Maait outlines next budget against the backdrop of covid-19

*** We’ve never asked you for a penny, but we’re doing so today — not to put a coin in our pocket, but to help the folks at the Breathe campaign raise funds to acquire ventilators the nation needs.

The Breathe Campaign is raising funds to purchase mechanical ventilators from suppliers around the world. As the number of covid-19 cases rises in Egypt, so does the need for ventilators across the country. For critically ill patients, mechanical ventilation can be the difference between life and death — all of you reading Enterprise have seen the stories about shortages in developed economies including Italy and the United States. The Breathe Campaign, a pilot project by charity startup Humankind with the aid of the Egyptian Cure Bank, has created a star-studded campaign featuring public figures including Yosra, Amina Khalil and Naguib Sawiris simply inhaling and exhaling.

Keep up to date with the campaign on Instagram and check out the ad (watch, runtime: 1:08).

Want to make a contribution? Hit up the Egyptian Cure Bank, Fawry or the FawryApp or check out the description section of the Youtube page for other options.

Finance Minister Mohamed Mait unveiled the 2020-20201 state budget yesterday. We have chapter and verse in this morning’s Speed Round, below.

It’s interest rate week, with the central bank set to meet on Thursday to review rates — it’s first regularly scheduled meeting since its surprise 300 bps rate cut earlier this month. We’ll have our usual poll of analysts for you tomorrow.

The government committee in charge of setting local fuel prices will hold its quarterly meeting today, the local press reports. Fuel prices look set to fall: The price of oil has plunged since the beginning of the year. The committee has raise or lower domestic fuel prices as much as 10% every three months.

MARKETS TODAY- Asian markets with the exception of India inched into the green this morning as we hurtle toward dispatch time. Futures suggest both European and North American markets should also open in the green later today.

COVID-19 IN EGYPT-

Egypt has now reported a total of 656 cases of covid-19 after 47 new infections, all Egyptians, were announced by the Health Ministry last night. The ministry also reported the death of a 44-year-old woman from Cairo, taking the death toll to 41. It said 150 people have made full recoveries and another 196 people have tested negative after seeking treatment.

The first known instance of a medical professional dying after contracting covid-19 came yesterday as the Health Ministry mourned the passing of Dr. Ahmed Abdou Ellawah, a professor of medicine at Al Azhar University, who died at age 57. His death will bring the toll to at least 42 when it is included in the ministry’s daily update this evening, health ministry spokesman Khaled Megahed said last night.

Egypt will roll out new testing facilities nationwide over the coming two days. Some 26 centers are already up and running, according to a cabinet statement released after a meeting between Prime Minister Moustafa Madbouly and Health Minister Hala Zayed.

The nation is looking to build a three-month reserve of personal protective equipment (so-called “PPE) for medical professionals amid fears of a shortage. Trade Minister Nevine Gamea is requiring Egyptian producers and importers of PPE to sell directly to the national stockpile at the Egyptian Authority for Unified Procurement, Medical Supply, and Technological Management. Suppliers to the Armed Forces and police service are exempt from the order, according to a cabinet statement.

The government is also adding to its strategic reserve of staple goods in the face of the covid-19 crisis and with Ramadan around the corner. The news came after President Abdel Fattah El Sisi met with cabinet members yesterday, according to an Ittihadiya statement. El Sisi also urged officials to crack down on price gouging and hoarding.

As many as 1k frontline healthcare workers will receive life insurance under policies worth EGP 2.5 mn each. The policies are being bought by the Federation of Egyptian Industries, the local press reports. The Health Ministry will help determine who is eligible for coverage under the policies. The policies are intended for staff who work directly with covid-19 patients.

New, temporary caps on deposits and withdrawals by individuals do not apply if you’re looking to buy into the new 15% fixed-rate savings certificates launched by Banque Misr and the National Bank of Egypt last week, Al Mal reports.

Restaurants, gyms, nightclubs, museums and archaeological sites will remain closed until 15 April in an extension of the suspension of activities period by the Tourism Ministry, according to a cabinet statement.

Imams who reopen mosques for prayers in defiance of the government’s closure orders will be summarily fired, the Endowment Ministry said yesterday, according to a cabinet statement.

The New Urban Communities Authority isn’t ceding an inch to real estate developers despite a directive from the Central Bank of Egypt that creditors reschedule loan payments and other obligations for a six-month period, the local press reports, citing unnamed informed sources. NUCA is reportedly preparing a memo for the Housing Ministry outlining why it doesn’t think land payments it is owed by real estate developers should be subject to the payment holiday. The domestic press report suggests NUCA needs the cashflow so that it can still honor its obligations to contractors it has engaged.

You’re not getting a visit from the gas meter reader this month: The Oil Ministry will stop sending meter readers for the duration of the crisis. Instead, it is asking citizens to record their consumption online or by calling the call center and to pay via electronic channels, according to Masrawy.

The Ministry of Water Resources isn’t going to be collecting license fees from boats or floating hotels anytime soon, either, Al Mal reports.

An exceptional flight yesterday repatriated some 350 Egyptians stranded in Kuwait since the covid-19 outbreak, Al Masry Al Youm reports. Government officials are still working to get home another 95 citizens stuck in the Maldives.

Gov’t falls short in t-bond auction: The Central Bank of Egypt sold EGP 2.5 bn of treasury bonds in two auctions that sought to raise EGP 7.5 bn, according to the official data. The CBE sold EGP 1.5 bn of three-year bonds in an EGP 4 bn offering at a 13.9% yield, almost 400 bps under the rate requested by investors. In the EGP 3.5 bn seven-year offering, investors bought EGP 1 bn of bonds at a 14% yield, 410 bps lower than the requested rate. The government has faced issues selling its target amount of bonds in recent weeks as market turmoil caused by covid-19 pushed investors to demand higher yields.

ON THE GLOBAL FRONT-

What’s this? Some good news? US healthcare giants Johnson & Johnson and Moderna are preparing to manufacture huge quantities of covid-19 vaccines after agreeing to overtures made by the US government, Reuters reports. The US will pay USD 421 mn to J&J to establish new manufacturing facilities that will enable it to produce more than 1 bn doses of a vaccine it is currently testing.

Let’s not get ahead of ourselves here: There exist no vaccines or treatments for the virus, and that’s not expected to change until at least 2021.

Researchers in Melbourne are investigating to see whether the BCG vaccine against tuberculosis can ward off corona, Bloomberg says. It all sounds good until you realise that countries where BCG is widely used — China, Iran and the UK for example — have also become hotspots for covid. So we’re not holding out too much hope that a century-old vaccine is going to be the answer to most of our current problems.

The news of progress towards a vaccine helped stocks to rally: Healthcare stocks led the charge in the US markets yesterday which saw the S&P 500 rise for the fourth time in five sessions, gaining 17% over the past week. It was a similar story on the other side of the Atlantic where all indexes except Spain’s IBEX finished in the green.

But “we’re not in an all clear,” El Erian warns: Market sage Mohamed El Erian said that he believes the “sell everything” moment has now passed, but that we’re still in for turbulence ahead. “If you feel it’s the all clear, go out and buy the index … I don’t think we’re there yet. We’re not in the an all clear,” he told CNBC’s Squawk Box.

FROM THE DEPARTMENT OF REDUNDANCY DEPARTMENT- IPOs are challenged (shocking, right?) as market volatility makes pricing difficult, the Financial Times reports.

AfDB issues USD 3 bn bond to curb economic impact of covid-19: The African Development Bank (AfDB) has raised USD 3 bn from a three-year social bond, the proceeds of which will be used to finance the bank’s planned “comprehensive response” to cushion African countries from the economic impact of the covid-19 virus, according to a statement.

This comes as Africa approaches its “break the glass moment”: At least, that’s how Chairman of the joint World Bank – IMF Development Committee Ken Ofori-Atta put it in an interview with the Financial Times. Ofori-Atta warned that international actors need to step up their efforts to help shield the continent from the spread of the covid-19, which could wipe out 5-10% of the continent’s GDP. That could force the IMF to step in with debt forgiveness and bailout packages.

The UN is listening, joining with the IMF to call for USD 2.5 tn in emergency support for developing countries: In a report published yesterday, the UN Conference on Trade and Development argues for massive fiscal support to be provided to lower income countries whose economies will take an “enormous hit” due to capital flight, falling commodity prices and currency depreciations. UNCTAD is calling for USD 1 tn in fresh liquidity, a USD 1 tn debt relief package for countries with USD debt, and USD 500 bn to support emergency health services and social programmes.

Dubai’s Expo 2020 will reportedly be pushed for one year due to the covid-19 outbreak, according to a draft statement seen by Reuters. The expo was previously scheduled to open on 20 October.

Israeli Prime Minister Benjamin Netanyahu is going into isolation after being in contact with an aide who tested positive for covid-19. (Bloomberg)

What we’re doing now? This could be the future of work, the Financial Times writes in the latest in a little string of pieces it has done on working from home.

Need a pick-me-up? Watch John Krasinski give a rundown of good news stories in the world today (watch, runtime: 15:43). It’s uplifting without being saccharine, and for fans of The Office there’s the bonus of an interview with Steve Carell.

It feels like a lifetime since we’ve had anything other than covid-19 on our screens: Last night Finance Minister Mohamed Maait was doing the rounds on the talk shows to discuss the new details of the draft budget released yesterday. Maait dropped into Al Hayah Al Youm (watch, runtime: 17: 12) and Masaa DMC (watch, runtime: 9:51) to talk about the announcement. We have the full story in this morning’s Speed Round, below.

WHO on Egypt’s covid-19 efforts: Al Kahera Alaan’s Lamees El Hadidi reported on the World Health Organization’s press conference yesterday, which relayed the latest covid-19 updates in Egypt, and announced that the government had agreed to proceed with clinical trials in search of treatments for the disease (watch, runtime: 2:40), El Hekaya’s Amr Adib (watch, runtime: 3:20) also covered the WHO’s statements.

Two nights ago, Naguib Sawiris took to Al Kahera Alaan to criticize the government’s covid-19 strategy. Last night, it was Alaa Arafa’s turn. The garment maker and industrialist repeated several of the same talking points used by Sawiris to argue against a period of lockdown to contain the virus. Speaking with El Hadidi, Arafa claimed that lockdowns had not been proven effective in flattening the curve in some countries, and emphasized that Egypt cannot afford to completely shut down its economy. Instead, he argued for a so-called “phase 2 rescue strategy” for when the worst of the crisis is over, involving isolating positive and at-risk cases and returning others to work (watch, runtime: 6:30).

A run on the banks? El Hadidi also reported on the crowds dashing toward the nation’s banks and ATMs following the Central Bank of Egypt’s decision on Monday to tighten limits on daily withdrawals and deposits. She voiced distress over the images and noted that the CBE will re-examine its caps in two weeks’ time (watch, runtime: 4:44).

Government spending on health, education, wages and welfare is set to increase in the coming fiscal year, according to highlights of the draft 2020-2021 budget released yesterday by the Finance Ministry. Our math suggests government spending will increase 9% during the year in what Finance Minister Mohamed Maait called Egypt’s biggest budget yet. Education and health allocations and government investment will rise substantially and the government says it is giving an EGP 4 bn tax cut low-income taxpayers when it raises the base personal tax exemption to EGP 15k from EGP 8k currently.

Revenues are expected to increase to around EGP 1.3 tn, up almost EGP 200 bn from FY 2019-2020.

The budget deficit is expected to shrink to 6.3% of GDP compared to the 7.2% target in the current budget.

State spending: The government will spend EGP 1.71 tn during the upcoming fiscal year, a 9% increase from the EGP 1.57 tn allocated for the current fiscal year. Among the highlights:

• The public wage bill will rise by 11.3% to EGP 335 bn from EGP 301 bn in the current fiscal year.
• Health spending will rise by a third to EGP 95.7 bn.
• Spending on education will increase by 70% to EGP 132 bn.
• Government investment will hit EGP 280.7 bn, a 64% increase from the current fiscal year.
• Spending on export subsidies will ramp up to EGP 7 bn from EGP 6 bn this year..
• Pensions will be allocated EGP 170 bn and EGP 19 bn will go to social security, takaful and karama pensions.
• Spending on goods and services will come in at EGP 100.2 bn.
• Support for low-income housing will rise 70% to EGP 5.7 bn.

Oil prices: The government sees oil prices averaging USD 61 / bbl through FY2020-2021, down from the USD 68 price used in the previous budget’s calculations. Prices are currently far below this, with both US and Brent crude trading at just over USD 20 / bbl. Maait said the comparatively high price set out in the budget is a hedge against a rebound in oil prices. “I have to protect the budget. What if the price of a barrel of oil increased? How will you finance it? What will you do?” he said.

CORRECTED on 31 March 2020

A previous version of this story incorrectly said the government had set the average oil price in FY2019-2020 at USD 70 / bbl.

Current account deficit narrows in the first half of FY 2019-2020: Egypt’s current account deficit narrowed to USD 4.6 bn in 1H2019-2020 from USD 5.3 bn the previous year, according to official data (pdf). The fall was caused primarily by an improving non-oil trade balance and a rise in unrequited current transfers, the central bank said. The decline in the oil trade balance, a drop in the services surplus and an increase in the investment income deficit, however, stemmed the growth. Balance of payments generated a USD 410.9 mn surplus, compared to a USD 1.8 bn deficit in the same period a year earlier.

Non-oil trade balance shows improvements: The non-oil trade deficit fell by USD 1.4 bn to USD 18 bn, from USD 19.4 bn. A key contributor was merchandise exports, which rose by USD 940.9 mn to US 9.2 bn, from USD 8.3 bn, mainly gold, radio and TV transmitters, as well as pharmaceuticals. Imports of iron, wheat, spare parts for cars, and pharmaceuticals dropped, also contributing to the deficit decrease.

But oil exports suffered: The oil trade balance entered a USD 733.3 mn deficit from a USD 150.8 mn surplus after oil exports fell 16%. Egypt’s oil exports fell to USD 5 bn during the six-month period from USD 6 bn a year earlier despite rising natural gas exports. There was a marginal decrease in oil imports by USD 79.7 mn to USD 5.78 bn, from USD 5.86 bn.

FDI was solid: Net foreign direct investment rose almost 20% to USD 5 bn, driven by a USD 1.2 bn increase in greenfield investments. Total inflows increased by USD 1.2 bn to USD 9.2 bn, and outflows rose by USD 378.9 mn to USD 4.2 bn.

Other key metrics:

• Tourism revenues increased by USD 460 mn to USD 7.2 bn.
• Suez Canal receipts rose by USD 103.8 mn to USD 3 bn, from USD 2.9 bn.
• Portfolio investments saw net inflows of USD 273.6 mn.
• Unrequited current transfers increased by USD 1.7 bn to USD 13.6 bn, from USD 12 bn, largely due to a 13.5% rise in workers’ remittances.

IIF downgrades Egypt’s 2020 growth forecast to 2.7%: The Institute of International Finance (IIF) has revised downward its projection for Egypt’s GDP growth this year to 2.7% from 5.4% due to headwinds caused by the covid-19 outbreak.

Behind the dip: Lower economic growth will come on the back of a drop in tourism receipts, remittances and Suez Canal revenues, as well as a slowdown in trade and foreign direct investment, IIF suggested in a report published this week.

The projection is far less bleak than that of Capital Economics which said last week that the Egyptian economy could contract by 1.3% in 2020. The London-based research consultancy firm had initially expected GDP to grow 6% this year.

The banking system should come out of this relatively unscathed: “While the coronavirus outbreak is expected to hurt banks’ profitability, asset quality and credit growth, the banking is sound and should be able to withstand the crisis,” the report says.

MENA GDP is now forecast to contract this year by 0.3%, compared to its previous call that the region would grow at a 1.8% clip this year. The slide is expected to be led by trade, FDI, tourism flows, and remittances all taking a hit. Fiscal deficits will widen dramatically as a result of the pandemic, expanding to 8.8% of GDP compared to 3.7% before the outbreak. Nosediving oil prices will also place pressure on net oil exporters, with hydrocarbon earnings (which account for 11% of GDP) expected to fall USD 192 bn.

DEBT WATCH- Corporate bond issuers want to extend their maturities: A number of players in the securitized bond market have held talks with the Financial Regulatory Authority over negotiating with bondholders to extend maturities for an additional six months after it granted a similar grace period for clients of mortgage lenders, and factoring and leasing companies, Al Mal reported citing sources that attending the meeting. Sarwa Capital, Raya Holdings, GB Capital, EFG Hermes, and Rawaj were among the attendees of the meeting.

Background: The market saw 18 securitization bonds offerings last year on 54 tranches collecting some EGP 22 bn in liquidity backed by issuers' asset portfolios with the real estate sector taking the lion's share. Most recently, Misr Capital concluded a EGP 2.2 bn securitized bond issuance on behalf of CI Capital’s Corplease backed by EGP 3 bn in receivables from leasing contracts and GB Leasing issued EGP 734 mn.

Natgas regulator lowers fees for commercial licenses: The Natural Gas Regulatory Authority will charge companies lower fees this year for commercial gas transmission, shipping, distribution, and supply licenses, Al Mal reports, citing an unnamed top government official. The new rates, which are between 22-30% lower, are as follows:

• USD 0.044/mmBtu for transmission licenses, down from USD 0.057 last year;
• USD 0.024/mmBtu for shipping licenses, down from USD 0.031 last year;
• USD 0.016/mmBtu for distribution licenses, down from USD 0.023 last year; and
• USD 0.006/mmBtu for supply licenses, down from USD 0.008 last year.

Fee for national grid use brought back up to 2018 levels: The regulator’s board approved bringing back the fee companies pay to use the state’s national grid to transport gas to USD 0.38 / mmBtu. The fee was set at this rate back in 2018, at which time the authority was just starting to begin issuing and revoking licenses for private sector industry players. It was then slashed to USD 0.29/mmBtu in 2019.

Background: Egypt has moved in recent years to deregulate the natural gas grid, opening it to use by the private sector. The authority which was made responsible for licensing in 2017 has, however, postponed an early issuance originally due in September 2018, saying at the time the private sector was “unprepared.” A year later, we picked up reports that 18 natural gas import and distribution licenses were issued, but import licenses were given exclusively to state-affiliated companies. Private sector companies, on the other hand, were given distribution licenses, which allow them to expand and build up the natural gas distribution grid.

M&A WATCH- Prime Holding has acquired boutique advisor Paradigm Invest as part of its expansion into investment banking, according to Al Mal, which cites a source close to the transaction. Prime hopes the acquisition will create synergies in both companies, with Prime benefitting from Paradigm’s M&A and transactions advisory focus and Paradigm from Prime’s client base.

Are emerging markets about the slap on capital controls? Emerging market economies are witnessing a collapse in external financing, with indications that outflows from EM bond and equity funds of the last three weeks exceeded 4% of net asset value. Normal protocol would see EM policymakers respond by selling reserves and allowing their currencies to devalue, but with the spread of covid-19 putting us all in uncharted territory, policymakers are reticent about selling USD. The answer could well be capital controls, writes David Lubin, Citi’s head of emerging markets economics, in the Financial Times.

Risk is going up, but certain risk premium measures are going down: Public debt burdens in EMs are increasing, either because of automatic fiscal stabilizers or because of measures taken to protect citizens from the economic fallout of covid-19, says Lubin. But at the same time, some aspects of the risk premium are going down along with monetary policy easing by central banks. So while a given country’s domestic economy might benefit from lower rates, preventing large capital outflows may require higher interest rates — especially with rising debt burdens.

Some EM may decide it’s best to just close up shop for the duration: This could see countries defaulting on debt or imposing restrictions on domestic banks’ ability to sell USD through taxes, differential exchange rates or even bans. These measures are all the more likely thanks to the IMF’s increased flexibility on the subject of capital movement restrictions and the probability that the Trump administration would not support measures to boost international liquidity, such as new Special Drawing Rights for member countries, Lubin says.

Egypt has managed to avoid the worst of this, so far: We’ve already seen analysts predict that the central bank’s emergency 300 bps rate cut two weeks ago is likely to accelerate outflows of foreign debt securities, but for the moment EGP debt still remains “relatively attractive.” But as we remain in a covid-19 lockdown, which Renaissance Capital predicts we may struggle to finance, the question of how long we can sustain these heavy outflows remains answered.

It’s a quiet morning in the international press.

China is proposing a radical overhaul of the internet: China has proposed overhauling the architecture of the internet in a change it says will permit the expansion of the internet of things, the mainstreaming of self-driving cars and the roll-out of so-called ‘holo-sense teleportation,’ the Financial Times reports. Beijing and several of its state-owned tech companies told the UN’s International Telecommunication Union (ITU) that the internet’s current infrastructure — TCP/IP — is “unstable” and will be “vastly insufficient” to support the digital world by the end of this decade, and suggested that the ‘New IP’ being developed by Huawei replace it.

The New IP: Little is currently known about the network but documents shared with the FT reveal that the network will have a “top-to-bottom design” and make it easier for governments to share data. Futurewei, Huawei’s R&D unit, describes it as a “more dynamic IP addressing system” that would allow devices in the same network to send information to each other without having to communicate through the internet. The tech giant said that parts of the system will be tested in 2021, and efforts to convince the ITU to recognize it will culminate in a conference in November.

Experts worry that this would bring an end to a free and open internet…: Cyber security company Oxford Information Labs warns in a forthcoming paper for Nato that New IP will allow “fine-grained controls in the foundations of the network” and “more centralized, top-down control of the internet and potentially even its users, with implications on security and human rights.” Critics of China’s proposals point to the amount of control governments will have over IP addresses, which will enable them to track new addresses added to the network, their users, and the information being sent. Others have predicted that the network will lead to the balkanization of the internet, with countries aligning themselves to either the freer Western model or the new centralized system administered by China.

Sudan will try to restart GERD talks: Sudan’s Prime Minister Abdullah Hamdok will visit Cairo and Addis Ababa soon to urge the two sides to resume talks on the Grand Ethiopian Renaissance Dam, according to a statement by Sudan’s ruling sovereign council. Tensions have risen in recent weeks after Ethiopia failed to attend the last round of negotiations in Washington and announced intentions to begin unilaterally filling the dam. Sudan’s announcement yesterday was made following a call between Hamdok and US Treasury Secretary Stephen Mnuchin, a co-sponsor of the talks along with the World Bank.

The Cairo Airport Company has submitted a tender worth EGP 1 bn for local companies to renovate the airport’s Terminal 2 over five years, Al Shorouk reports, without providing a deadline for the offer. The refurbishment will include construction, utilities and maintenance work.

Egypt will produce more than nine mn tonnes of wheat this season, head of the Farmer’s Union Hussein Abu Saddam said, Al Shorouk reports.

Lab and diagnostic testing company Speed Medical (SPMD) signed a shareholder agreement yesterday to establish Prime Speed for Medical Services in which it will own a 30% stake, according to a regulatory filing (pdf). Other shareholders include Modern Solutions Company and Tamer Waguih, the chairman of Prime Egypt Group. SPMD Chairman Mahmoud Lashin said the new company will provide medical services across Egypt and help SPMD implement its expansion plans.

Misr Hotels is postponing the opening of Safir Dahab Resort to the end of 3Q or 4Q2020, from an original planned opening in June, the local press reports, citing a source at Misr Hotels. Construction on the EGP 140 mn hotel is more than half complete, but the rest of the development work may be temporarily suspended due to the covid-19 pandemic.

A number of microfinance institutions are in discussions with banks to set up a mechanism that allows clients to either delay loan repayments or pay a reduced rate of interest, Al Mal reports, citing an unnamed source in the banking sector. Rural borrowers and NGOs have been among those unable to meet monthly payments on loans in the wake of the economic slowdown brought on by the covid-19 outbreak.