CBE expected to cut rates when it meets later today.

Today’s the day, ladies and gents: The Central Bank of Egypt’s Monetary Policy Committee meets later today to decide on interest rates. Consensus among economists polled by Enterprise and Reuters is that the central bank will cut rates, with most anticipating a 100 bps cut. And 10 out of 12 economists surveyed by Bloomberg yesterday also wagered that it will resume easing. We have more insights and analysis on where the CBE’s monetary policy is heading over the coming months in this morning’s Speed Round, below.

Is Powell going to tell markets what they want to hear this weekend? As central bankers gather in Jackson Hole tomorrow, markets will be waiting with bated breath for Fed chairman Jay Powell to signal the bank’s next move on interest rates. But disagreement among Fed officials revealed yesterday means that he is unlikely to offer anything concrete, analysts tell the Associated Press. Minutes released yesterday showed that Fed officials were sharply divided about last month’s 25 bps cut, with “several” wanting to keep rates on hold and “a couple” preferring a deeper 50 bps cut. “I am expecting he will cautiously hint at another quarter point cut, but he doesn’t have everyone on board,” Diane Swonk, chief economist at Grant Thornton said. The yield curve between US 2-year and 10-year bonds briefly inverted again after the minutes were released.

A lack of ammo is also a problem: Give how low interest rates are already, Powell may not want to signal further rate cuts for fear of diluting the few policy tools he has at his disposal. “It would be dangerous for him to signal more rate cuts are coming, given the fact he has precious little ammunition left,” Sung Won Sohn, economist at Loyola Marymount University, said.

Signalling multiple rate cuts is probably off the cards: Mark Zandi, chief economist at Moody’s Analytics, said that hinting at multiple cuts would stoke fears of a recession further, and undermine business and consumer confidence. “I think he will want to err on the side of arguing that more rate cuts seem likely, just because the economy is slowing, and he doesn’t want to tip the economy over into a recession,” he said.

US stocks continued to rebound yesterday, after retailers Target and Lowe’s posted strong quarterly earnings, the FT says. The S&P 500 finished up 0.8%, and both the Dow Jones and Nasdaq closed 0.9% in the green.

And EM currencies rose as the USD weakened ahead of Powell’s speech, Reuters reports. The ZAR, KRW and RUB all saw gains against the USD as hopes for renewed stimulus grew. “A lot depends on the Fed’s stance, whether an indication of interest rate cuts is down to global growth expectations being lowered or larger systematic risks,” said Roubesh Adaya, senior investment specialist, fixed income at Aberdeen Standard Investments. “Or if the Fed does nothing as well, that can be taken as an indication that things are not as bad as expected.”

Analysts say that EMs could benefit from movements in US markets, the Wall Street Journal reports. Gustavo Medeiros, portfolio manager at Ashmore, said in a note Tuesday that falling yields in the US will encourage inflows into EM fixed-income assets, especially bonds denominated in USD. Morgan Stanley, meanwhile, predicted that the USD will peak later this year, which will “disproportionately benefit international equities, led by EM equities.”

Exhibit A: International financial group Mirabaud has hedged 50% of its equity exposure in emerging markets and Europe, having made recommendations to clients to do so in both February and May, chief economist Gero Jung told Dow Jones Newswires, according to a piece in the WSJ.

Germany sold its first-ever negative yield 30-year bonds yesterday “in another sign of how investors’ desperation for safe assets is inflating their value,” the Wall Street Journal reports. The zero-coupon bonds attracted investors enough that they purchased the notes for more than face value, making the total yield on the bonds negative.

Bulgaria’s Kristalina Georgieva is now a step closer to becoming the new IMF boss after the international lender agreed to scrap a rule preventing people aged 65 years or older from becoming the managing director, the Financial Times notes. Georgieva, who currently serves as the World Bank chief executive, was nominated for the position by the EU in a vote earlier this month. The IMF will vote on the final list of candidates on 4 October.

New “moderate Islamist” Tunisian president on the way? Some say Abdelfattah Mourou, a member of Tunisia’s Ennahda party who is running in next month’s presidential elections, could break the mold by being a leader who stands for political Islam while holding relatively progressive values, Reuters reports.

It was another quiet night on the airwaves yesterday, with no single story capturing the attention of the talking heads.

Gov’t prepares for move to NAC: President Abdel Fattah El Sisi met with officials yesterday to discuss plans to move government offices to the new administrative capital (NAC), Al Hayah Al Youm’s Khaled Abu Bakr said (watch, runtime: 05:24).

The gov’t has collected EGP 100 bn in resolved tax disputes, Abu Bakr also noted (watch, runtime: 08:52). The government had established special committees to resolve tax disputes and increase state revenues.

Zohr is smashing production targets: Natural gas production at Zohr field has reached 2.7 bcf/d, a level initially expected to be met in four months, Yahduth Fi Misr’s Sherif Amer said (watch, runtime: 00:42). We have more on this in this morning’s Speed Round, below.

A new GERD plan: A meeting led by Prime Minister Moustafa Madbouly yesterday discussed a government proposal to resolve the long-running Renaissance Dam issue. Affected countries are planned to meet in the coming month to discuss the proposal in length, Amer noted (watch, runtime: 02:32).

There’s a growing consensus for a rate cut today: The Central Bank of Egypt (CBE) will cut its benchmark overnight deposit rate by “at least” 100 basis points when it meets later today as easing inflation and a stable EGP offset concerns of a sell-off, according to 10 of 12 analysts polled yesterday by Bloomberg. The other two anticipated the CBE will hold. Three-quarters of economists we surveyed this week also see the central bank easing (with most anticipating a 100 bps cut). Ten out of 13 economists polled by Reuters this week expect a cut, with seven forecasting a 100 bps cut, three expecting a deeper 150 bps cut, and three forecasting a hold. The MPC last cut interest rates in February, when the overnight deposit and lending rates were reduced by 100 bps to 15.75% and 16.75%, respectively.

Joining the chorus is Naeem Holdings, which earlier this week had expected the CBE to keep rates on hold. “We observe that prices of some essential food items (in particular, vegetables) continue to decline in August, which should give the CBE comfortable room to cut rates,” Allen Sandeep told Enterprise. Sandeep now believes the CBE could cut rates by as much as 200 bps.

The carry trade shouldn’t be an issue: Egypt would remain one of the most attractive carry trades in the world, even after a rate cut, EFG Hermes’ Mohamed Abu Basha, pointed out. Interest rates would still be some of the highest in emerging markets, providing “a margin to cut the interest rate without halting or affecting the competitiveness of the carry trade,” he said.

The country’s reform story is solid enough to point the CBE in the direction of a rate cut, says Doug Bitcon, fund manager at the regionally-focused Rasmala Investment Bank, in a separate Bloomberg interview (watch, runtime: 4:15). The budget deficit declining to 8.2% of GDP, the current account deficit narrowing to nearly 1%, and the economy growing at a near-5% clip are a few examples of the positive indicators. Bitcon, too, says that the risk of a currency sell-off is low, and that Egypt will remain the region’s most attractive carry trade following a rate cut. Foreign holdings in Egyptian treasury bonds have risen significantly so far this year, coming in at around USD 19.2 bn as of mid-June compared to USD 13.1 bn in January.

Could Egypt’s central bank cut rates by up to 550 bps until next year as some expect? This would depend on the evolution of inflation over the next few months and how the recent subsidy cuts will impact prices, Bitcon said.

EXCLUSIVE- Global slowdown could hit economic growth -sources: The Finance Ministry could revise down its growth projections to 6% from 6.5% due to the global economic slowdown, two government sources told us. The budget factored in average global growth at 3.3%, but this looks increasingly unlikely as global conditions continue to deteriorate. “We might not achieve our targeted growth rate,” the sources said, adding that it is unlikely to drop below 6% due to improvements in the industrial and tourism sectors.

Gov’t spending set to fall on lower oil prices, global easing: The Finance Ministry may revise downwards its spending forecasts for oil subsidies and debt service payments amid the continued slump in oil prices and global monetary easing, two government sources told us. The ministry could announce the new projections in September, after economic data for 1QFY2019-2020 is released.

Savings expected from lower interest payments…: Pressure on the world’s central banks to cut rates and counter the slowdown in global growth could lead to a smaller interest bill on bonds listed on foreign stock exchanges, the sources said. Debt service payments, which are expected to amount to EGP 569 bn this fiscal year, eat up some 36% of the state’s budget. Any reduction in interest rates, therefore, would lead to a lower budget deficit and debt-to-GDP ratio. The ministry announced in a statement last week new plans to reduce debt-to-GDP to pre-2011 levels of 77.5% by the end of FY2021-2022, lower than the 80% target announced in March.

…And a fall in the oil subsidy bill: The approved FY2019-2020 state budget (pdf) uses a benchmark crude price of USD 68/bbl. Crude oil futures, however, have been trading at below USD 57/bbl for the good part of the fiscal year. Bloomberg analysis conducted last year suggests that EGP 3-4 bn (USD 222 mn) is added to annual spending for every USD 1 increase above the benchmark price.

But tax revenues may fall short of expectations: Customs tax will likely fall this year on lower imports, while global headwinds may impact corporate profits.

Zohr production is four months ahead of schedule: Production from the Zohr natural gas field has reached the 2.7 bcf/d mark four months ahead of schedule, Oil Minister Tarek El Molla said in a statement (pdf). This is significantly higher than the figures provided by Rosneft, which last week said production was currently averaging 2.4 bcf/d. The oil ministry’s figures mean that output has increased by 600 mcf/d since February, when the production stood at 2.1 bcf/d. Twelve wells in the field are now producing gas, the statement said. Field operator Eni originally estimated that production would peak at 2.7 bcf/d, but the ministry later said that output would rise above that to 3 bcf/d. Reuters also picked up the story.

M&A WATCH- No agreement on Prime-Pharos acquisition: Prime Holding’s bid to acquire Pharos’ securities brokerage and investment banking arms has come to an end after acquisition talks collapsed yesterday. Both Prime Holding and Pharos released statements announcing that they had failed to reach a final agreement. Prime Holding said earlier this week that it completed the due diligence process ahead of the planned acquisition. Prime Holding made a bid in June to acquire 100% of Pharos’ brokerage and investment banking arms.

LEGISLATION WATCH- Customs Authority considers new Customs Act amendments: The Customs Authority has proposed expanding draft Customs Act amendments that would regulate customs clearance agents, Al Mal reports. The new clauses would require that agents are Egyptian passport holders aged over 21 who have an undergraduate degree and have completed military service. Agents would also be required to pass a “professional eligibility” exam, and have a clean criminal record. The proposed amendments — which would expedite customs clearance, create a “whitelist” of trusted importers, and broaden the authority’s discretion — made it to the House of Representatives at the end of the last legislative cycle which wrapped up in July. The House is set to vote on the amendments in it returns from summer recess in October.

EARNINGS WATCH- Porto Group’s 1H2019 profits jumped 50% y-o-y to EGP 80.1 mn, compared to EGP 53.1 mn a year earlier, the company said in a bourse filing (pdf).

MOVES- Bank Audi Egypt has nominated Deputy Managing Director Mohamed Bedeir to become the new managing director, a decision approved by the CBE earlier this week, Al Mal reported. Bedeir has almost 28 years of experience in the field.

MOVES- Three Trade Ministry officials resign: The Trade Ministry saw three officials resign over the past few days, Al Masry Al Youm reported. Head of the Export Development Authority Khaled Youssef’s resignation was reported yesterday, but AMAY reports that Hossam Farid, an advisor on export council affairs, Hossam Abdel Aziz, an engineering advisor, have also handed in their notices. No reason has yet been given for the resignations.

Monetary easing won’t solve the world’s trade problems -IMF: The global trend towards monetary easing risks harming trading partners and aggravating existing trade tensions, the IMF has said. Senior IMF economists Gita Gopinath, Gustavo Adler, and Luis Cubeddu write that, although easing can increase domestic demand for foreign goods, it also weakens the exchange rate, producing the opposite effect of lowering demand for imports. This is what is known as ‘expenditure switching.’

Beggar-thy-neighbour: Expenditure switching is described by the IMF as a “beggar-thy-neighbour” policy: a term that refers to economic policies that are introduced to benefit a country’s economy but that simultaneously harm its trading partners. Currency weakening leads to a decline in exports, inflicting economic harm on the countries it trades with.

An ineffective trade policy: What’s more, currency weakening in this way is unlikely to make meaningful improvements to a country’s trade balance. “One should not put too much stock in the view that easing monetary policy can weaken a country’s currency enough to bring a lasting improvement in its trade balance,” they write. “Monetary policy alone is unlikely to induce the large and persistent devaluations that are needed to bring that result.”

This morning in the foreign press: Egypt will be faced with multiple economic and environment challenges — some obvious, others unexpected — if global temperatures continue to rise, Afshin Molavi, senior fellow at the Foreign Policy Institute at Johns Hopkins University, writes in Arab News. Egyptian farmers are already facing the triple threats of declining rainfall, higher temperatures and increasing concentrations of saltwater, all of which are hurting agricultural production. But melting glaciers in the Arctic will also undermine the Suez Canal’s role as a strategic shipping route: ships in Asia heading west may soon be able to shorten their travel time by using new Arctic shipping lanes, instead of the Suez Canal. Meanwhile, tensions with Sudan and Ethiopia are likely to rise as Nile water becomes more scarce and populations increase.

Water-efficient agriculture in Egypt: The government’s “100k greenhouse project” is part of a water conservation strategy that is essential in the face of existing and anticipated shortages, Jean Marie Takouleu writes in Afrik21. The 1,300 greenhouses are expected to produce 184k tonnes of fruit and vegetables per year, using water efficiently and protecting the crops from insects.

Other stories in the international press:

• Calls to release US PhD student barred from leaving Egypt: The Middle East Studies Association’s Committee on Academic Freedom has urged the lifting of travel restrictions imposed on a University of Washington PhD student, arrested in May 2018 while conducting academic research on the Egyptian judiciary, Inside Higher Ed reports.
• Judicial reforms: Constitutional changes granting the power to appoint judges to the presidency is attracting criticism, AFP reports.
• The E.coli outbreak in Hurghada is back in the news in the British press: The Sun and the Scotsman are reminding readers of a health warning issued by the UK government in July about the spread of E.coli in the Red Sea resort town.
• A burgeoning tourist interest in long-distance Red Sea mountain trails presents a chance toconnect to ancient Egyptian traditions and civilizations, Trade Arabia reports.

Why isn’t Egypt’s economic growth translating into lower poverty rates? Despite growth spiking over the past several years and Egypt remaining one of the Middle East’s fastest-growing economies, the country’s poverty rate has also risen. Although it might be easy to blame the IMF-backed austerity program for this trend, the two indicators that offer real explanations are which sectors are driving this growth and how the growth is then redistributed by the state, Amr Adly writes for Bloomberg.

Growth is fueled mostly by sectors with low job creation, including oil and gas, and telecoms, while other sectors such as construction and tourism generally create low-skill and low-paying jobs. Meanwhile, there has been little growth in high value-added industries that require greater skill levels and more sophisticated technology. Developing these industries requires far greater investment into education and research and development, as well as infrastructure capable of facilitating innovation. “None of this has been prioritized by Egyptian governments,” Adly writes.

And when growth lags, it’s usually the poorer chunk of the population who bear the brunt of austerity measures, Adly says. Improving macroeconomic indicators are indeed signs that the country is heading in the right direction. But they also fail to account for changes in the country’s social and political changes; they are “too abstract, too economistic” to gauge the experiences of people living and working in the real economy, he says.

The National Renewable Energy Authority is planning to tender solar power plants with a combined capacity of 200 MW in the Benban solar facility in Aswan, Electricity Ministry officials told Al Mal. The projects will require around EGP 3 bn of investments.

The New Administrative Capital Company for Urban Development (NACCUD) is preparing to offer land plots for developers to build up to 50-storey high-rises by the end of the year, government officials told the local press. The company has yet to decide on the number of plots it will sell.

Property developer Scope Real Estate is planning a residential project in the new administrative capital in partnership with an unnamed Saudi developer in 2020, Chairman Mohamed Ghobashy told Al Mal. Ghobashy did not provide further details on the expected investment value of the project.

Ride-hailing app Careem has launched operations in Marsa Matrouh and Qena as part of an expansion plan to bring its services to governorates across Egypt, according to a statement seen by Masrawy. The move to Matrouh is meant to coincide with the summer season to take advantage of the large number of holidaymakers in the city. The decision to expand to Qena, meanwhile, was prompted by the city’s large population of 3 mn. The company is currently studying launching in the new cities being built by the New Urban Communities Authority.

Harris Pye Engineering Group UAE has inked an agreement to supply five multi-tubular smoke tube boilers to the Canal Sugar project in Minya, MEP Middle East reports. The project is expected to be one of the largest beet sugar production facilities in the world, closing Egypt’s sugar production gap by 75%, providing supplies worth USD 650 mn, and boosting exports by USD 120 mn annually. It is expected to come online by early 2021.

Egypt last month arrested the son of Palestinian president Mahmoud Abbas’ advisor, Nabil Shaath, the politician’s family said in a statement picked up by the Associated Press. The statement says that 48-year-old Rami Saath was questioned by prosecutors yesterday after having been arrested on 5 July on allegations of having ties with the Ikhwan. Shaath helped establish the Egypt branch of BDS, an anti-Israel boycott movement.

Egyptian and Chinese naval forces carried out joint military drills off the Mediterranean Coast, according to an Armed Forces statement. The exercises focused on counter-terrorism and anti-piracy activities.

J-Lo puts Egyptian designer Nagwa Zahran on the map: Her visit to Egypt may not have been without its controversy, but Jennifer Lopez’s appearance in a burgundy sequined number at her concert in New Alamein earlier this month is reportedly sending a lot of attention the way of local designer Nagwa Zahran. According to Grazia Middle East, Zahran was previously well known in the region, but not beyond…until J-Lo’s performance.