expand the number of Egyptian companies allowed to export goods to the Saudi market. Saudi Arabia lifted in April a ban on Egyptian onions it had imposed earlier this year.

Doctors working under the new universal healthcare system in Port Said will receive significantly higher salaries, the Health Ministry said, according to Al Mal. The ministry said doctors will earn between EGP 10-12k a month and specialists will receive EGP 12-16k provided they are contracted for a period between three months and a year. Port Said will be the first governorate where the new universal system will be implemented. Health Minister Hala Zayed has asked the government to increase the budget allocation for the health sector to EGP 100 bn in the coming fiscal year.

A major Albanian tourism company will launch weekly chartered flights to the Red Sea’sSharm El Sheikh and Hurghada from Tirana until September, the Foreign Ministry said in a statement. The first flight is scheduled to depart tomorrow.

Total vehicle sales in Egypt fell 8.5% y-o-y to 60,207 vehicles in 5M2019, compared to 63,948 vehicles in the same period last year, according to figures from the Automotive Information Council (AMIC) cited by Al Mal. Passenger car sales dropped 10% y-o-y to 41,154 units, while bus sales climbed 3.6% y-o-y to 5,690. The dip in sales is a continuation of a trend witnessed in 4M2019. The automotive industry had shown signs of recovery last year following a slump that was exacerbated by the EGP devaluation in 2016.

Bavaria Auto signed last week an agreement with Germany’s Ziegler Group to assemble ambulances in Egypt, Ahram Gate reports. The two sides inked the agreement during Prime Minister Moustafa Madbouly’s visit to Germany last week. No further details were provided.

A delegation from the Arab Organization for Industrialization (AOI) and holding companies met with major Chinese electric bus manufacturers in Shanghai last week, Trade Commissioner for Egypt in Shanghai Matar Al Mowafy said, according to Al Mal. Talks between the two sides focused on possible cooperation to assemble electric buses in Egypt at AOI facilities, Al Mowafy said. The Chinese companies agreed to grant Egypt one bus to use as a model during manufacturing.

The General Authority for Freezones and Investments (GAFI) is set to complete six customs-exempt special economic zones (SEZs) in FY2019-2020, GAFI head Mohsen Adel tells Al Masry Al Youm. The plan includes “Egypt’s largest” mixed-use SEZ in Tenth of Ramadan City, which the authority will develop in partnership with the New Urban Communities Authority (NUCA). Other zones in the pipeline include another mixed-use SEZ in Aswan, the Minya textiles SEZ, a zone in Giza’s El Herafyeen dedicated to making electronics, and another one in Kafr El Sheikh specialized in petrochemicals and plastic.

President Abdel Fattah El Sisi ratified the FY2019-2020 state budget, according to the Official Gazette. The House of Representatives had passed the budget last week.

The Culture Ministry reopened the Garden City Cinema in Heliopolis last Thursday after a three-year hiatus, Asharq Alawsat reports. Established in 1989, the palace was renovated as part of plans to restore historical sites in the capital. Exhibitions and workshops are planned to take place at the site.

Fayoum’s El Lahun pyramid of pharaoh Senusret II opens to the public: Antiquities Minister Khaled El Anany opened to the public on Friday the “El Lahun” pyramid of pharaoh Senusret II, the ministry said in a statement. This is the first time the 4000-year-old monument becomes accessible to the public since its discovery by British archaeologist William Petrie in 1889. Its opening came following extensive preservation work, ministry officials said. ABC News picked up an earlier announcement on the opening.