Will a floating customs rate raise inflation?

It’s PMI day: The purchasing managers’ index for Egypt, the UAE and Saudi Arabia will be released this morning at 06:15 CLT. Non-oil business activity grew in July after two months of contraction, buoyed by a slight growth in output and new orders.

Other key data points to keep your eye on in the coming days:

• Foreign reserves: The Central Bank of Egypt is due to release Egypt’s net foreign reserves figures for August this week. Reserves rose slightly to USD 44.91 bn in July.
• Inflation: Monthly inflation figures for August at due out next week. Inflation fell unexpectedly to a four-year low of 8.7% in July.

We’re about to start the fall conference season, with a number of international conferences taking place in the capital:

• The Japan Arab Economic Forum is coming to Cairo on 9 September at the Nile Ritz Carlton.
• The Euromoney Egypt Conference gets underway on 9 September.
• The Sahara agricultural expo starts on 9 September at the Egypt International Exhibition Center.
• The E-Commerce Summit will take place at the Nile Ritz Carlton on 17 September.
• The Egyptian Private Equity Association will hold its venture capital event on 18 September.

Over in the UK: EFG Hermes will hold its annual conference in London on 9-12 September.

Nigeria has its own version of Egyptian trucking app Trella, and it’s streamlining the freight logistics industry: Startup Kobo360 is an app that connects cargo and truck owners to drivers and customers, increasing efficiency in a market that loses an estimated USD 19 bn annually from problems like traffic jams and a lack of available vehicles, along with illegal charges and insecurity. The company, which operates in Nigeria, Kenya, Togo, and Ghana, has moved USD 2.1 bn-worth of goods since 2017, and recently raised USD 20 mn in a Goldman Sachs-led funding round and USD 10 mn from Nigerian banks, which it plans to use for expansion in another 10 countries, Bloomberg reports.

EM mutual funds prove resilient amid low survival rates in developed countries: Emerging market mutual funds have experienced a lower death rate than funds in advanced economies over the past decade, the Financial Times reports. More than 70% of USD EM funds trading at the start of 2009 were still open in 2019 in comparison to less than half of UK and European funds. This trend is mainly due to the fact that fund managers of EM mutuals have more chances to pick the best performing companies, the FT said.

EM currencies to fall 2% against the USD this month -Morgan Stanley: EM currencies could continue to sell off against the USD this month as US-China trade tensions continue to spook investors, according to Bloomberg. Writing in a note yesterday, Morgan Stanley strategists forecast EM currencies to fall 2% against the USD during the month, suggesting that September may be just as tumultuous as August. “For EM prospects to improve, we would need to see the Fed turning more proactively dovish and/or trade tensions abating,” they wrote. “Neither of these outcomes seem likely for now.”

Saudi Arabia appoints former royal court advisor as new Aramco chairman: Saudi authorities have placed the head of the country’s sovereign wealth fund Yasir Al-Rumayyan as the new chairman of Saudi Aramco ahead of the oil giant’s imminent initial public offering, reports Bloomberg. Rumayyan — who served as a royal court advisor between 2015 and 2016 — owes much of his growing influence to how Crown Prince Mohammed bin Salman positioned the state’s SWF to drive his economic diversification ambitions. Rumayyan succeeds Khalid Al-Falih, who is also the kingdom’s energy minister. The move is hence meant to distance the ministry from Aramco in order to avoid conflicts of interest that could step over the IPO plans, Bloomberg cited a source familiar with the decision’s rationale as saying.

Worth a read during your commute this morning:

• Another gender gap to be concerned about: Women across generations tend to be less financially literate than men, meaning they tend to have less control over their own finances, according to the Wall Street Journal. Married women tend to leave financial decisions to their husbands, while single women are more prone to negative financial surprises because they don’t quite understand basic financial concepts.
• Take a day off sometime soon, and do it properly: If you, like a handful of us here at Enterprise, feel the need to stay connected and respond to emails on your rare days off work, walk away from your laptop. Embrace a day off for what it really is — time to let your brain (and body) rest, and maybe tick off a few things from your personal to-do list, Tim Herrera writes for the New York Times.

It was a mixed bag of nuts on the airwaves last night, with no particular topic dominating the conversation. Discussions of the new floating customs exchange rate, automotive sales, and a new presidential health initiative all got some airtime.

El Hekaya’s Amr Adib phoned advisor to the finance minister for customs affairs Magdy Abdel Aziz for his two cents about the ministry’s recent decision to float the customs exchange rate. The customs exchange rate was previously fixed at EGP 16 / USD 1 as a measure to ensure access to strategic goods and manufacturing raw materials and reduce the tax burden, and the recent EGP appreciation means that importers will not feel a significant difference, Abdel Aziz told Adib (watch, runtime: 4:26). We have more on this in Speed Round, below.

2020 could see a rebound in car sales, car expert says: Next year could witness an increase in automotive sales in Egypt as consumers’ purchasing power recovers and with the improvement of road networks, deputy head of the automotive division at the Federation of Egyptian Chambers of Commerce Ehab El Mosallamy tells Adib. El Mosallamy also expects car prices to inch up a little in the next period on the back of the floating customs exchange rate (watch, runtime: 5:51).

El Sisi launches initiative to treat infant hearing impairment: Mothers are lining up to conduct hearing tests for newborns as part of a presidential initiative to detect and treat hearing loss in newborns, Hona Al Asema’s Lama Gebril reports (watch, runtime: 1:03).

Floating customs rate could raise inflation -analysts: The decision to float the customs exchange rate could drive inflation up in the coming months if the EGP depreciates sharply against the USD, analysts told Reuters yesterday. Earlier this week, the Finance Ministry reversed a decision to set the customs exchange rate on a monthly basis, a policy introduced in January 2017 amid exchange rate fluctuations. The ministry said it would revert to setting the rate on a daily basis according to the average FX rate set by the Central Bank of Egypt. The rate for non-essential imports was previously set at EGP 16.62 / USD 1 for August, while the discounted customs exchange rate was held for several months at EGP 16.

Traders could get greedy and hike prices: Esraa Ahmed, a senior economist at Shuaa Securities, warned that traders could take advantage of the floating rate to raise prices. “The main concern is any big increase in the foreign exchange rates. In that case, inflation rates will soar,” she told Reuters. EFG Hermes’ Mohamed Abu Basha agreed that the decision "may have a slight impact” on inflation.

The decision shows the government is confident the EGP will hold its ground in the near future, Radwa El-Swaify, head of research at Pharos Securities Brokerage, told the newswire. The EGP has gained 7.5% against the USD since the beginning of the year, selling at 16.60 to the USD on Monday compared to 17.97 in January. Inflation dropped to its lowest recording in four years in July, prompting the central bank to cut its key interest rates by 150 bps in its last meeting.

Market players seem to be taking the decision as a return to the norm that is unlikely to lead to major price hikes. Should the move affect commodity prices, it would do so within a narrow window of no more than 3% on imported goods,Federation of Egyptian Chambers of Commerce general importers’ division member Ahmed Shiha told Ahram Online yesterday. “The decision was a step on the right track for the domestic market and the industry sector,” Shiha added, sharing the view that the fixed customs exchange rate was “an exceptional response” to the needs of the economy after the EGP float.

Fuel subsidy spending falls 30% in FY2018-2019, beating gov’t targets: The government’s fuel subsidies bill fell 30% in FY2018-2019, beating spending targets outlined in the state budget, an Oil Ministry official told Reuters. Fuel subsidy spending last year came in at EGP 85 bn, EGP 4 bn lower than the budget target. In comparison, the government spent EGP 120.8 bn in FY2017-2018. The FY2019-2020 budget anticipates subsidy costs to fall to EGP 52.96 bn in the current fiscal year, after the government raised fuel prices by up to 30% at the beginning of July.

Will the auto manufacturers incentives strategy see the light of day soon? The Madbouly Cabinet’s economic group reviewed yesterday a proposed package of incentives for automotive manufacturers to spur domestic manufacturing and assembly, according to a Cabinet statement. Prime Minister Moustafa Madbouly ordered the finance and trade and industry ministries to complete all the necessary studies on the incentives and their implementation by the end of the month, at which time the economic group will discuss the matter again.

What does the strategy entail? The statement did not disclose any details on the proposed strategy, but our sources in government previously told us that the incentives — which would be introduced through amendments to the Customs Act — would provide customs discounts of varying amounts to car manufacturers in return for increasing their use of local components. The customs breaks would be split into three tiers according to the percentage of local content used.

Background: We were told last summer that, after scrapping the original incentive plan (known as the automotive directive), the government was looking at an alternative strategy that could borrow heavily from one adopted by successful regional players including Morocco and South Africa. The strategy involves a policy of supporting full-fledged auto manufacturing customs-exempt zones that would offer a range of as-yet unspecified tax and customs breaks.

Naguib is waiting on Mineral Resources Act exec regs before deciding on gold investments in Egypt: The executive regulations to the newly-ratified Mineral Resources Act will determine whether or not Naguib Sawiris will invest in Egypt’s gold and copper mining industry, he tells Al Arabiya TV (watch, runtime: 3:44). The details of the regulations have the potential to spur or discourage investments depending on how friendly they are to investors, particularly as companies have several other potential gold mining destinations around the world they could opt for if Egypt’s regulations prove to be discouraging, Sawiris says.

Sawiris is specifically keeping his eye on the royalty fees and customs and tax rates that will be laid out in the regulations. Under the new act, companies will have to pay a minimum royalty of 5% of annual production, with the cap set at 20%. The Egyptian Mineral Resources Authority (EMRA) is also reportedly planning to abolish the bidding system for gold exploration licenses next year and allow investors to apply for a license covering a specific area or up to six years.

All praise for the new legislation: Sawiris lauded the new act’s decision to scrap the production sharing agreement system, which he says held back investors in the gold mining sector. He also said that the amendments are a “bold” step from the government to reform the industry, and could put Egypt’s mining industry in a position to be as big a source of income for the country as its oil and gas industry.

REGULATION WATCH- Market regulator paves the way for SME bond sales: SMEs will soon be able to issue short- and medium-term bonds after the Financial Regulatory Authority (FRA) gave the go-ahead to SME credit rating agencies to obtain licenses, the regulator said in a statement (pdf). FRA Chairman Mohamed Omran said the move aims to make it easier for SMEs to finance capital expenditure.

Background: The FRA last year defined the framework and regulations governing short-term debt instruments as part of amendments to the Capital Markets Act’s executive regulations. According to the rules, the issuer must present financial statements going back at least two financial years that have been audited by an FRA-listed auditor. They must also have a credit rating of at least BBB- (or an equivalent) and must appoint a FRA-approved lead manager who should ensure buyers are in good financial standing. Qualified buyers must be solvent and, in the case of individual investors, have at least three years of investing, banking or finance experience.

Ahmed Saadeddin resigns as parliament’s secretary-general: Secretary-General of the House of Representatives Ahmed Saadeddin yesterday resigned from his post citing “very private reasons” in a statement, Ahram Online reports. He said in his statement he intends to return to his former role as a judge with the Council of State (Maglis El Dawla), having served as parliament’s secretary-general for four years. However, well-connected House Rep. Mostafa Bakry said in a tweet that Saadeddin is heading to the UAE, where he will be “on loan” to the Emirati parliament. Saadeddin’s resignation comes one month before the House reconvenes for its last legislative session before parliamentary elections are held at the end of 2020.

IIF tracker confirms EMs might want to wipe August from their memories: Net emerging markets portfolio inflows witnessed their most unfortunate month in August since November 2016, according to the Institute of International Finance’s (IIF) most recent capital flows tracker. Investors pulled out roughly USD 13.8 bn from EM stocks and bonds in August as a consequence of the US-China trade row and jitters over slowing global growth, the IIF estimates.

Equity flows were negative at USD 14.1 bn, but debt saw (slightly) positive flows of USD 0.3 bn. The “negative outcome was uniform across all regions.” This came despite July proving a “relatively” positive month, with net inflows of USD 24.3 bn, according to the tracker.

But Egypt managed to keep its cool: Net inflows, including errors and omissions insurance (E&Os), into Egypt were USD 2.1 bn in July. Inflows recorded USD 7 bn in 1Q2019 and USD 3.8 bn in 2Q2019, and are forecast to reach USD 7.3 bn by the end of 2019.

Overall, August has been a nightmare for EM inflows: We picked up a Bloomberg report earlier this week saying that “August was a month to forget for emerging-market investors.” EM stocks suffered USD 873 bn in losses during the month, and currencies experienced their worst monthly run since 1997. An increasing number of press reports, including one yesterday by Reuters, is placing at least some of the blame on EM central banks moving ahead with the largest number of coordinated rate cuts in a decade. EM central bankers followed the lead of the US Fed, which cut its benchmark rate by 25 bps in July.

Can technology replace human creativity? For years now, the age of automation has taken a foray into fields such as fine arts and journalism, posing the question of whether we’ve reached a point where technology can take over the creative process and if AI and automation threaten to extinguish the last flame of human creativity. Viputheshwar Sitaraman argues in this Ted Talk that we must be careful to correctly implement the potential of machines without overestimating their abilities (watch, runtime: 11:24).

Russian ambassador to Egypt Sergei Kirpichenko died suddenly at a Cairo hospital on Monday, Egypt’s Foreign Ministry said in a statement. The statement extended its condolences to Kirpichenko’s family. No details were given about the cause of death. Kirpichenko, who was 68, had been ambassador to Egypt since 2011 and was also the Russian envoy to the Arab League.

Egypt’s natural gas production has reached 7 bcf/d, up from 6.8 bcf/d at the end of June, an Oil Ministry official told Reuters. Production at Zohr field rose to 2.7 bcf per day last month, ahead of its development plan by around four months.

Qarun Petroleum, a joint venture between Apache and the Egyptian General Petroleum Company, has drilled 10 exploratory wells in the Western Desert, producing a combined 5k bbl/d, the Oil Ministry said in a statement yesterday (pdf). This will account for 16% of the company’s total production. The company is now considering investing USD 237 mn during FY2019-2020 in further development projects.

Egypt’s cotton exports increased 219% in 2Q2019 to 510.2k qintars from 160.1k qintars during the same period last year due to an increase in production, CAPMAS said in a report yesterday. Private companies refused to participate in the first cotton auction held under a new mechanism last month, complaining that the opening price of EGP 2.1k per qintar was too high.

The Federation of Egyptian Industries’ electrical appliances division is working to get Italian companies to partner with local firms to manufacture parts used for feeder industries, Hassan Mabrouk, a board member of the division, told the local press. Local companies are unable to manufacture the components needed for electrical appliances without the involvement of foreign investors because of the high capital and tech know-how requirements, Mabrouk said. He did not clarify why the division is looking at Italian companies in particular.

The Engineering Automotive Manufacturing, a subsidiary of the Holding Company for Maritime & Land Transport, is close to reaching an agreement with China’s Yutong to assemble 100 buses, Chairman of the Metallurgical Industries Company Medhat Nafei told Al Mal.

Ibnsina Pharma has signed an agreement with global pharma company Roche to import and distribute 40 Roche products in Egypt, the company said in an EGX disclosure (pdf). “This strategic partnership will allow Ibnsina Pharma to not only further strengthen its product offering but will give patients across Egypt unprecedented access to the latest pharmaceutical treatments available,” said Ibnsina Chairman Mohsen Mahgoub.

Orascom Development Egypt (ODE) will launch the third phase of its O West project west of Cairo in September, CEO Khaled Bishara said, according to Masrawy. Bishara said the new phase will include high-end apartments.

A number of investors have reached out to the General Authority for Investment’s (GAFI) dispute resolution committee over the issue of recently imposed fees on the use of beaches in South Sinai, Egyptian Tourism Federation head Hossam El Shaer told Al Mal. The issue has been ongoing for the past two years and a number of investors have filed legal cases against the South Sinai governor for requesting retrospect payments of EGP 150 on every square meter of beach space, El Shaer said.

The Communication and Information Technology (CIT) Ministry is targeting USD 4.7 bn in exports (outsourcing) in 2020, compared to USD 3.2 bn per year currently, the Information Technology Industry Development Agency (ITIDA) said in a report picked up by Al Mal. The revised targets are markedly more ambitious than those announced in March, which saw annual exports reach USD by 2021.

CI Capital’s shareholders have approved increasing the company’s issued capital to EGP 800 mn from EGP 544 mn, the company said in a bourse filing (pdf). The company will issue 0.47 bonus shares per each share held.

The Chemicals Industries Holding Company (CIHC) will give the land at the center of the recently settled Al Kholoud dispute to the Oil Ministry to settle part of its debts, CIHC’s Vice Chairman Walid El Rasheed told the local press. The status of the land was settled last week when Al Kholoud agreed to drop its claim to the 29-feddan land plot used by El Nasr for Steam Boilers. The land is valued at EGP 624 mn and the company owes around EGP 3.4 bn to the ministry, El Rasheed said. CIHC plans to repay EGP 2 bn of its debts in the coming months.

The Export Subsidy Fund has so far only ratified one of three mechanisms through which it will disburse export subsidies, head of the Trade Ministry’s trade agreements sector Amany Al Wesal said. The ratified mechanism gives tax breaks to importers. The two other mechanisms of the framework, which involve cash payments to exporters and investments to build up the country’s export capabilities, are still under study. Reports emerged earlier this week that Egypt’s exporters are awaiting clarity on how the government is planning to implement the new export subsidies program, which was announced in July.

A judicial MoU signed between Egypt and Kuwait yesterday will see the two countries work together to arrest and extradite suspected cybercriminals, Prosecutor General Nabil Sadek said yesterday, according to Ahram Online.

The Trade Ministry’s anti-dumping policy unit issued a report defending the ministry’s decision to impose import duties on iron billets, saying it serves the public interest and is beneficial for the domestic steel sector, according to the local press. Steel rebar factories have been in a legal dispute with authorities since the Trade Ministry imposed in April anti-dumping duties of between 15-25% on iron billets imported for further processing. The companies won a court case reversing the ministry’s decision. The ministry then lodged appeals to bring back the duties, but saw the appeals turned down by the lower administrative court. The appeals are scheduled to be heard next Sunday by the Supreme Administrative Court.

The ancient tradition of clay pottery is alive and well in Old Cairo, says the National. Clay pottery is but one of many ancient traditions that carry on in this iconic part of the capital “that pre-dates most of the city that surrounds it.” Many pottery workshops in the area still use clay sourced from Aswan to produce pots of varying prices, sizes, drawings, and craftsmanship.