What has been driving the EGP appreciation — and who stands to gain or lose from its rally?

Tomorrow is interest rate day: Our poll earlier this week showed a definite lack of consensus among analysts about whether the central bank will cut interest rates or keep them unchanged when it meets tomorrow, with six forecasting a cut and five calling a hold. A Reuters poll published yesterday showed similar results.

Belarus President Alexander Lukashenko will arrive in Egypt today for a two-day official visit during which he will hold talks with President Abdel Fattah El Sisi and participate in the Belarus-Egypt Business Cooperation Council, according to Belarusian state media.

The House of Representatives is studying the legislation governing rent control with an eye to finalizing it within three months, Rep. Soliman Wahdan tells the local press. Also expected to be finalized by the same deadline: The Labor Act and Criminal Procedures Act.

It’s looking like the final GERD agreement isn’t going to be signed by the end of the month as was previously expected. Despite reaching an initial agreement and appearing to be on track to sign a final contract on the Grand Ethiopian Renaissance Dam (GERD) with Egypt and Sudan, Ethiopia apparently doesn’t see eye-to-eye with its northern neighbors on certain issues. Speaking at a joint presser with US Secretary of State Mike Pompeo, Ethiopia’s foreign minister said there remain some “outstanding issues” to iron out, AFP reports. Pompeo also suggested the end-of-month target for a final agreement is now out of reach, saying, “a great [amount] of work remains, but I’m optimistic that over the coming months we can resolve this.”

The only patient in Egypt to have been diagnosed with covid-19 is in good health and has not been showing any symptoms, Health Minister Hala Zayed said, according to Ahram Online. Meanwhile, the two Egyptian expats in Wuhan who were diagnosed with the virus and barred from boarding an evacuation flight to return to Egypt are also in good condition and will be returning home soon after their quarantine period is completed.

The spread of the virus in China appears to be slowing, but “experts cautioned against predicting that the worst was over,” the New York Times reports. The death toll globally now exceeds 2k, with a total of 74,185 infections.

HSBC is taking dramatic measures as macro headwinds halve its profits. Europe’s largest bank in terms of assets said it plans to cut over USD 100 bn of its assets by the end of 2022, drop its headcount from 235k to 200k over three years, suspend buybacks for two years, and revamp its US and European businesses, the Associated Press reported. The overhaul will also see HSBC cull some 224 branches in the US, Reuters notes. HSBC’s net profit tumbled 53% in 2019 and is seeing “significant disruption″ this year as the covid-19 continues spreading, interim CEO Noel Quinn said.

Want to go deeper? The FT has a great piece on shareholder concerns that HSBC is effectively taking on too much with a caretaker leader in place.

Nissan’s shareholders are demanding “quick fixes” to address the fallout from the Carlos Ghosn scandal, which has resulted in the automaker seeing its stock prices falling, failing to pay shareholder dividends, and turning in a quarterly loss for the first time in over a decade, the Associated Press reported. New CEO Makoto Uchida said he will announce a recovery plan, which would also address governance issues, in May.

CLIMATE WATCH- Glencore Plc, the world’s largest coal shipper, sees its customers’ carbon emissions falling by 30% over the next 15 years, according to Bloomberg. The shipper did not explain, though, how much coal production would be cut to meet the projection. The company said that indirect emissions created by the company’s products are falling on the back of the depletion of mines in Colombia and South Africa.

Bezos commits USD 10 bn to face climate crisis: The world’s richest man and Amazon CEO Jeff Bezos said he will fund scientists, activists, and NGOs to explore new ways of fighting the impact of climate change, the New York Times reports. Last year, Bezos introduced a “Climate Pledge” and said that Amazon will be meeting the Paris climate agreement goals 10 years ahead of schedule as it becomes carbon-neutral by 2040.

Former New York mayor Michael Bloomberg has qualified for the Democratic presidential debate taking place in Las Vegas today, the Washington Post reports. Bloomberg surged to the second spot in an NPR/Marist College poll, he secured the support of 19% of US Democratic primary voters. The national qualifying poll requires candidates to earn at least 10% of the votes to qualify for the debate. Senator Bernie Sanders continues to lead the pack with 31% of the poll’s votes.

In international miscellany:

• The EU is deploying warships “to enforce” an arms embargo on Libyan warring factions, according to Bloomberg.
• Lebanon’s premier turns to Iran after getting cold shoulder from the GCC: Lebanese Prime Minister Hassan Diab met with Iranian Parliament Speaker Ali Larijani yesterday to discuss how Tehran could help Lebanon through its economic crisis, after appearing to get snubbed by its “rich Gulf neighbors,” according to Reuters.

*** It’s Hardhat day — your weekly briefing of all things infrastructure in Egypt: Enterprise’s industry vertical focuses each Wednesday on infrastructure, covering everything from energy, water, transportation, urban development and even social infrastructure such as health and education.

In today’s issue: We look at why multiple pieces of legislation that aim to reform our water usage have been mouldering in the House of Representatives for years (literally years).

Another slow news day once again permeated the airwaves, leaving the talking heads with little to ponder over.

Egypt tops list of fastest growing Middle Eastern economies -cabinet: Al Hayah Al Youm’s Hossam Haddad took note of a timelapse graph published yesterday by the cabinet’s Information and Decision Support Center showing the progression of the economy’s growth rate since 2011 compared to that of other Middle Eastern countries (watch, runtime: 2:23). Masaa DMC’s Ramy Radwan (watch, runtime: 10:22) and Min Masr’s Amr Khalil (watch, runtime: 8:58) both had lengthy segments on this.

CBE debt settlement initiative moving forward: The Central Bank of Egypt’s (CBE) debt relief initiative, which is aimed at factories, has recently waived EGP 18.4 bn-worth of interest payments on non-performing loans, CBE Governor Tarek Amer said during a cabinet economic group meeting, according to Haddad (watch, runtime: 8:13). We noted last week that the initiative has so far settled EGP 48.5 bn of debt and interest for struggling factories and companies.

Your regularly scheduled denial of more covid-19 cases: Health Ministry Spokesperson Khaled Megahed denied voice notes circulating on social media alleging that the covid-19 is prevalent in schools and other public places despite the lack of any official announcements. Such messages only serve to create “panic” among Egyptians, Megahed told Yahduth Fi Misr’s Sherif Amer (watch, runtime: 9:49).

EXCLUSIVE- What has been driving the EGP appreciation — and who stands to gain or lose from its rally? The EGP has been on tear for more than a year now, gaining almost 13% against the greenback since the beginning of 2019, when it stood at EGP 17.85 / USD 1. In 2020 alone, the currency has strengthened 44 piasters to hit EGP 15.56, and it was changing hands for 15.67 yesterday.

This story has two parts: If you’ve not been following the EGP, start at the top with “What’s going on” for a rundown of what is propelling the EGP’s appreciation. If you think you’ve got that down cold, skip straight to “What it means for business,” below, where we talk winners and losers — and look at how it is that there isn’t really a consensus from analysts on where the EGP is heading against the greenback by year’s end.

WHAT’S GOING ON?

Analysts we spoke with all told one version or another of the now-standard narrative on what’s driving the appreciation:

• Strong investor appetite for Egyptian debt (the “carry trade” that we speak of so often in Enterprise);
• Strong remittance flows from Egyptians who live and work abroad;
• Increasing tourism revenues thanks to the ongoing recovery;
• Significant “de-USD-ization” of the economy starting in early 2017 as businesses and individuals like stopped hoarding USD after the float amid tight regulation and the attractiveness of high interest rates.

It’s all about the hot money, or foreign inflows into government debt, which is mainly sourced from carry traders borrowing at low interest rates and then lending to the Egyptian government at higher rates, say EFG Hermes’ macro unit head Mohamed Abu Basha and veteran economist Hany Tawfik. Inflows nearly doubled to USD 24 bn since 2018, and this happened in a time of decreased local demand for the USD and fewer Egyptians holding on to the USD as a safe haven asset. The CBE had ended the the FX mechanism in late 2018, which meant the central bank no longer had to guarantee new portfolio investments and could let the interbank market handle repatriation. Analysts said at the time the move would be good for the FX market and the EGP, since the mechanism was keeping the EGP from reaching its full potential.

Investors pile into long-term debt, signaling confidence in the economy: Investors are increasingly looking at longer-term debt instruments as the CBE pushes forward with its monetary easing cycle, meaning they are willing to invest in the long haul, said Fakhry El Fiky, former IMF advisor and CBE board member. These investors still see the carry trade as being attractive, and are being guided by positive outlooks from credit ratings agencies and international institutions. News that the government is in talks with the IMF for a post-loan agreement is also inspiring investor confidence in the economy’s trajectory moving forward, according to El Fiky.

Because even with rate cuts (apparently) on a declining path, they’re still really attractive in a world of low-to-negative interest rates. See, for example, Bloomberg’s headline story a week ago: World’s best carry trade thrives with Egypt’s rates on pause — and buying may have intensified as investors look to lock in yield amid expectations of rate cuts to come.

Is the CBE offering a helping hand? Nope. Speculation was rife last summer that the strengthening EGP could be a direct result of CBE intervention. The consensus today is that the central bank doesn’t have its finger on the scale. According to El Fiky: “The FX market has been moving according to supply and demand since the EGP float in November 2016. The lack of FX availability at the time prompted the currency to dip to EGP 20 to the USD instead of stabilizing closer to its fair value of EGP 13-14 [to the greenback].”

And what about state-owned banks? The country’s two biggest state-owned banks — the National Bank of Egypt, which holds 28% of deposits in the banking sector, and Banque Misr, which holds 15% — have significant USD liquidity thanks to foreign investments in treasury bills, investment banking sources tell Enterprise. This excess FX liquidity is then injected into the interbank market. It’s impossible for banks to stockpile FX because the central bank monitors banks’ FX levels, El Fiky said.

The real helping hands are rising exports, good improvements in tourism revenues and remittances, higher Suez Canal revenues, and foreign direct investment, according to El Fiky.

• Annual exports have risen by around USD 7 bn since the start of the economic reform program in 2016 to hit USD 28.5 bn in FY2018-2019. This was mainly thanks to oil exports which almost doubled to USD 11.5 bn;
• Tourism receipts stood at USD 12.6 bn in fiscal year 2018-2019, up nearly 260% from USD 3.5 bn in the year following the Russian metrojet crisis in 2015.
• Remittances jumped to USD 26.5 bn a year post the EGP float and have stabilized close to that figure;
• Suez Canal revenues inched up to USD 5.9 bn last fiscal year despite headwinds from global trade wars;
• FDI started a modest recovery in the second half of 2019.

Overall, foreign currency inflows jumped to USD 95 bn in 2019, from USD 82 bn in 2018 and USD 71 bn in 2017, El Fiky said.

So far in 2020, inflows have reached USD 12 bn from the sources above, a CBE official told state news agency MENA on Sunday. This speaks of how attractive the market is for investment funds and international financial institutions despite regional tensions, the official said.

EMPI reading shows decreased pressure on FX market: The continued EGP strengthening has resulted in a lower reading for Pharos Holding’s Exchange Market Pressure Index (EMPI), which measures foreign currency market pressure resulting from the economy’s fundamentals and speculative attacks. The gauge is also now moving in line with the currency, unlike what was seen following the float, when EMPI showed high market pressure despite a stable currency, Pharos’ head of research Radwa El Swaify said.

WHAT IT MEANS FOR BUSINESS

So, how is this all affecting business? Exporters across the board are standing on the losing side of the EGP rally, El Swaify says, particularly as exports have struggled to pick up over the past few years because of problems that have little to do with the FX rate. El Swaify notes that most EGX-listed companies with exports in their revenue base haven’t been able to grow the percentage of exports in their revenue base. Exporting companies that rely on importing raw materials will not be as hard-hit, though, since the EGP rally means they are buying inputs at a lower cost, which somewhat levels out the playing field, El Fiky added.

One of the issues facing industry is high input costs, which El Fiky suggests could be alleviated to a certain degree if the government cuts natural gas prices for heavy consumption factories to help make them more competitive abroad.

Which industries in specific are most vulnerable? Sitting at the top of the list of industries that have the most to lose from the EGP rally are the petrochemicals, fertilizers, and steel industries, El Swaify notes. Sigma Capital’s head of research Abu Bakr Emam is of the same mind, pointing specifically to fertilizers and chemical products. They have business models tilted heavily toward exports, and their products just lost their cost competitiveness. Soft oil and commodity prices aren’t helping, either.

Agricultural exports could also be in trouble if the EGP continues to appreciate and breaks the EGP 14 / USD 1 barrier, according to the head of the exporters division at the Federation of Egyptian Chambers of Commerce, Sherif El Gabaly. Division member Hossam Elwan is of the same mind, but sees the tipping point at EGP 15 / USD 1 — a barrier he believes will be broken before the year is out. In the meantime, undermined competitiveness is being offset by cheaper inputs of packaging material, Elwan says. El Gabaly sees the currency’s upwards trajectory as a chance for Egyptian exporters to tap into new markets such as China and African countries, which could compensate for the drop in competitiveness in more crowded markets.

Tourism probably won’t take much of a hit, because Egypt remains a relatively cheap destination for tourists, El Swaify says.

What’s the outlook for the EGP? As it currently stands, it’s fairly unlikely that the EGP will keep up its rally at the same pace, since foreign investments in government debt will probably not continue increasing forever, CI Capital Head of Macro and Financials Sara Saada says. Egypt may look better than other emerging markets, but there’s a point at which rates go so low here that the carry trade starts to look elsewhere.

Hot money can always flee: The currency’s strengthening has not been driven by sustainable sources and factors — save for rising tourism inflows and stable remittances — which means the EGP is susceptible to sharp volatility if we see a sudden drop in hot money, Tawfik warns. That means the country has to see a healthy uptick in FX inflows from more sustainable sources, such as FDI, to prolong the EGP rally, Saada says.

Analysts and businesses alike are all over the map with where the EGP is headed by the end of 2020. With ongoing trade wars, a slowing global economy, the covid-19 outbreak, Brexit, and a drop in oil and commodity prices around the world, there are too many factors subject to rapid change to be able to accurately predict where our currency will end up, Tawfik says.

• El Swaify suggests the average FX rate this year will be at EGP 16.25 / USD 1, but doesn’t rule out closing out the year at EGP 15 to the greenback if FX inflows exceed expectations.
• CI Capital is currently revising its previous projections of the currency weakening to EGP 16 to the greenback at the end of the year;
• HC’s Monette Doss expects it to slide to EGP 16.30 / USD 1.
• Deutsche Bank said in a report earlier this month it expects the EGP to fall to 15.50 against the USD by the end of 1H2020 and EGP 15.00 by the end of the year.
• Some 52.5% of respondents to the 2020 Enterprise Reader Poll see the FX rate at EGP 15.51-16.50 at mid-year.

And the wildcard nobody is talking about when looking at the EGP’s future path: Interest rates. Just not in the way you think. The business community has held back from borrowing since the CBE jacked interest rates after the float — delaying in many cases everything but critical maintenance and borrowing only to finance cashflows, not for capex. Now, consider this: Businesses take on debt at variable interest rates, not the fixed rates at which individuals borrow. As long as they believe rates are on a declining path in 2020, pent-up demand from corporates should see strong growth in corporate borrowing this year.

And what do you think these folks are going to be buying with that fresh debt on board? All sorts of imported things — particularly capital goods and other imports, putting pressure on importers to re-stock and, as a result, pushing up the demand for the USD.

With amended Mineral Resources exec regs and a new tender on the way, Naguib looks set to get in on mining in Egypt: Naguib Sawiris is currently in talks with the government to participate in the upcoming international gold exploration and mining tender and is “willing to participate in any area that could be promising,” the bn’aire tells Bloomberg.

It is unclear which company Sawiris is involved with is holding talks with the government. He is currently the chairman of La Mancha, which is also the biggest shareholder in Endeavour Mining. Endeavour recently tried to acquire Centamin — the only company producing gold in Egypt from its Sukari mine — but withdrew its offer last month saying it hadn’t received enough information during an assessment period to be confident in the takeover. Endeavor operates in the Ivory Coast, Burkina Faso and Mali.

Sawiris praised the executive regulations to the amended Mineral Resources Act, saying they are “more favorable and more realistic and would attract foreign investments to the sector.” He had previously said he was waiting for more clarity on the regulations — additional details of which we noted yesterday — to determine whether or not he will invest in the country’s gold and copper mining industry. Under the new act, companies will have to pay a minimum royalty of 5% of annual production, with the cap set at 10% for mineral ores and 20% for other resources.

The tender will be launched for areas in the Eastern Desert by the end of this month or early March. It will be the first mining tender since the Mineral Resources Act was amended last year and the first for gold exploration since 2017. It hopes the tender will boost investment in the sector, raising contribution to GDP to EGP 7 bn by the end of the decade.

PRIVATIZATION WATCH- The government could be resuming the state privatization program as early as next month, Public Enterprises Minister Hisham Tawfik said, according to Bloomberg. The program, which has only seen a single offering when Eastern Tobacco sold a 4.5% stake in a secondary offering back in March last year, has been stalled as market conditions were far from ideal.

Which offering can we expect to see first? While Tawfik didn’t name any companies, he said that the committee in charge of the program is pushing for the initial public offering of Banque du Caire to go first. We also noted last week that the state-owned bank could sell up to 45% of its shares in an IPO slated for April. BdC’s IPO has already seen “significant” during a recent roadshow in the Gulf, and a second roadshow in the US is set to kick off this month. The sale would be the first IPO under the program.

Other candidates include Heliopolis Housing and Development, which is currently mulling four offers from private sector companies bidding for a contract to take over management and acquire a 10% stake. An additional 11-15% stake will then be sold on the EGX after this contract, which is expected to be awarded by no later than Sunday, is finalized. Alexandria Container and Cargo Handling (ACCH) and Abu Qir Fertilizers — two already-listed companies that have finalized procedures last year to take secondary offerings to market — are also on the table.

Fawry transfers majority shareholder stake to indirect shareholders: Egyptian e-payment company Fawry has transferred the ownership of the 63.99% stake held in the company by PSI Netherlands Holding to indirect shareholders, finishing a restructuring process detailed in its listing prospectus (pdf) published ahead of its IPO on the EGX last August, Hapi Journal reports. More than 40 companies and individuals — which together own PSI Netherlands — received the shares at EGP 8 apiece. The International Finance Corporation, the Egyptian American Enterprise Fund, and Link Holdco are among the list of investors who now directly own stakes in the company. Prior to the transaction, they held indirect stakes.

Avoiding an MTO: Distributing ownership among its indirect shareholders allows Fawry to bypass Egyptian securities regulations that would have required it to make a mandatory tender offer. The Financial Regulatory Authority agreed not to force the company into an MTO earlier this month. EFG Hermes acted as the broker for the EGP 3.6 bn transaction.

STARTUP WATCH- Bosta secured EGP 40 mn in series A round -sources: Cairo-based courier startup Bosta raised more than EGP 40 mn in the series A funding round announced earlier this week, the local press reports, citing sources close to the matter. The company said on Sunday that European delivery company DPD and Egyptian e-payment firm Fawry invested seven-figures during the funding round but did not disclose the value of the investment or the currency. Other anonymous sources cited by Waya claimed that Bosta raised USD 1.4 mn (c. EGP 21.85 mn).

STARTUP WATCH- Digified to complete first funding round by end of 2020: Cairo-based fintech startup plans to complete its first round of financing from local and international investors by the end of 2020, CEO Ibrahim Hassan told Al Mal. The company will use the capital to expand its existing identity verification services to new sectors and customers in the banking and non-financial financial sectors. Digified is one of three companies — along with Valify and Bangalore-based FRS Labs — currently testing an automated know your customer system (e-KTC) for the Central Bank of Egypt, as part of the bank’s fintech hub slated to open in the second quarter of this year.

Digified uses machine learning technology to extract data and verify identities from official Arabic-language documents. Part of accelerator Falak Startups, it was the only Egyptian finalist at last year’s Seamless North Africa pitch-off.

EARNINGS WATCH- Rameda Pharma’s net profits dropped 36% y-o-y in FY2019 to EGP 82.4 mn, down from EGP 129 mn a year earlier, the company revealed in its earnings statement (pdf). The dip in profits came as the company shut down production lines earlier in the year for key upgrades. Consolidated revenues for the year came in at EGP 894 mn, up 11% y-o-y, from EGP 805 mn during the last year. CEO Amr Morsy said it was “a landmark year” ending with the group’s listing on the EGX in December and “the completion of a capital increase for EGP 582.5 mn that will enable Rameda to accelerate its growth potential.” Rameda, which launched eight new molecules last year, said it would use proceeds from the IPO to directly fund growth, including the acquisition of new molecules and opportunistic M&A.

Noting that Rameda is one of the fastest-growing companies in the industry here in Egypt, Pharos Holding recently initiated coverage of Rameda’s shares with a fair value of EGP 5.50 per share (implying upside of nearly 17%) and an “overweight” recommendation.

MOVES- TMG hires Emaar Misr’s former development manager as deputy VP: Hazem El Sharkawy (LinkedIn) has been appointed Talaat Moustafa Group’s (TMG) deputy vice president for technical affairs, he told Hapi Journal. El Sharkawy previously served as senior director of development at Emaar Misr.

Egypt was the world’s largest exporter of oranges in 2019, overtaking Spain for the second consecutive year, Agriculture Export Council head Abdel Hamid El Demerdash said. Exports of the crop reached 1.68 mn tonnes, El Demerdash added without specifying a value. Egyptian oranges have been gaining ground in European and global markets, with sales growing by 17% last year in Europe alone. Egypt is already one of the world’s largest producers of oranges, behind Brazil, India, China, Mexico, the US and Spain.