Analysts split on interest rates ahead of Thursday’s CBE meeting

The holiday news lull (such as it was this year) is officially over, as we have a packed issue for you this morning. The big stories are still on the international front (Libya, Ethiopia and Iran), but M&A news is back in the headlines and the CBE is shaping up to be the newsmaker of the week between the end of its subsidized loan program for midsized industries, the strengthening of the EGP and Thursday’s interest rate meeting.

It’s crunch time on GERD talks: Egypt, Sudan and Ethiopia will begin what’s being billed as a final round of talks in Washington today in the hope of finally reaching an agreement on the filling timetable for the reservoir of the Grand Ethiopian Renaissance Dam (GERD).

There’s no sign (so far) that a breakthrough is imminent: The three Nile river countries pledged to end the years-long impasse by the 15 January, but neither Egypt nor Ethiopia has ceded any ground. Ethiopian PM Abiy Ahmed insiss his country will begin filling the reservoir in July; he says it will be done in 12 years, Egyptian officials want a 21-year period.

Ethiopia changing its tune on international mediation? Ahmed has called for South African President and incoming African Union head Cyril Ramaphosa to get involved in the dispute in the hope that he may force a resolution, according to the Associated Press. We’re reading that as a signal not to expect a breakthrough today.

Meanwhile, Libya enjoyed a quiet night as a ceasefire held (we have detailed coverage in this morning’s Speed Round, below) and Iran’s leaders faced a second night of protests following the government’s admission it shot down a Ukrainian airliner, killing all 176 people on board. The Iran story is making headlines globally. See: Bloomberg, the FT, BBC and CNN

EGP WATCH: The EGP continued to gain against the greenback yesterday following the Finance Ministry’s t-bill auction, rising to EGP 15.89 per USD from EGP 15.93 last week. At least one banker has attributed the bump to foreign inflows into EGP-denominated government bonds ahead of Thursday’s MPC meeting. Yesterday’s t-bill auction was more than 3x oversubscribed, as investors lodged EGP 51 bn in bids for EGP 14.5 bn in 3-month and 9-month treasuries.

Investors are starting off the year with a bright outlook for global growth in 2020. It’s a marked shift from sentiment last year, when concerns of a recession were triggered by higher interest rates and mounting tariffs, but the Federal Reserve rate cuts and the US-China trade agreement later in the year instead drove a market rally. The S&P 500 hasn’t recorded a 1% daily pullback in three months and was unperturbed by the escalating tensions between the US and Iran. The Wall Street Journal has more.

Asset managers are lining up to tap China’s USD 4.2 tn investment fund market ahead of the abolition of foreign ownership limits in April, says the Financial Times. This highly anticipated change, which China said last October will happen a year earlier than initially expected, will allow foreign investment houses to fully own a fund management company. They could then tap a vast retail investment market without the need for a local partner.

Vanguard assets surpass USD 6 tn benchmark for the first time following increased investor inflows from 2019. Despite more conservative investor sentiment in the wake of US stock market highs at the end of December 2019, the asset management giant has marked its third best performance on record, breaching USD 6 tn in managed assets, the FT reports.

This is part of the “great index fund takeover”, which Bloomberg says has resulted in the top three ETF providers (BlackRock, Vanguard and State Street) becoming “the most important players in corporate America.” With a combined USD 15.5 tn in assets under management, the concentration of shareholder power in the hands of just three funds is raising concern among regulators, lawmakers and activists alike.

Aramco IPO value hits new record: Saudi Aramco said yesterday that the size of its IPO had reached a record USD 29.4 bn after it exercised its “greenshoe option” allowing it to sell an additional 450 mn shares to satisfy investor demand, the Associated Press reports.

*** It’s Blackboard day: We have our weekly look at the business of education in Egypt, from pre-K through the highest reaches of higher ed. Blackboard appears every Monday in Enterprise in the place of our traditional industry news roundups.

In today’s issue: We look at how Egypt is building competence in artificial intelligence.

PSA- We’re getting a brief reprieve from the cold: Winter is taking a little breather this week through Thursday, with temperatures in Cairo expected to increase 5°C, according to the Egyptian Meteorological Authority (pdf). Look for a high of 20°C today rising to 24°C on Wednesday before the mercury settles in at 19°C or below for the foreseeable future.

Headlining the talk shows last night was Qalaa Holdings chief Ahmed Heikal, who sat down for a 20 minute chat with Al Kahera Alaan’s Lamees El Hadidi, delving into the economy, global trade wars, and expectations for TAQA Arabia’s IPO. Here are the key takeaways from the interview (watch, runtime: 23:44):

• TAQA Arabia to debut in April? Heikal said that Qalaa subsidiary TAQA Arabia will make its debut by April this year. Qalaa will sell up to 30% of its subsidiary's shares on the EGX while retaining controlling stakes in the company.
• Investment and job creation should be top priority for the gov’t: Noting that progress had been made on economic reform, Heikal drew attention to the low rates of foreign investment and slow job creation in the economy. Ordinary Egyptians will not see a rise in income until these problems are solved, he said.
• The private sector is optimistic but continues to face challenges: Economic inefficiency and difficulties with communication continue to make the lives of private sector companies harder than they need to be, he said.
• The US-China trade war could have an impact for many years to come, Heikal suggested, using one example. The US imposition of dumping fees on Chinese exports resulted in China depreciating its currency, making the EGP more expensive to Chinese companies importing from Egypt.

GERD talks also feature on Al Kahera Alaan: El Hadidi phoned Heba Al-Qudsi, the Washington bureau chief of Asharq Al-Awsat, who said that this meeting is the last chance for the sides to reach a fair and balanced agreement. If they fail to make a breakthrough, the dispute will only escalate, she warned (watch, runtime: 3:11). Law professor Ayman Salama says mediation will be the next step if these talks fail, with a final resort being the International Court of Justice (watch, runtime: 4:17). El Hadidi also phoned in former Irrigation Minister adviser Diaa Al-Din Al-Qousi who went back to basics stressing that the Nile River is a cross-border river and there no decision will be taken without Egypt, Sudan, and Ethiopia’s consent (watch, runtime: 5:19).

The Libyan ceasefire was all over the airwaves: Min Masr's Amr Khalil mentioned that the Foreign Ministry welcomed the ceasefire in Libya and renewed its call for a political solution (watch, runtime: 2:35). Al Hayah Al Youm's Hossam Hadad highlighted President Abdel Fattah El-Sisi's meeting with the European Council President Charles Michel where the two agreed on working towards a comprehensive political settlement of the Libyan issue (watch, runtime: 1:58). Min Masr's Reham Ibrahim noted that President Abdel Fattah El Sisi received a phone call from German Chancellor Angela Merkel to discuss the situation in Libya (watch, runtime: 1:11). El Hekaya's Amr Adib also took note of the story (watch, runtime: 2:40). We have more in this morning’s Speed Round, below.

SURVEY- Analysts split on interest rates ahead of Thursday’s CBE meeting. A poll conducted by Enterprise over the weekend shows no consensus among analysts about whether the central bank will cut interest rates when its new Monetary Policy Committee meets on Thursday. Four of the seven analysts we polled predicted the central bank would cut rates, while three see the MPC leaving rates on hold. Seven of 10 economists we had polled in December, when the meeting was originally scheduled to take place, saw rates being left unchanged.

The CBE cut rates by 100 bps in November, capping a year of accelerated easing that saw 450 bps in rate cuts between February and November. The overnight deposit rate currently stands at 12.25%, the lending rate at 13.25%, and the main operation and discount rates at 12.75%.

December’s inflation reading seems to have changed a couple of minds, with EFG Hermes’ Mohamed Abu Basha and Renaissance Capital’s Ahmez Hafez now predicting cuts. The annual urban inflation rate effectively doubled to 7.1% last month due to rising food prices. Abu Basha suggested that this shows inflation has now “normalized,” providing the CBE with space to cut rates by 50-100 bps. Meanwhile, Hafez is calling a 100-bps cut citing the second consecutive reading of monthly deflation.

Others cite rising inflation as a reason for staying put: Pharos head of research Radwa El Swaify maintained her forecast for a hold due to the pickup in inflation and increasing geopolitical risks. Shuaa senior economist Esraa Ahmed also said that inflation — along with rising commodity prices — will persuade the central bank to pause this week.

Global easing trends could persuade the central bank to cut, according to HC Securities chief economist Monette Doss, who became more dovish from December. She now predicts a 100-bps cut compared to 50 bps last month.

The CBE will likely hit pause to “test liquidity levels” after a year of “bold interest rate reduction decisions,” Beltone’s Alia Mamdouh said, maintaining her forecast from December.

Inflation predictions vary but all see prices remaining within the CBE’s target range: The strength of the EGP and the government’s decision to hold fuel prices will ensure that inflation is maintained within the 9% (± 3%) range, Mamdouh said. Capital Economics’ senior EM economist Jason Tuvey wrote in a note last week that prices will not rise above the midpoint of the CBE’s target range, leading him to believe that the central bank will opt to cut by 50 bps this week. El Swaify sees inflation falling back to around 5% by February, while Doss forecasts inflation to average 5.7% during the first half of 2020.

Going forward: Although she sees little chance of a cut this week, El Swaify remains confident the CBE will take its hand off the brake in the next two months, predicting a 100-bps cut by the end of the first quarter. Meanwhile, Capital Economics is sticking with its prediction from last year of a 325-bps cumulative cut through 2020, which would return the overnight deposit rate to pre-float levels of 10.00%.

M&A WATCH- Unnamed PE fund close to buying out Cook Door: An unnamed foreign private equity fund is in the final stages of acquiring a majority stake in the International Company for Food Industries (IFCI), which owns fast-food chain Cook Door, reports Al Mal, citing sources close to the matter. No details on the transaction or further information on the fund were provided. The acquisition would inject enough capital for the fast food chain to push forward with a plan to nearly double its number of branches to 150 from 80. IFCI Chairman Amr El Said recently said the company is planning to increase its investments in Egypt to EGP 1 bn, alongside pushing forward with a regional expansion plan that would focus on Saudi Arabia, according to Al Mal.

M&A WATCH- Is Bank Audi’s NBG acquisition still on? Bank Audi Egypt has begun supervising some of the operations of its acquisition target the National Bank of Greece (NBG), indicating that the ongoing employee dispute has failed to derail the transaction, Al Mal reported, citing bank sources. NBG has reportedly issued instructions to its local branches not to approve any banking transactions for large clients without getting the green light from Bank Audi. The bank’s management is also now having the final say over some of NBG’s financial transactions, the sources said without elaborating.

What happened to the employee pay dispute? It’s still unclear what the state of play is surrounding NBG’s employee pay dispute which in October looked set to torpedo the acquisition. The last we heard the Central Bank of Egypt intervened in the row, with Governor Tarek Amer moving to assure the workers that their claim to severance pay would be upheld after the acquisition.

Background: Negotiations on the acquisition started a year ago after NBG decided in 2018 to exit the Egyptian market. Bank Audi announced in May that it intended to purchase the bank and would seek approval from the CBE. A dispute between NBG and its employees caused the two banks to miss the CBE’s acquisition deadline at the end of October, threatening to at best delay the transaction by six months and at worst cancel it altogether.

IPO WATCH- Macro Pharma looking to raise USD 100 mn in IPO: Macro Group Pharma is planning to sell an undisclosed number of its shares in an initial public offering on the EGX during 4Q2020 or 1Q2021, said Ahmed Rady, head of Alta Semper Direct Investment Company, which owns 60% of the shares of Macro Pharma, according to Al Mal. The company is looking to reel in USD 100 mn from the stock market debut, Rady said. Macro Pharma will finalize the process of hiring an investment bank to quarterback the offering next month.

Egypt was the most active venture capital market in MENA last year with 25% of all transactions in the region, according to startup platform Magnitt’s 2019 MENA Venture Investment Report. Egypt’s share of total number of seed funding agreements fell 1% y-o-y, but the UAE, which topped the ranking in 2018, saw its agreements fall 3% y-o-y in 2019. The larger dip pushed the UAE to the number two spot with 23% of all agreements, followed by Saudi Arabia with 12%, Lebanon with 8%, and Jordan with 6%. The UAE remains the largest recipient of venture funding by value (60% of the total), while Egypt followed with 14%.

In short: Egypt had the largest number of transactions, the UAE led in total value, while Saudi Arabia was the fastest-growing by number and value of transactions announced.

It was a year of records for MENA startups: MENA startups in 2019 saw a record of 564 startup investments worth a total of USD 704 mn, marking a 31% y-o-y increase in the number of investments and a 12% rise in the total funding value. These figures, however, do not account for Careem’s exit, which became official in Egypt, Saudi, Jordan, and the UAE earlier this month, or Amazon’s acquisition of Souq. Careem’s USD 3.1 bn acquisition by Uber also became MENA’s first unicorn exit. It was also a record year for exits with a total of 27 across the region.

Two Egyptian companies, Swvl and Adzily, made it to the top 11 funded startups last year. Ride-hailing app Swvl closed USD 42 mn in funding, while digital screen advertisers Adzily received USD 12.2 mn in funding last year, bringing their combined total to 48% of the year’s total funding.

Fintech is the most active industry, but transport lands the cash: Fintech retained its top position from last year as the most active industry by number of agreements, accounting for 13% of the total agreements, while e-commerce came in second at 11%. According to the report, accelerators and governments have played a key role in supporting fintech startups this year. However, when measured by total funding, delivery and transport takes the lead with 19%, real estate and e-commerce come in second and third with 15% and 14% respectively, and fintech falls to the fourth spot with 11%.

Read the summary (pdf) and full report (paywall).

CBE ends EGP 5 bn medium-sized business initiative: The Central Bank of Egypt has issued a statement (pdf) instructing banks to stop giving out new subsidized loans to medium-sized industrial, agricultural and renewable energy firms under its EGP 5 bn finance initiative. The initiative has fulfilled its objectives and the loans allocated have been fully utilized, it said. The CBE last month launched a new EGP 100 bn support mechanism for medium-sized manufacturers, which can now apply for subsidized loans at a declining 10% interest rate.

INVESTMENT WATCH- Samih Sawiris, Sovereign Fund of Egypt plan to sign Bab El Azab partnership next month: Samih Sawiris and the Sovereign Fund of Egypt (SFE) are planning to sign a partnership agreement to develop the Bab El Azab area by no later than 4 February, the celebrity b’naire tells Hapi Journal. Under the agreement, Sawiris will invest alongside the SFE in a stake in a project that will involve building a museum with interactive technologies, crafts schools, theaters, and others in Bab El Azab, a historic site in Islamic Cairo. There’s a chance other investors will join in, including Al Ismaelia For Real Estate Investment — which is already on board to handle execution, Chairman Karim Shafei told the newspaper. As soon as the partnership agreement is inked, a study will be conducted to determine the project’s ownership structure, timeframe, and expected cost.

Background: The SFE received cabinet approval last month to hold the rights to renovate and develop Bab El Azab under a 49-year contract. SFE CEO Ayman Solliman told Reuters at the time that the fund is looking to Sawiris to help develop the area with total investments of EGP 2 bn. The approval came after Hapi reported in November that Sawiris is looking to invest in the project, saying he would be acting individually and not as part of Orascom Development Egypt (ODE).

Release of USD 3 bn China loan for new capital business district faces delays: The release of a USD 3 bn Chinese loan to finance the construction of the new administrative capital’s business district has been delayed after the Housing Ministry failed to meet the loan conditions, a government told Al Shorouk. The first tranche of USD 834 mn was due to be paid out after licenses were acquired for the project this month, but Chinese lenders are reportedly not satisfied that the government has met their conditions, which the source refused to disclose. Egypt has closed the USD 3 bn in Chinese financing back in May 2019. The first tranche will be used to finance construction during the initial 600k sqm phase of the district, which includes two administrative and five residential skyscrapers.

Cabinet studying SCZone tax incentives package -Zaki: The cabinet is studying new tax incentives for investors in the Suez Canal Economic Zone (SCZone), zone chairman Yehia Zaki told the local press yesterday. Officials from the SCZone have been studying such incentives for years now after President Abdelfattah El Sisi “agreed in principle” that taxes in the SCZone ought to be reviewed from 22.5%.

New agreements in the pipeline: Zaki also said that the SCZone will sign agreements soon to build 2-3 factories for manufacturing components for the auto industry. Another agreement will be signed this quarter with Mercedes-Benz — which is preparing to assemble cars in Egypt again — to establish a car storage facility before the end of 1Q2020.

LEGISLATION WATCH- Central Depository Act gets preliminary nod from parliament: The House of Representatives has approved in principle the proposed Central Depository and Registration Act, according to Masrawy. The bill will now see further discussions in the house before heading for a final vote. The House Economic Committee had approved the bill in December and left the controversial Article 35 unchanged, despite committee members voicing concerns that it could have a negative impact on the securities market. Under the article, the Financial Regulatory Authority would determine the ownership structure of companies licensed to provide clearing and depository services, set the conditions for board formation, and determine the minimum amounts of issued and paid-in capital, among other things.

Libya rivals prepare to sign truce as ceasefire holds: The leaders of Libya’s warring factions will travel to Moscow this week to sign a formal ceasefire agreement, Bloomberg reported last night, citing two senior officials. Head of the UN-recognized government Prime Minister Fayez Al Serraj and eastern military general Khalifa Haftar have been strong-armed by Russia and Turkey to end the war, which had escalated in recent days with the arrival of Turkish troops to the country. Yesterday was the first day of the ceasefire, and while the sides traded accusations of violating the truce in the early hours, clashes had stopped by midday, according to Reuters.

Egypt welcomed the truce and expressed support for the Berlin conference to reach a political settlement, the Foreign Ministry said in a statement. President Abdel Fattah El Sisi also repeated the call yesterday for a political solution during his meeting with the European Council President Charles Michel.

Haftar-backing Libyan parliament may ask Egypt for military support if things go south: The Tobruk-based Libyan parliament, which supports Haftar’s Libyan National Army, may ask Egypt for military support in case of foreign interference in the Libyan conflict, parliament speaker Aguila Saleh said, according to Sputnik.

Background: The conflict entered a more dangerous phase earlier this month when Turkey authorized the deployment of troops to the country to shore up the Government of National Accords’ forces, increasing the likelihood of a clash between regional powers in the war torn country. The move has intensified existing tensions surrounding Turkey’s gas exploration activities in the Mediterranean, leading Greece and Cyprus to join with Egypt and France — which both support Haftar — to condemn Turkish military adventurism.

EARNINGS WATCH- Maridive & Oil Services reported a consolidated net loss of USD 22.2 mn in 9M2019, compared to a USD 18.3 mn profit during the same period the previous year, according to an EGX disclosure (pdf). ٌRevenues fell 33% y-o-y to USD 105.5 mn during the first nine months of 2019, down from USD 156.3 mn the year before. The company attributed the losses to the US sanctions on Venezuela and delays in marine constructions contracts that they only began implementing near the end of 3Q2019.

MOVES- Prime Holding approves board reshuffle: The general assembly of Prime Holding has approved changes to the formation of the board, and reduced the number of Sameem Capital representatives to one, the local press reported. Prime Holdings had appointed Mohamed Maher as CEO after removing Khaled Rashed back in December. Sameem Capital has since lodged a legal complaint with the Financial Regulatory Authority against Prime Holding over Rashed’s removal.

All is quiet in the pages of the foreign press this morning, with little coverage of Egypt and no single story dominating the conversation on our fair country today.