Inflation unexpectedly cools to 6+ year-low in August

We have good news to start your Wednesday with, and it’s not just that the weekend is within arm’s reach. Egypt’s headline inflation rate in August fell to its lowest in years, defying expectations of a spike on the back of July’s fuel subsidy cuts. We have chapter and verse on the pleasant surprise in this morning’s Speed Round, below.

The penultimate day of EFG Hermes’ annual investor conference in London gets underway today at the Arsenal Emirates Stadium. The event provides a forum for investors, company executives, and fund managers from Egypt and other frontier and emerging markets to network and discuss investment options with London-based investors.

The Sahara agricultural expo also enters its third day today at the Egypt International Exhibition Center. The event wraps up tomorrow.

The latest edition of the National Youth Conference will kick off on Saturday at Al Manara conference center in New Cairo, according to the official Facebook page. The one-day event will feature the usual the “Ask the President” Q&A session.

Other events coming up this month:

• The 2019 E-Commerce Summit will take place on Tuesday, 17 September at the Nile Ritz Carlton.
• The Egyptian Private Equity Association will host their venture capital event (pdf) on Wednesday, 18 September at the Conrad Hotel.
• The Engineering Export Council of Egypt’s Home Appliance and Tableware Show (HATS) will run for three days on 23-25 September at the Kempinski Royal Maxim.
• The Techne Summit will take place in Alexandria on 28-30 September.

US President Donald Trump sacked National Security Adviser John Bolton, who wasn’t particularly supportive of Trump’s approach to “major foreign policy challenges like Iran, North Korea and most recently Afghanistan,” the New York Times says. Trump, naturally, announced the decision on Twitter yesterday, saying that he had “asked John for his resignation,” but says he offered to resign willingly.

Softbank wants to pull WeWork’s IPO: WeWork’s biggest outside shareholder, SoftBank, is opposing the loss-making property group’s IPO after unenthusiastic responses from investors, sources tell the Financial Times. Softbank and its Saudi-backed Vision Fund have invested more than USD 10 bn into WeWork, but their eagerness has dwindled as the company’s valuation was slashed from USD 47 bn to USD 15-20 bn. The venture has even been called “the most ridiculous IPO of 2019.”

Rival New York bourses NYSE and Nasdaq are keeping a close eye: The New York Stock Exchange and Nasdaq are in a “knife fight” for IPOs, and both are watching WeWork’s movements closely to capitalize on a potential listing, the FT says. But if Softbank gets its way and the stake sale falls through, the battle between the two is expected to intensify as they fight to attract the next corporate listing.

It’s Groundhog Day: Aramco IPO to take place “very soon.” Yes, we’ve heard this before — but this time there might be some substance to it. Sources tell the FT that the company is looking to offer a 1% stake on the Tadawul as a means of proving the feasibility of a larger listing on a foreign exchange. Banks believe the IPO could take place before the end of 2019, while Aramco CEO Amin Nasser said it could take place “very soon.” The shift in strategy comes just a week after the ouster of Khalid Al Faleh from the Energy Ministry. The FT reckons it was his cautious approach to the IPO that proved to be his downfall.

Not to be outdone, Kuwait is also keen for its state-owned oil companies to list on the domestic stock market. While nearly half of the country’s GDP came from oil and gas companies last year, they account for less than 1% of Boursa Kuwait’s market cap. But now, spurred by the prospect of an Aramco IPO, Kuwait is one of several GCC countries looking at offering stakes in state-owned enterprises to relieve cash flow pressures.

Uber pushes ahead with more job cuts: Ride-hailing giant Uber is letting go of 435 of its 2.7k employees in its second major staff cut this summer amid losses and a falling stock price, according to Bloomberg. The employees, all of whom are from the product and engineering departments, are being laid off as the stock is trading 25% below its IPO price since Uber went public four months ago, but CEO Dara Khosrowshahi maintains the IPO flop is unrelated.

BlackRock now holds a 15% stake in Centamin: BlackRock, the world’s largest asset manager, has purchased a 15% stake in London-listed gold miner Centamin, according to a Centamin disclosure. The transaction, which closed on Monday, involves 80 different BlackRock entities, including the asset manager’s subsidiaries in Canada, Australia, Japan, Hong Kong, Singapore, and the Netherlands, among a host of others.

Party time for goldbugs as Citi predicts record gold highs: Gold prices may exceed their previous 2011 record to rise to over USD 2k per ounce in the next two years, Citigroup analysts wrote in a recent note picked up by Bloomberg. Risks of a global recession, falling interest rates, and an increase in trade and geopolitical tensions will all drive flows into the safe haven asset.

Fighting climate change isn’t enough — we need to adapt to it: Adaptation to climate change is as essential as attempts to mitigate it, and could significantly benefit economies, experts from the Global Commission on Adaptation say in a new report picked up by the AP. The researchers call for USD 1.8 tn investment in climate change adaptation between 2020 and 2030 in a report released yesterday in advance of this month’s UN climate change summit.

Yesterday’s release of inflation figures was the talk of the town, withAl Hayah Youm’s Khaled Abu Bakr (watch, runtime: 3:03) and Masaa DMC’s Ramy Radwan (watch, runtime: 11:03) among those taking note. We have the details in this morning’s Speed Round, below.

Inflation figures give CBE impetus for a rate cut: Hona Al Asema’s Lama Gebril took note of Bloomberg saying yesterday that August’s inflation figure puts Egypt in a position “primed for emerging world’s deepest rate cuts after Turkey.” The host gave her viewers a primer on the importance of rate cuts to increase liquidity in the economy and the relationship between interest and inflation rates (watch, runtime: 1:26).

Mohamed Salah snagging Liverpool’s Goal of the Month award for August obviously couldn’t go unnoticed, with Gebril happily reporting on the news and saying that Mo’s success is a source of joy for Egypt (watch, runtime: 6:55). Salah’s trademark finesse toward a far-right corner, after bolting past Arsenal’s defense, to put his team 3 up earned him the Red’s goal scorer of the month designation (watch the team’s top 5 goals here).

Headline inflation falls to six-and-a-half year low in August, confounding expectations: Egypt’s annual headline inflation rate fell to 7.5% in August from 8.7% in July, a low not seen January 2013, official data showed yesterday. Figures released by Capmas showed that monthly inflation slowed to 0.7% last month from 1.8% in July, driven in part by a slowdown in fruit and vegetable prices. Central bank data, meanwhile, showed that annual core inflation fell to 4.9% in August from 5.9% in July. On a monthly basis, core prices saw mild deflation, falling to -0.4% compared to 0.1% growth in July. Inflation was widely expected to rise in the summer months after the government raised fuel prices by between 16-30% in July. Bloomberg and Reuters also have the story.

Headline vs. core: Headline inflation accounts for a basket of goods and services in an economy while core inflation removes volatile products such as food and fuel.

A favorable base effect is being touted by analysts to explain the surprising figures: Esraa Ahmed, senior economist at Shuaa Securities, wrote in a note that the drop is “highly attributed” to the favorable base effect, as well as slowing fruit and vegetable price inflation. Jean-Michel Saliba, economist at Bank of America Merrill Lynch, also said the positive figures were due to the base effect. Inflation in August 2018 came in at 14.2%.

Analysts across the board had predicted a rise in inflation following fuel subsidy cuts: Inflation over the past two months has defied analyst expectations, who predicted that the effects of lifting fuel and electricity subsidies would push figures higher into double digits. Beltone’s Alia Mamdouh predicted in July an average inflation rate of 13.8% in the months following the subsidy cuts, while Pharos forecast in May 14% inflation through the summer months.

All of this puts us odds-on for a rate cut this month: Capital Economics is forecasting the central bank to cut rates for the second consecutive month, suggesting in a note yesterday that the Monetary Policy Committee would cut the overnight deposit rate by 50 bps to 13.75% when it meets on 26 September. “August’s inflation, coupled with shift towards looser monetary policy elsewhere, means that the MPC won’t hesitate in lowering interest rates again at this month’s meeting,” it wrote in a note. Radwa El Swaify, head of research at Pharos Securities, told us she expects the MPC to be more aggressive. She forecasts a 100-150 bps rate cut, putting the overnight deposit rate at either 13.25% or 12.75%.

Egypt’s rate cuts in 2019 and 2020 could be the second-deepest in emerging markets after Turkey, Bloomberg also cited BNP Paribas as saying. The CBE last month cut rates by 150 bps, bringing the overnight deposit and lending rates to 14.25% and 15.25% respectively. The main operation and deposit rates were both cut to 14.75%.

Thinking long-term: Pharos sees little chance of inflation rising back into double digits this year, and predicts an average inflation rate of 9.1% for the rest of 2019 and 9.2% for the remainder of the current fiscal year. Capital Economics sees the central bank pushing ahead with an extended easing cycle, bringing interest rates down to 9.75% by the end of 2021.

FinMin sees tax revenues accounting for 14% of GDP, investments contributing bigger portion of GDP growth in FY2019-2020: The Finance Ministry expects Egypt’s tax revenues in FY2019-2020 to comprise 14% of the country’s GDP, with that figure projected to rise to 14.3% and 14.5% in the next two fiscal years, according to a report compiled by PricewaterhouseCoopers (pdf). The ministry’s projections for the current fiscal year’s tax revenues fall below the revenues recorded in FY2017-2018, and would see the revenues remain the same as the last fiscal year, albeit with a higher percentage of non-sovereign taxes.

Other revenue sources: The ministry expects remittances to account for 8.5% of GDP in FY2019-2020, down from 9.0% last fiscal year, while tourism receipts are expected to account for 4.2% this fiscal year, up marginally from 4.1% in FY2018-2019.

Investments, including those from the public and private sectors, should contribute 2.5% of Egypt’s real GDP growth this fiscal year, according to the report. Previous figures show private investment hitting a peak of 1.4% of GDP growth in FY2017-2018. Projections for the current fiscal year do not delineate the ratio of public and private investments. Net exports are projected in the FY2019-2020 state budget to contribute 2.3% of real GDP growth, up from 1.9% last year and 1.7% the previous year.

DISPUTE WATCH- GTH finishes paying USD 136 mn settlement to Tax Authority: The dispute between Global Telecom Holding (GTH) and the Tax Authority finally came to a close yesterday after GTH finished paying its USD 136 mn tax settlement, the authority said in a statement picked up by Mubasher. GTH paid USD 82.3 mn to the authority yesterday to settle the dispute, after making an initial payment of USD 53.7 mn. GTH signed in June the USD 136 mn settlement agreement, ending a long-running dispute that had prevented Veon from acquiring it. The settlement covered tax liabilities accumulated by GTH and its subsidiaries between 2000 and 2018. Veon last month completed a mandatory tender offer, taking GTH private.

Pharos Holdings has a transaction pipeline worth EGP 15 bn, Pharos’ Managing Director and Head of Investment Banking Noha Ghazaly told the local press. The transactions include M&As and financing transactions in the food and beverage, healthcare, chemicals, and building materials sectors, Ghazaly said, without providing further details. Several of the M&A transactions the investment bank is managing include first-time investors.

Consumer and structured-finance player Sarwa Capital is close to concluding two issuances of securitized bonds worth EGP 5 bn, Ayman El Sawy, managing director of Sarwa Promotion & Underwriting, told the local press. The company expects to offer EGP 4 bn in securitized bonds for the New Urban Communities Authority (NUCA) before the end of this month in collaboration with Banque Misr, as well as a EGP 1 bn issuance for real estate developer Palm Hills. The two issuances will bring the company’s securitized-bond portfolio to over EGP 20 bn. Sarwa, the first company granted the green light to issue sukuks, also aims to issue the sharia-compliant bonds in the coming year.

Correction: 12 September 2019

An earlier version of this story had incorrectly said Sarwa Capital is issuing EGP 2 bn of securitized bonds for Palm Hills. The correct figure is EGP 1 bn.

A multi-pronged approach is needed to help Egypt’s auto sector overcome its challenges: The government must combine its plan to provide customs breaks to auto companies with R&D incentives, new licensing regulations, and a comprehensive e-mobility strategy in order to stimulate growth in the lagging auto sector, according to a report (pdf) published by Egyptian public policy consultancy Lynx Strategic Business Advisors. The Madbouly Cabinet’s current version of its incentives strategy aims to increase demand for locally-produced components by reducing customs duties for auto companies to as little as 5.6%, depending on the percentage of local content used.

The incentives strategy doesn’t go far enough: Lynx recommends that the government introduce tax breaks for feeder companies and component manufacturers in order to provide them with the financial resources necessary to move up the value chain. A package of export incentives — such as subsidies, low-interest loans, and tax exemptions — should also be introduced to encourage assemblers and manufacturers to increase business activity overseas.

More needs to be done to stimulate R&D: To generate added value in the sector, the government should introduce measures specifically designed to encourage R&D investment. Patent-linked incentives, tax breaks for innovation and product development, and government financial support for R&D would assist feeder industries and companies aiming to produce original equipment. Lynx also recommends that the government devise a strategy for increasing the use of electric vehicles, and introduce new licensing regulations that would ban vehicles that are more than 30 years old.

It’s not all bad: Egypt has major economic potential since the implementation of the bold economic reform program, Lynx says. The EGP float, fiscal reform and developments in the energy sector have all made positive impacts on Egypt’s economy. On top of this, the government’s existing stimulus plans for the sector, projects like the Suez Canal Economic Zone, and the low operating costs compared to other countries give Egypt a competitive edge.

Egypt will begin receiving natural gas from Israel by the end of 2019, Oil Minister Tarek El Molla said in an interview at the World Energy Congress yesterday, according to Bloomberg. Israel will initially ship some 200 mn scf of gas per day, an amount that will increase to 500 mn scf/d at some point in 2020, he said. The import of Israeli gas comes as part of the landmark USD 15 bn agreement between Alaa Arafa-led Dolphinus Holdings, Delek Drilling, and Noble Energy, which was signed last year.

Multilateralism to blame for delays? El Molla said that the multilateral nature of the gas export arrangement was the main reason for the process taking longer than planned, but insisted that export plans remain on track, according to Reuters. Trial shipments were originally supposed to come in March, with commercial sales beginning by the end of June. Another potential spanner in the works surfaced in May when Thailand’s PPT Energy — a stakeholder in the Egypt-Israel EMG gas pipeline — filed a USD 1 bn lawsuit against Egypt for failing to meet gas deliveries after 2011.

The pieces are slowly moving into place: One of the final export hurdles was removed this week when the operator of the EMG pipeline signed an agreement to use a terminal owned by Israel’s Europe Asia Pipeline Company (EAPC) to export the gas.

Damietta LNG plant will not open this quarter: El Molla said that the Damietta LNG plant will open before the end of 2019, rather than during 3Q as recently claimed by an anonymous industry source. Damietta will begin exporting 500 mcf/d of LNG, before increasing to 700 mcf in 2020.

New oil and gas exploration tender coming in 2020: El Molla also said yesterday that the ministry is planning a new oil and gas exploration tender in the western Mediterranean in 1Q 2020. Another tender covering 8-12 concessions in the Western Desert, Gulf of Suez and the Eastern Desert is expected by the end of 2019.

LEGISLATION WATCH- Cabinet, industry figures review draft law to regulate real estate developers: Prime Minister Moustafa Madbouly, Housing Minister Assem El Gazzar, and representatives from the real estate industry met yesterday to review a draft bill that would regulate developers and the industry, according to a Cabinet statement. No details were provided on the developers’ gripes with the legislation, but Madbouly ordered officials to settle the contentious points in the bill ahead of presenting it to Cabinet for approval.

Background: The House of Representatives had been working since January on the law, which would regulate the real estate industry by clamping down on wildcat developers, create the state-sponsored federation, and set up a fund to hedge against sector-related risks. Developers have since voiced objections to stipulations in the law that would impose fines and prison time on developers who miss delivery deadlines.

STARTUP WATCH- Egypt’s Kijamii and Good People form independent digital media network: Data-driven advertising agency Kijamii and production house Good People are merging to form an independent digital media network, GP&K, the two companies told Startup Scene. They will continue to operate independently but will streamline their services, which are essentially complementary. Good People has extensive experience in producing TV and film advertising content, while Kijamii is specialized in data driven research on campaigns and social engagement. The joint project will offer clients throughout the region advertising and creative production services, including original content.

Fin-de-siecle Arab cartoons set the scene for contemporary Middle Eastern comics: Early satirical broadsheets — such as this experimental newspaper series by journalist and Egyptian nationalist Yaqub Sanu in the late 19th century — were the precursor of the political cartoons and comic art that are now a growing medium for self-expression in the Middle East. Alternative comics, graphic narratives for adults that explore social issues through genres ranging from romance to adventure and fantasy, are not mainstream in the region. Even in Beirut, which is becoming a hub for underground comics, they are viewed as a novelty. But the Middle East has a history of cartooning for social and political expression that dates back over a century, Jonathan Guyer writes in Atlas Obscura. Photo credit for this image goes to Heidelberg University.

Egypt is enjoying another relatively quiet morning in the foreign press, save for extensive coverage of August’s lower-than-expected inflation figures, which we recap in Speed Round, above.

Chinese companies flock to Sahara expo: Egypt’s largest agricultural event, Sahara expo, is bringing in many potential Chinese partners, with 73 of the 233 foreign companies in attendance coming from China, Xinhua reports. There is increasing demand in China for Egyptian agricultural products, evidenced by the MoU signed earlier this week to import Egyptian dates, and plans in the pipeline to import Egyptian pomegranates, onions and honey. The 2019 Sahara expo concludes tomorrow.

Also making the rounds this morning is the controversy surrounding an Egyptian woman who publicly announced her decision to freeze her eggs, Al Monitor reports. The “confession” has stirred debate on the ethical and religious ramifications of the procedure.

Yes — deepfakes are creepy. But if Black Mirror has taught us anything it’s that humans are the real problem. Deepfakes, video or audio files generated by AI with unnerving realism, are “eerily dystopian.” But an online manipulation expert says in this New York Times video that the collective hysteria they generate is just as problematic (watch, runtime: 03:38). More worrying than misleading content, she says, is the “liar’s dividend,” where unscrupulous people leverage widespread skepticism for their own benefit. When anything can be fake, the guilty can easily dismiss the truth as being fake too.

AI can actually be used with human intelligence to slow the spread of fake news (watch, runtime: 03:09). This is the model used by Leeds-based startup Crisp Thinking, which is paid by multinationals to scan social media for harmful comments that could damage their brand. Crisp Thinking can’t stop fake news, but it can identify it at an early stage, and advise companies on damage control — which is sometimes the best you can hope for.

The Environment Ministry is in talks with international lenders for USD 100 mn to support eco-friendly projects, especially youth-led ones, to help create jobs, Minister Yasmin Fouad told Al Mal. The ministry will focus on youth-led projects that accelerate job creation among small and medium-sized businesses. Fouad did not say whether the support would come in the form of facilitated funds or grants, or which lenders the ministry has approached, but said the negotiations would take place in cooperation with the Investment Ministry.

Egypt, Japan to form joint trade group: Trade and Industry Minister Amr Nassar yesterday agreed with a Japanese trade delegation to set up a joint working group to promote trade between the two countries, according to a ministry statement. The group will be headed by the chair of the Egyptian Commercial Representation Authority, and feature representatives of Egyptian export councils and the Egyptian trade office in Tokyo. A number of Japanese companies expressed interest in expanding investments in Egypt during the recent Tokyo International Conference on African Development, and plans have been floated for a Japanese industrial zone in the Suez Canal area.

Saudi continues to tighten its regulation of Egyptian onions: Egyptian onion exporters will now have to send their Saudi Arabia-bound products in refrigerated trucks as the kingdom continues to tighten its Egyptian onion import regulations, Alex Fresh export manager Fathi Abdel Aziz said. Saudi Arabia lifted in April a ban on Egyptian onions it had imposed earlier this year, saying it was proven that Egyptian onions exceeded the global residue limits of pesticides.

The Transport Ministry has denied that a consortium of construction firms Hassan Allam and Samcrete has been awarded the contract to build and operate the USD 100 mn 6 October dry port. The local press had claimed Transport Minister Kamel El Wazir reportedly said the consortium had been tapped for the 100-feddan project, which will comprise cargo zones, customs clearance offices, and multipurpose storage facilities linked to key seaports, and will be developed under a public-private partnership (PPP) framework. We noted in June that the Finance Ministry’s PPP unit began accepting offers from several qualified consortiums in July. The qualified consortiums, according to the statement the ministry issued then, did not include Samcrete.

Clarified on 11 September 2019

An earlier version of this story had said that the Hassan Allam-Samcrete consortium was awarded the contract. The Transport Ministry has denied that the consortium was awarded the contract, saying in a statement later in the day that “the project’s technical offers are still under review.”

The Cotton & Textile Industries Holding Company will spend USD 30 mn developing its El Mahalla and Damanhour mills starting November, Chairman Ahmed Mostafa said, without disclosing further details. The two mills are expected to be ready for production at the beginning of the cotton harvest season in 2020. The company previously spent EGP 250 mn developing its Fayoum mill, which was inaugurated in July.

Obour Land is spending USD 8 mn to upgrade its white cheese assembly line, the cheesemaker said in a bourse disclosure (pdf). The company also signed a contract to purchase a machine to produce a new variety of processed cheese spreads in Tetra Pak packaging, alongside its traditional glass-contained spreads. Catalyst Leasing, an equipment leasing and financing company, has signed a five-year EGP 135 mn contract with Obour Land to supply Tetra Pak’s advanced technology food processing and packaging machines imported from the EU, according to a statement (pdf).

Consumer healthcare provider Integrated Diagnostics Holdings (IDH) is launching a new Egypt-based subsidiary, Wayak, to better employ data mining and artificial intelligence in its operations, it said in a press release. The aim is to develop and offer targeted services to clients, using AI and data mining tools to extract new information from a patient database of over 13 mn people, 10% of whom suffer from chronic illnesses. Wayak will allow the London-listed company to create electronic medical records of patients and better cater to their needs. Wayak is a joint venture that is 94% owned by IDH and 6% owned by angel fund Himangel.

Real estate player Memaar Al Morshedy plans to develop a 900-acre mixed-use project on Egypt’s north coast, a company source told Reuters. The project will be designed by Spain's VDP Design, Egypt's Raef Fahmy Architects, and US-based Hadid Design. Work on the project will begin in January 2020 and will take four years to complete.

Egypt is entering new partnerships with six major international media companies including Beautiful Destinations, CNN, Ctrip, Discovery, Expedia Group, and Isobar as part of the Tourism Ministry's global tourism campaign, Minister Rania El Mashat said, according to a ministry statement. El Mashat called the campaign a “key pillar” of the ministry’s efforts to reform the tourism sector.

State-owned landline monopoly Telecom Egypt (TE) signed an agreement with Ericsson to set up a facility housing an artificial intelligence training center and innovation lab at an unspecified location, according to a cabinet statement. The agreement will see TE fit the site with tech infrastructure and Ericsson provide software and devices.

The Transport Ministry will sign by the end of the month a USD 430 mn agreement with Progress Rail Locomotive to purchase 50 new locomotives and repair 50 old ones, Minister Kamel El Wazir said. Egyptian National Railways (ENR) signed an MoU with the US-based company last year.

An Egypt-based subsidiary of Kuwait’s United Real Estate Company signed on Monday a five-year, EGP 250 mn loan with Ahli United Bank, the parent company said in a bourse disclosure picked up by Mubasher. The loan will be used to fund the company’s Aswar Residences project in New Cairo.

The Finance Ministry began distributing almost 5 mn “Meeza” debit cards to public sector workers at the beginning of September as part of government efforts to increase financial inclusion, it said in a statement. Ten banks are participating in the scheme, including Banque Misr, the National Bank of Egypt, Banque du Caire, and CIB. The government originally planned for civil servants to begin receiving their salaries via Meeza at the beginning of August. It distributed some 18k point-of-sale machines to government entities and made it mandatory for government payments over EGP 500 to be paid electronically starting 1 May.

The UAE’s National Central Cooling Company (Tabreed) is looking to enter the Egyptian market, CEO Bader Al Lamki said yesterday without providing further details, according to Mubasher. Speaking on the sidelines of the World Energy Congress in Abu Dhabi, Al Lamki said the company — which currently operates 75 stations in the Gulf — is also looking to expand in the GCC. Tabreed provides district cooling systems for large-scale urban developments.

The Civil Aviation Authority has allowed hot air balloon trips in Luxor to resume after an 80-day suspension, ensuring that operators took necessary measures to achieve better security and safety, according to Ahram Gate. The authority suspended flights in June after a balloon was driven off course by strong winds.