Will a strengthening EGP put pressure on corporate earnings?

THE STORY OF THE DAY- The covid-19 virus appears to have become a global pandemic: Italian cities are on lockdown, Iran is struggling to curb infections and South Korea is shutting down schools and bracing for an economic slowdown:

• Italy has put 10 cities on lockdown, sealing off the towns worst affected by covid-19 after the number of infections rose to more than 150, according to Reuters (link above). Currently the biggest outbreak of the virus in Europe, Italy has banned public gatherings including conferences and football matches and canceled the last two days of the Venice carnival.
• Iran has the highest infection numbers in the wider region, Bloomberg reports, and its neighbors are closing off their borders.
• South Korea’s business community is braced for the worst after an infected worker turned up at a Samsung plant. Six people have died in South Korea and more than 600 people have been infected, according to BBC.

The total number of cases worldwide is nearing 80k with almost 2.5k deaths, according to a live Bloomberg tracker. The story is front page news in the global business press, including the Financial Times and the Wall Street Journal.

Scientists are now concerned they don’t know how the virus is spreading: As the virus rapidly spread in Italy, Iran and South Korea, a World Health Organization spokesperson noted that “infections that are now emerging in people who haven’t traveled to China or come into contact with confirmed cases show ‘it’s not clear how the virus is spreading.’”

Pundits think the global economy will “shudder as [the] coronavirus threatens the world economy,” the Wall Street Journal writes, quoting one business leader who described the impact of covid-19 on his business as a “once-in-a-generation event.”

The Dow could open down more than 400 points as the market gets its head around the extent of the contagion, CNBC reported near dispatch time this morning. Nasdaq and S&P500 futures also pointed to lower opens this morning. Oil prices are down 3%.

So where does Egypt stand? It’s a mixed bag, but mostly good (so far). There are no new cases in Egypt as of this morning, and the country’s one patient has tested negative for the virus for days now. Worth noting: A study in the British medical journal The Lancet found that while Egypt, Algeria, and South Africa “were at the highest risk [in Africa] of importing a COVID-19 case from China,” all three countries “have the most prepared health systems in the continent and are least vulnerable.”

EGP WATCH- The EGP rally against the greenback is still going strong, bringing it to EGP 15.49 yesterday. The currency has now risen 51 piasters so far in 2020. You can check out our breakdown of the rally and what it means for industry here.

Our friends at EFG Hermes are holding their annual One on One conference on 2-5 March at Atlantis, Dubai. The gathering is the world’s largest frontier- and emerging-market-focused investor conference.

Other dates for your diaries during the first week of March:

• Business Today’s bt100 awards ceremony (pdf) takes place on Tuesday 3 March.
• The two-day Women Economic Forum (pdf) gets underway on Wednesday, 4 March in Cairo.
• The Union of Arab Banks will hold a three-day forum for risk officers on 6-8 March in Hurghada.
• A one-day investment conference for the Suez Canal Economic Zone will take place on Saturday, 7 March.

Located on the North West Corner of Somabay, lies Mesca Beach, stretched out onto 1.5km of silky sand. Mesca Beach is best known for its big tidal changes, shallow sandy waters and mounds of mangroves, in addition to the 7Bft Kite House, famously known as one of the best surfing spots on the planet. Combining luxury and adventure, the beach will be welcoming its very own Mesca Hotel, making its debut later this year.

It’s the final day of the G20 summit in Riyadh, where finance ministers and central bank governors focused on the global economic slowdown fueled by the covid-19 outbreak, but appeared to struggle to find common ground on a “coordinated response,” sources told Bloomberg. The communique from the summit only referenced the epidemic once. Delegates from 20 countries also talked about digital taxation, with the EU spearheading a drive to regulate Big Tech, while the US is still dragging its feet out of fear that taxing tech companies could hinder innovation, CNBC says. The final communique will be here once the summit wraps.

Meanwhile, central bank governors had the price growth challenge on their minds, with the US, Japan, and the EU discussing how aging populations are preventing inflation from meeting their 2% target despite stimulus measures, according to Reuters. The Fed is looking into allowing inflation to run above target to make up for the economic downturn.

Two Finland-based pension funds holding USD 108 bn are racing to hedge against global warming repercussions. The “Massive Risk” of climate change is driving the two funds to limit investments to companies that are seriously considering environmental, social, and governance aspects to reach the 2035 climate goals, Bloomberg reports. One fund, Varma Mutual Pension Insurance, has a plan to offload stocks with thermal coal exposure by 2025.

US Democrats are scrambling to keep up with Bernie Sanders in the primary election race after the senator won the Nevada Caucus by a landslide, earning some 48% of county convention delegates, Reuters reports. The results of the Nevada vote have placed Sanders as the frontrunner in the race to become the official party candidate in this fall’s presidential election. The possibility of having Sanders face off against Donald Trump is concerning to more centrist Democrats, who think the senator’s far-left policies would be a death sentence for the party’s “chances of winning back the White House and Senate and holding on to the US House of Representatives,” the Financial Times says.

Two must-reads about work to liven up your commute this morning to … work:

• AI is coming for your job if you’re a marketing type, financial advisor or computer programmer, according to the Wall Street Journal.
• Companies are putting food at the center of their offering to staff, the Financial Times suggests in a piece in its (rather good) special on the Future of the Workplace.

*** 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 the costs and benefits of the growth of Egypt’s high-end preschool industry.

It was a fairly uneventful night on the airwaves, save for a chat with EGX boss Mohamed Farid and updates on the Grand Ethiopian Renaissance Dam (GERD).

Unnamed energy company to IPO before Ramadan; financial services, chemicals companies after September -Farid: An unnamed energy company is expected to sell shares in an initial public offering before Ramadan, which will be observed toward the end of April this year, Farid tells Al Kahera Al Aan’s Lamees El Hadidi. Two other companies, one in the financial and payments sector and another in the chemicals sector, could go to market after September, Farid added.

The stock exchange is open for all as a channel for both saving and investing, Farid also said. There is a mistaken belief that only large investors have access to the market, but numbers don’t matter, the EGX chairman added. The bourse has been pushing to attract younger investors through online and television adverts (watch, runtime: 1:00). According to Farid, the majority of EGX investors are over 40 years old. You can watch Farid’s interview with El Hadidy here (runtime: 22:05).

Cairo, Addis Ababa, Khartoum reportedly receive GERD agreement draft: A draft agreement on the rules of filling and operating the Grand Ethiopian Renaissance Dam (GERD) expected to be signed before the end of the month has reportedly been sent to the Egyptian, Ethiopian, and Sudanese capitals, but authorities denied the news, Al Hadath TV’s Washington correspondent, Pierre Ghanem, told El Hadidi (watch, runtime: 6:17). The US Treasury Department and the World Bank, which recently stepped in to mediate the GERD dispute, were preparing the draft. Delegations from the three countries should be meeting on Friday to review the draft ahead of signing an agreement.

Gov’t focuses on raising awareness about the environment: Lobna Assal phoned the environment minister for a comment about a meeting yesterday with President Abdel Fattah El Sisi and efforts by the El Sisi administration to protect the environment and conserve natural resources (watch, runtime: 4:51). A recently launched presidential initiative, “prepare for green,” aims to raise environmental awareness in the country.

Strengthening EGP to put pressure on corporate earnings -Pharos: Corporate earnings will come under pressure over the next four quarters as the EGP continues to strengthen against the USD, Pharos Holding’s head of research Radwa El Swaify wrote in a report. The research house forecasts the currency changing hands in the EGP 14.50 to 15.50 band against the greenback this year and predicts “a gradual weakness in earnings over the next four quarters” through both a direct impact and “indirect effects.” On that last bit, El Swaify suggests that when the “exchange rate was depreciating, consumers were rushing into buying to avoid higher cost in the near future. Now, that exchange rate is weakening, the purchase decision is postponed until prices find a bottom.”

In short: The appreciating currency is going to sap export sales and prompt consumers to hold back from major purchases as they wait to see whether prices have hit bottom.

Earnings may also be buffeted by macro headwinds: Cheaper commodity prices, slowing global trade or lower infrastructure spending in Egypt may place further pressure on corporate earnings. “We expect the market to continue to be trapped by these dynamics until the strength in the FX rate comes to a stop or global commodity prices find a floor,” the report says.

Corporate earnings had recovered to pre-float levels at the end of last year, with inflation decelerating rapidly, FX reserves reaching an all-time high, and economic growth clocking in at more than 5.6% in 2019, Bloomberg said in November.

M&A WATCH- Sawiris eyes majority stake in state-owned Shalateen: Naguib Sawiris is in talks with the government to buy a 51% stake in state-owned Shalateen Mining, Reuters reports. No further details were provided, including the timeline of the negotiations and the expected value of the transaction.

Sawiris, who is the chairman of La Mancha Mining, has long been interested in getting in on Egypt’s mining industry. He last week flagged his interest in the government’s upcoming international gold exploration and production tender, telling Bloomberg that he is “willing to participate in any area that could be promising.” La Mancha is the biggest shareholder in Canada’s Endeavour Mining, which recently tried to acquire Centamin, currently the only gold producer in Egypt. Sawiris lauded the recently-announced executive regulations to the amended Mineral Resources Act as being positive for investors. The new regs will see gold mine operators pay the minimum 5% royalty, EGP 25k in rent each year per sq km, and income tax of 22.5%.

The government will start accepting bids for the tender during the first half of March, an official at the Egyptian Mineral Resources Authority told Reuters. Local press reports recently indicated that the government would issue the tender either at the end of February or by the beginning of March. The tender will be the first of its kind since the Mineral Resources Act was amended last year and the first for gold exploration since 2017. It will feature blocks in the Eastern Desert that will be offered in phases, each to be closed within four months of offering.

Meanwhile, Aton Resources’ mining license is still under review. Authorities are reviewing an economic feasibility study before the license receives final approval from cabinet and then the House of Representatives, Al Mal reports, quoting unnamed sources. Once approved, Aton will be exploiting the Eastern Desert’s Hamama region to extract gold under a 20-year license with an additional 10-year option period and would also retain rights to explore in the Abu Marawat concession area in the Arabian-Nubian Shield, north of Sukari mine, where existing player Centamin is operating.

Beltone, Emirates NBD tapped to manage HHD secondary offering: Beltone Financial and Emirates NBD have reportedly been selected to manage the sale of a 25% stake in Heliopolis Housing & Development (HHD), Al Mal reports, citing unnamed sources close to the banks. The secondary offering will include allocating a 10% stake and management rights to a strategic private investor, while the remaining 15% stake will be sold on the EGX as part of the state privatization program.

Meanwhile, the deadline for companies to submit their bids for the 10% stake + management rights contract was yesterday. SODIC, BPE Partners, Palm Hills, and Saudi’s Dar Al Arkan are expected to have submitted bids. The company had requested that all companies submit their bids all on the same day to avoid leaks that could sway the company’s decision. HHD had said it would open all the submitted envelopes on the same day. Other companies that had shown interest include EFG Hermes, Emaar Misr, and Orascom Development Egypt (ODE), and Orascom Development.

Background: HHD had extended to February the deadline for investors to submit their bids, and had previously said it will take its secondary offering to market before May 2020. It also revealed some minor additional information regarding the naming of the chairman and managing director, as well as how many feddans it plans to sell in New Heliopolis.

BUDGET WATCH- FinMin adopts more ambitious debt-to-GDP targets in coming fiscal year: The Finance Ministry will aim to lower Egypt’s debt-to-GDP ratio to 79% during FY2020-2021, Minister Mohamed Maait said on the sidelines of a conference yesterday, Hapi Journal reports. The new figure is more ambitious than targets announced in the ministry’s preliminary budget statement in November, which forecast debt-to-GDP falling to 80%. The statement revealed that the ministry expects GDP to grow at a 6.4% clip in the coming fiscal year, up from a projected 6% in FY2019-2020. The jury is still out over whether the government will meet this year’s target: Preliminary figures announced last week showed that the economy grew at a slower 5.6% clip during the first six months of the fiscal year.

EXCLUSIVE- The ministry is also planning to reduce its ceiling for Egypt’s external debt-to-GDP ratio to 30% in the medium term, down from 37% in FY2018-2019, according to official documents reviewed by Enterprise. The ceiling will be reviewed and adjusted on an annual basis according to economic developments. The government began implementing last March a comprehensive debt strategy, which includes moving towards longer-term debt and imposing a cap on eurobond issuances.

Fertilizers could be subject to automatic pricing mechanism now, too: Separately, the ministry is working with the IMF to draft a strategy to boost government revenues. The proposals currently under study include pegging the cost of fertilizers to global prices — which the government began doing with oil prices last year — while creating a transitional safety net for small-scale farmers that own less than five feddans. The government would provide these farmers with financial support for three years, and would gradually reduce the amount handed out each year. The financing package is expected to cost EGP 5 bn, according to the documents.

Banque Misr eyes USD 250 mn loan for SME finance: Banque Misr is in talks with two unnamed international institutions for a USD 250 mn loan to increase its SME financing in Egypt, Chairman Mohamed El Etreby tells Bloomberg. The bank recently signed an agreement with the European Investment Bank to double its SMEs financing credit line to EUR 1 bn. Banque Misr is also expecting a boost in liquidity from the sale of a 45% stake of Banque du Caire in 1H2020 as part of the state privatization program.

Africa expansion plans coming along: Egypt’s second-largest state-owned bank is also moving ahead with its plans to expand its presence in Africa, which will see it opening either branches or representation offices in Somalia, Kenya, and Djibouti. El Etreby had said in November that Banque Misr received approval from the Central Bank of Egypt to set up rep offices in Somalia, Kenya, and Tanzania.

Alexbank lands USD 100 mn EBRD loan for SME finance: Alexbank has signed a cooperation agreement worth USD 100 mn with the European Bank for Reconstruction and Development (EBRD) to finance SMEs, the local press reports. Under the agreement, the EBRD will provide USD 50 mn in funding for SMEs, including an assistance package that will provide businesses with training and workshops. The remaining half of the loan will be disbursed under the EBRD’s Trade Facilitation Program which aims to boost foreign trade between EBRD countries by underwriting international trade transactions made by banks.

CBE eases debt repayment terms for financially distressed companies: The Central Bank of Egypt (CBE) will renegotiate debt repayment terms with individual companies seeking help through its initiative to support financially distressed firms, according to an official release (pdf). The CBE is scrapping a condition under the initiative requiring companies to pay 20% of their debts before June and 50% before the end of 2020, and will agree new repayment periods with each company according to its financial situation. "Discussions [with banks and companies] revealed that customers need to adjust payment periods and rates in order to properly save them from defaulting," the CBE said.

Financial leasing and factoring companies send a list of defaulters for CBE aid: Fifty-four leasing and factoring companies have sent data of their troubled clients to the Financial Regulatory Authority (FRA) and the CBE to seek debt relief help, Egyptian Factoring Association Chairman Gamal Muharram told Al Mal. An FRA committee is looking to pen criteria for choosing the customers who have defaulted for reasons beyond their control, excluding mismanagement, to help them recover by seeking help from the banking sector by including them in CBE's initiative to reschedule debt.

Background: The CBE had launched an initiative in December to exempt nearly 5.2k factories from accrued interest payments halt legal action against struggling factories to help boost medium sized domestic manufacturing. Since then, the CBE has waived EGP 48.5 bn-worth of debt and interest payments and tens of companies have submitted applications to receive this aid. The FRA had set up last month a committee to assess how non-banking financial services companies can be brought into the initiative.

CBE studying plan to hedge against bank investments in SMEs: The Central Bank of Egypt (CBE) and its newly established Credit Guarantee Company are planning a program to help banks hedge against risks incurred by holding stakes in private equity companies and funds that invest in SMEs, CBE Sub Governor Nermine El Tahry said, according to Al Mal. The program comes after the CBE issued regulations last year allowing banks to fulfil their mandatory quota of loans to SMEs by purchasing stakes in SME-oriented investment funds. Banks are required under a CBE initiative first launched in 2015 to dedicate a portion of their loan portfolios to lend SMEs at a subsidized 5% interest rate.

Correction: 24/02/2020

A previous version of this article incorrectly cited the CBE’s Export Credit Guarantee Company.

IPO WATCH- Emerald’s IPO retail component 17.7x oversubscribed: Retail investors have put in orders for 61.9 mn shares for Emerald Real Estate’s public offering on the final day of subscription yesterday, leaving the retail component 17.7x oversubscribed, reports Al Mal. The company had allocated 3.5 mn shares for the retail offering. The institutional component was, meanwhile, 1.3x oversubscribed, with orders placed for 89.1 mn shares from a total of 66.5 mn on sale. The Financial Regulatory Authority has published the prospectus (pdf) for the potential 28% sale.

LEGISLATION WATCH- House approves Data Protection Act, pending final signoff: The House of Representatives approved in a plenary session yesterday all articles of the Data Protection Act, and is due to cast a final vote at a later session, Al Shorouk reports. The law, which lays out the ground rules for how businesses use personal information collected online, was slated to pass the House last month, after having been delayed several times from an original 2018 date. The final draft of the legislation excludes banks from its stipulations, says the newspaper. We have previously noted that a House committee voted to exempt the Central Bank of Egypt and the Financial Regulatory Authority.

No word on controversial prison sentences: House reps were working to resolve a controversial article that would impose a six-month prison term on non-compliance, which the reps say could discourage investors. There was no mention of whether this was changed or revoked.

Other elements of the law: The bill enshrines users’ right to access their private data at any time as well as gives them the right to take legal action against parties responsible for data breaches and misuses of private information. The legislation also stipulates that a unit to protect personal data be established under the Information Technology Industry Development Agency whose members shall be selected by the Justice Minister and given powers of arrest. Check out our comprehensive breakdown of the legislation and how it may affect you and your business.

LEGISLATION WATCH- Real Estate Registry Act receives nod from House committee: The House Legislative Committee has greenlit amendments to the Real Estate Registry Act that would speed up procedures for citizens to register properties by setting a time limit and simplifying the registration process, reports Masrway. The House has been consistently nagging the government to introduce the bill, which only very recently received cabinet approval. House Speaker Ali Abdel Aal previously called on the government to fast track the bill amid criticism that the existing law defers from registering their properties due to the difficult procedures and the high costs. The changes should now be up for a final vote in a general assembly session before being signed into law by the president.

LEGISLATION WATCH- Draft Labor Act ready to enter House -Saafan: The draft Labor Act is ready to be introduced to the House of Representatives, Manpower Minister Mohamed Saafan said during a TV interview on Saturday (watch, runtime: 2:08) without providing a timeline. House Deputy Speaker Soliman Wahdan said last week that he expected parliament to finalize the legislation within the next three months. A draft of the legislation was last under parliamentary review in 2019 when it had received approval from the House Manpower Committee. The legislation includes provisions intended to encourage youth employment and create specialized courts to handle labor-related cases.

REGULATION WATCH- Industrial Development Authority branch directors will be allowed to grant conditional licenses to industrial investors following new amendments by the Trade Ministry to the executive regulations governing the Industrial Permits Act, according to a ministry statement (pdf). IDA chief Magdy Ghazi said that the authority’s branch directors, or whomever they delegate, will now be empowered to grant facilities temporary licenses until they complete their paperwork, provided the decision is published in the Official Gazette. Trade Minister Nevin Gamea said the decision was made to simplify the process of setting up facilities and make the sector more attractive for investors.

SCZone can now directly regulate its companies’ imports: Prime Minister Moustafa Madbouly has issued a decree putting the head of the Suez Canal Economic Zone (SCZone) In charge of setting regulations on goods imported by companies operating in the zone, government sources told the local press. The move is meant to streamline the movement of goods within the zone.

Security forces arrested yesterday two individuals accused of operating two unlicensed satellite channels, the Interior Ministry said. According to the ministry, the individuals were found in possession of banned books on the Ikhwan. They are being charged with violating the Investment Act, disseminating content and using broadcasting programming without the necessary licenses, and setting up satellite channels outside the Egyptian Media Production City without approval.

EARNINGS WATCH- Oriental Weavers profits increase 54% in 2019: Oriental Weavers posted net profits after tax and minority interests of EGP 775 mn in 2019, a 54% increase from the previous year, according to an EGX filing (pdf). Revenues fell 2.6% to EGP 10.1 bn during the period, down from EGP 10.4 bn from 2018.

Jews visiting Alexandria’s synagogue decades later aren’t sure whether to be hopeful or despondent: Last week’s homecoming for 180 Jews that were dispelled from Egypt back in 1956 was a bittersweet event combining a sense of loss with a twinge of hope, Declan Walsh and Ronen Bergman write for the New York Times. The group were taken to the recently renovated synagogue where they were overwhelmed by the restoration of the place of worship they frequented as children. Still, the story asks: Will the restored synagogues be opened to the public as Egypt embraces its Jewish heritage? Or will the renovations remain out of the public eye?