Praise from the IMF and the prospect of a Moody’s upgrade — good news to end the week

It’s a busy news day as we slide into PMI day and, with it, the weekend.

Be on the lookout at 6:15am for figures measuring non-oil private sector activity in Egypt, Saudi Arabia and the UAE. Egypt’s PMI hit a one-year high in July as output and exports picked up speed following the three-month shutdown of much of the economy in the second quarter. It wasn’t all great news though: Despite the 12-month high, activity remained in contraction and employment continued to decline. You’ll find the release here at the appointed hour.

The EGX is allowing brokerages to trade in bulk on NileX from today, after completing a pooled accounts system for the small-cap exchange, according to an EGX statement. The pool system that the EGX brands at Omnipass allows stock brokers to collect purchase orders and buy in bulk before dividing the shares among their clients. In a sale, the broker would book transactions and then settle with Misr for Central Clearing, Depository and Registry. The service has only been available on the big board since July 2019.

We’ll know this coming Tuesday, 8 September, what the school year will look like for both private and public K-12 schools, Education Minister Tarek Shawki said in a statement yesterday. The announcement will include details on safety requirements, how tuition will be handled, private tutoring, and use of online platforms.

What can you expect? We’re told that the reopening protocol will include a hybrid system that will see students going to school in person no more than twice a week. The system is expected to blend online and in-class learning and will feature social distancing measures (in class, at lunchtime and at recess); separate entrances and exits; daily temperature checks; and mandatory masking on buses, among other measures.

Who’s not affected by this? Association-run and other independent schools that are not directly regulated by the Education Ministry, including Cairo American College and the British International School, Cairo. Classes have started at many of these schools with strict distancing measures and / or hybrid learning in place.

When does the school year start? Private schools regulated by the Education Ministry can kick off the school year on 15 September. Public schools go back on 17 October.

Other key news triggers coming up in the next few weeks:

• Foreign reserves figures should be out early next week;
• Runoff elections for Senate seats are scheduled for 8-9 September. Look for final results on the 16th;
• Inflation data for August should be out on or around Thursday, 10 September.
• Interest rate day falls on Thursday, 24 September when the central bank next meets to discuss its policy rates.

Editor’s note: We’re taking a break this week from our usually scheduled Work From Home Routine interviews. We appreciate all your suggestions, so please keep them coming — email us on editorial@enterprise.press.

A reminder to those among you who are planning to fly:

Emirates Airlines is adding three more weekly flights between Dubai and Cairo starting 3 September due to an increase in demand. That will bring us to 17 weekly flights between the destinations, according to a company statement.

KLM flights will return on 9 September after a three-year hiatus. The Dutch airline announced last week that it will be running two weekly flights between Amsterdam and Cairo from 9 September to 25 October.

The Health Ministry reported 165 new covid-19 infections yesterday, down from 176 the day before. Egypt has now disclosed a total of 99,280 confirmed cases of covid-19. The ministry also reported 21 new deaths, bringing the country’s total death toll to 5,461. We now have a total of 74,626 confirmed cases that have fully recovered.

The UAE continues to record high rates of new covid-19 cases, reporting 735 new cases yesterday, Reuters reports. It comes on the heels of two consecutive days of over 500 new cases, and is the highest daily rate seen since 883 new infections were recorded on 27 May. Authorities have warned that a nationwide curfew could be reinstated if the trend continues.

US ELECTION WATCH- “Joe Biden is still beating President Donald Trump in most general election polls,” CNBC reports, but notes “those trackers show signs that Biden’s lead is narrowing slightly following the parties’ national conventions.” Americans go to the polls on 3 November.

Are we heading into volatile waters in September? Market watchers will be on the lookout for changes in USD indexes and other stock market benchmarks this month as some strategists suggest a volatile election season could knock markets, CFRA Chief Investment Strategist Sam Stovall tells CNBC’s Trading Nation. Stovall suggests that history shows markets are cool-headed in fall when during an election year: “If you look at the volatility in the three months prior to the election compared with the non-election years actually volatility typically is less,” Stovall said.

Instead, Stovall suggests we could see a bear market in November. September has spent 25 years shrugging off its reputation as the weakest month for markets, he says, Instead, we should be watchful for the unwinding of the historic post-pandemic rally post-election.

The Financial Times also notes that traders expect a “particularly turbulent US presidential election on November 3 and a potentially messy aftermath.”

What’s this messy aftermath? A premature declaration of victory by King Cheeto: “What if early results in swing states show President Trump ahead, and he declares victory before heavily Democratic mail-in votes, which he has falsely linked with fraud, are fully counted?” asks the NY Times in This is Democrats’ doomsday scenario for election night.

SIGN OF THE TIMES: US debt is set to exceed the size of the economy next year for the first time since the Second World War.

Corporate bonds are smashing records in the US: Companies have issued more bonds in the first eight months of 2020 than in any full-year on record, the FT reports. Refinitiv data shows that overall bond issuance has now reached USD 1.919 tn so far this year, exceeding the previous annual record of USD 1.916 tn in 2017. The Federal Reserve’s emergency intervention in the corporate bond market in March, in which it pledged to buy corporate bonds and ETFs, has seen liquidity-starved firms rush to the markets to raise cash.

Meanwhile: The US has lifted a decades-old arms embargo on Cyprus, prompting backlash from Turkey. Turkey’s Foreign Minister said the move could lead to a flare up in tensions in the eastern Mediterranean, according to Bloomberg. The embargo had been in place to maintain peace on the partitioned island, over which Ankara holds de-facto control of the northern third.

It was a mixed bag of nuts on the airwaves last night: Ala Mas’ouleety dedicated a slot to covid-19 protocol in schools ahead of the start of the new academic year, the environment minister dropped into Al Hayah Al Youm to discuss new legislation to regulate waste, while building violations continued to get airtime.

Back to school amid covid-19: Ala Mas’ouleety’s Ahmed Moussa spoke with presidential health advisor Mohammad Awad Tag Eldin, who discussed the World Health Organization’s recommendations on schools reopening amid the ongoing pandemic. Tag Eldin noted that while the WHO recommended a continuation of distance learning, it also said that each country has its own circumstances to address. He said that the government is handling the return to school carefully, and that safety guidelines would remain in place until at least March. They discussed vaccines briefly, noting that while over 100 are being tried, only a handful had reached the final testing phase (watch, runtime: 22:24). Yahduth Fi Misr’s Sherif Amer spoke with Hossam Hosny, the head of the covid-19 task force, who said that contingency plans are in place in the event of cases breaking out in schools, without mentioning what these are (watch, runtime: 3:57), (watch, runtime: 4:07), (watch, runtime: 3:11).

Latest on building violations: Moussa spoke with the governor of Al Sharqiyah, Mamdouh Ghorab, who said that clearances and demolitions of illegal buildings are being carried out daily. Only 35% of people (some 50k) found to be in breach of the building code have applied to settle the violations, he said (watch, runtime: 3:43). Moussa also spoke with Minya’s governor, Osama El Qadi, who said that around 49k citizens had applied for settlement, out of a total of over 110k, and that 39k of them had already paid the fees (watch: runtime: 5:00). Ahmed Moussa also spoke briefly with the governors of Greater Cairo, Dakhla, Aswan, and Gharbia (watch, runtime: 10: 13), (watch, runtime: 6:56), (watch, runtime: 4:13), (watch, runtime: 30:15), (watch, runtime: 6:21).

New waste management efforts: Al Hayah Al Youm’s Mohamed Sherdy spoke with Environment Minister Yasmine Fouad, who discussed the latest legislation to improve waste management. The legislation goes beyond outlining regulations and allows for the establishment of a regulatory authority that can engage and collaborate with the private sector on the ground, helping with issuing licenses and setting prices, she said (watch, runtime: 2:26). The ministry is also looking into ways of integrating the informal sector of cleaners and garbage collectors by registering them with the government and creating an association to represent them, she added (watch, runtime: 4:03).

The IMF heaped praise on Egypt’s response to covid-19 in a staff report on the recently-approved one-year USD 2.8 bn rapid financing instrument Cairo received to help “targeted and temporary” spending. “The Government of Egypt has responded to the crisis with a comprehensive package aimed at tackling the health emergency and supporting economic activity. The authorities acted swiftly to allocate resources to the health sector, provide targeted support to the most severely impacted sectors, and expand social safety net programs to protect the most vulnerable,” the fund said. This includes the government’s EGP 100 bn stimulus package, which amounted to 1.8% of GDP, and includes increased health and social spending. The loan, which was approved in May, was followed by a separate USD 5.2 bn standby agreement to help plug a balance of payments shortfall.

The fund also liked the CBE’s interest rate cut in March, but is suggesting rates be left on hold until the impact of the historic 300 bps cut becomes clearer. Further easing needs to consider how a lower interest rate could create capital flight, drive up inflation, or create pressure on the EGP, the fund said.

Continued exchange rate flexibility will be a “crucial shock absorber,” it added.

But challenges remain: The fund’s analysis of how covid-19 affected Egypt was largely unchanged from what it said in a staff appraisal in August on approving the larger standby facility. “Growth [is also] projected to sharply slow during 2019/20 and 2020/21 as a result of a halt in tourism, reduced remittances, and a slowdown in domestic activity,” it said yesterday. Lack of clarity on when the pandemic will end is obviously a challenge, the fund noted.

A longer recovery period could mean more “unemployment, larger public debt, lower growth, rising poverty and inequality, asset quality erosion in the banking sector, and social pressures.”

The fund thinks GDP growth will rebound to pre-pandemic levels of 5.5% in the medium term, the fund forecasts, after having revised downward its projections for the current fiscal year. Average inflation will accelerate to 9% this fiscal year, up from 6% in FY2019-2020, before falling back to 7.2% the year after, according to IMF projections. Unemployment, meanwhile, is also expected to rise especially due to the shutdown of the tourism sector, but the fund offered no hard figures.

Other key indicators:

• Net foreign direct investment will fall to USD 7.1 bn by the end of the fiscal year, down from USD 7.8 bn in FY2019-2020, but recover to reach USD 17.1 bn in FY2024-2025;
• The current account balance, excluding interest payments, will worsen to a deficit of 3.1% by the end of 2020, from a surplus of 1.6% in 2019, before gradually recovering to a surplus of 3.7% in 2025; and

A refresher on the rapid financing instrument: The IMF instrument is designed to address emergency spending needs. It is usually easier to access for most member countries, and will involve less stringent conditions than a full-fledged reform program, unlike the USD 12 bn extended fund facility we had signed up for following the EGP float.

Read the report: Tap or click here for the landing page or download directly here (pdf).

Egypt could get an upgrade from Moody’s as our credit profile proves “resilient” to shocks: Indicators that measure Egypt’s credit worthiness have proven “broadly resilient” to external financing shocks despite high exposure, Moody’s said in a report. This profile, which gives the country a solid credit rating of B2 with a stable outlook, puts us on track for an upgrade by the ratings agency pending “a marked improvement in debt affordability and reduction in gross financing needs,” Moody’s said.

On the flipside, a further reduction in foreign exchange reserves caused by another wave of capital outflows could lead to a rating downgrade, as would worsening debt affordability, the ratings agency said. Overall, our main weaknesses are “very large” gross financing needs of between 30 and 40% of GDP a year and creating jobs for a large number of annual entrants into the labor force, which is “a long-term social challenge.”

The health of public finances got the lowest possible score of “Ca” due to a widening deficit and the government having a “very high debt burden” that was compounded by — but not yet overcome by — our newly increased access to foreign creditors, Moody’s said. Egypt was on track to restore fiscal strength, but the covid-19 crisis and the new public spending it demanded meant the primary surplus is now projected to grow to 0.5% in FY2020-21 from 1.5% in FY 2019. But this only “delays rather than derails” fiscal consolidation efforts, due to resilience to many types of shocks. “Allowing for additional off-budget spending of about 3% of GDP in fiscal 2020 and 4% in fiscal 2021, we expect the general government debt/GDP ratio to rise to over 90% in fiscal 2021 before resuming its declining trend thereafter,” Moody’s said.

Other economic challenges mentioned by Moody’s include our exposure to the collapse in tourism earlier in the pandemic, a dip in industrial production from March to May, and long-term water challenges exacerbated by the filling of the Grand Ethiopian Renaissance Dam. Egypt’s moderate per capita income level, as well as general labor market challenges, prevented a higher economic strength score. “Over the longer term, more inclusive growth will depend on a rise in the employment rate — particularly among women — to absorb the large number of new entrants to the labor market.”

You can catch a press announcement of the report here. The full version is only available to Moody’s subscribers.

M&A WATCH- Competition for Blom Bank acquisition could heat up as third potential suitor enters the race: Another foreign financial institution is reportedly competing with Emirates NBD and Bahrain’s Arab Banking Corporation (Bank ABC) to acquire Blom Bank Egypt, the local press reports, citing unnamed sources. But there’s a hitch: The unnamed suitor is a non-bank financial services outfit and so will face challenges convincing the Central Bank of Egypt to allow it to start due diligence.

Time is also against it: Pressure from the Lebanese central bank means that Blom is looking to exit Egypt before the year, which compresses the timeline for all potential bidders.

HSBC tapped to advise Bank ABC: Bank ABC reportedly hired HSBC as its financial advisor on the transaction, sources told the press. The Bahraini bank expects the CBE to greenlight its request to begin due diligence on Blom by the end of the week, the sources said. Bank ABC tabled a request to start the due diligence process earlier this week.

Background: Blom confirmed last month it is looking to sell its Egypt assets as its home country suffers its worst economic crisis in decades. Dubai-based Emirates NBD was the first to show interest. NBD is said to be close to completing its due diligence on the transaction, which could value Blom’s Egypt arm at USD 250-300 mn.

CIB’s USD 65 mn in green bond issuance take place in October after finalizing the due diligence process, Heba Abdellatif, head of debt capital markets at CIB, told Enterprise. CIB has been working in collaboration with the International Finance Corporation (IFC) to issue Egypt’s first green bonds offering through a private placement, which will see the IFC invest USD 65 mn in the first tranche of the five-year bonds. If successful, the IFC will bring its investment up to USD 100 mn in another tranche, Abdellatif told us back in June. The government, meanwhile, has been working to issue up to USD 500 mn of green bonds in FY2020-2021, Assistant Finance Minister for Debt Khaled Abdel Rahman told us.

The Sovereign Fund of Egypt (SFE) has set up four sub-funds covering healthcare, financial services, tourism and real estate, and infrastructure, Al Shorouk reports, citing an announcement by Planning Minister Hala El Said published in the Official Gazette on Wednesday. The SFE originally planned to establish separate funds for renewables, logistics and manufacturing, but re-thought its investment strategy by the covid-19 pandemic.

The creation of a healthcare sub-fund was telegraphed by CEO Ayman Soliman in May, when he announced that the healthcare and pharma industries would be a top priority for the fund, alongside electricity, transport, agriculture and infrastructure. The fund has made several moves into the healthcare sector since the onset of the pandemic, announcing plans to set up a USD 300 mn healthcare JV with Concord International Investments in May, and reportedly considering buying a stake in state pharma company Chemical Industries Development.

The financial services sub-fund will focus on investments in the non-banking financial services sector and fintech. The SFE is seemingly looking to capitalize on the success of e-payments and fintech firms, which have been among the biggest beneficiaries of the pandemic as consumer demand for mobile payments and ecommerce surged. The sub-fund announced yesterday will invest in a range of non-banking financial services and investment companies covering everything from insurance, microlending and real estate finance, to credit ratings, portfolio management and securitization. The SFE has been in talks with investors interested in fintech and services that further financial inclusion at least since May, and announced its intentions to take a 76% stake in the Arab Investment Bank alongside EFG Hermes.

M&A WATCH- The UAE’s Dana Gas is in talks with Texas-based IPR Energy over the sale of its Egypt assets ahead of a USD 300 mn debt repayment in October, Reuters reports, citing unnamed sources familiar with the matter. The energy company was hoping to raise over USD 500 mn from the sale, but will likely collect significantly less, they added, without providing additional details Dana Gas said last September that it could potentially sell all of its assets in Egypt.

Sukuk payment due in October: Dana had previously said that proceeds from the long-delayed sale of its Egypt assets, which it had hoped to complete in March before the pandemic broke out, would be used to pay some USD 379.6 mn in outstanding Islamic bonds, or sukuk, due at the end of October.

Industrial players still want to pay less for natural gas… Chemicals and fertilizer manufacturers are raising the issue of lowering gas prices once again, with Chemical and Fertilizers Export Council passing on a request to the Trade and Industry Ministry to lower the price of gas to USD 3.5/mmbtu, Khaled Abu Al Makarem, chairman of the council tells the local press. It’s unclear whether the bid is only on behalf of the chemical and fertilizers industry or all industrial players. Export councils used a recent meeting with ministry officials to press for lower gas prices to help them export more. The Trade and Industry Ministry plans to discuss the proposal at a cabinet meeting soon, Al Makarem said.

Factories in Egypt currently pay USD 4.5/mmBtu for natural gas after the government slashed prices in March as part of its stimulus package to help cushion the private sector from the impact of covid-19. The government also mulled waiving EGP 5.3 bn-worth of natgas arrears owed by public and private sectors factories in June. The cut followed two price cuts in for some energy-intensive industries, the last of which came last October after years of lobbying efforts by manufacturers, who said high energy costs forced them to hike their prices, resulting in weaker sales volumes and lower production.

The current price is more than 2.5x the international price paid by foreign competitors, say fertilizer producers who warn that high gas prices would push them out of the market. The region’s largest fertilizer producer, OCI NV and the Abu Dhabi National Oil Company, warned in July they could shutter Egypt fertilizer plants due to gas prices. The companies said they would first reduce production, but could eventually be forced to close entirely if prices remain at current levels.

The government’s energy pricing committee could cut gas prices by 80 cents/mmBtu at its next meeting, one industry insider said to Al Shorouk. Another unnamed source predicted that the committee would implement a 50 cent cut, in line with declining oil prices. Mohamed Junaidi, the head of the Industrial Investors Association, said he expects the government to bring gas prices down to USD 2.5/mmBtu to improve local industry’s competitiveness and increase imports.

US suspends some aid to Ethiopia for GERD impasse: The US has suspended about USD 100 mn worth of aid to Ethiopia following its decision to fill the Grand Ethiopian Renaissance Dam (GERD) without an agreement with Egypt and Sudan on the dam’s long-term operation. The US State Department has cut aid to Ethiopia to the tune of USD 100 mn, an unnamed official told Reuters. Ethiopian ambassador to the US Fitsum Arega confirmed the aid suspension on Twitter, without specifying the size of the cut. The decision comes after the Trump administration voiced concerns that talks between the three countries aren’t moving forward. The latest round of negotiations last Friday again failed to provide a breakthrough after irrigation ministers were unable to agree a timetable for filling and operating the dam.

What aid is being targeted? The expiring funding covers border security, political competition and nutrition, but funding for HIV/AIDS, the food for peace program, international disaster assistance, and migration and refugee assistance will remain unaffected, Reuters’ source said.

Concern over unilateral measures: “The decision to temporarily pause certain assistance for Ethiopia reflects our concern about Ethiopia’s unilateral decision to begin to fill the dam before an agreement and all necessary dam safety measures were in place,” another unnamed US State department official said, the Financial Times reports.

An ineffective strategy? Rather than pressure Ethiopia into signing on the dotted line, the suspension of aid may provoke the opposite reaction, the International Crisis Group said yesterday, according to Bloomberg. “Ethiopia will not be deterred from finishing the GERD by US aid cuts and nor will it change its negotiating stance,” said ICG senior analyst for Ethiopia, William Davison. “Any US attempt to pressurize Ethiopia in this manner will stiffen the government’s resolve to not make any concessions that Ethiopia believes will reduce the benefits” of the dam, he said.

The US had previously attempted to mediate the GERD talks, but efforts ended with no agreement.

Business leader Salah Diab has been ordered detained for 15 days pending investigation of allegations of misuse of public land, building without licenses and tax evasion, Youm7 reports. The founder of Pico Group and Al Masry Al Youm newspaper, Diab arrested at his home on Tuesday.

MOVES- Maglis El Dawla vice president Mahmoud Ismail Etman has been appointed secretary-general of the newly-reconstituted Senate, Youm7 reports.

The suspension of US aid to Ethiopia over the Grand Ethiopian Renaissance Dam, and President El Sisi’s phone call with Israeli PM Benjamin Netanyahu is topping coverage in the foreign press this morning. See this morning’s Speed Round and Diplomacy + Foreign Trade sections for more.

Also getting attention in the foreign press: Vice picked up the twisted turn of events in the viral Fairmont Incident, Al Azhar slammed French magazine Charlie Hebdo for reprinting images of the Prophet Mohamed, and the Associated Press reports on the killing of seven suspected criminals in a firefight in Edfu, Aswan.

Topping diplomatic coverage this morning: A phone call between President Abdel Fattah El Sisi and Israeli PM Benjamin Netanyahu on the recent UAE-Israel diplomatic breakthrough.

El Sisi welcomed news of the normalization agreement, according to an Ittihadiya statement, but cautioned Netanyahu against unilaterally seizing parts of the Palestinian West Bank, warning that any attempt to annex settlements would jeopardize chances of finding a peaceful solution to the decades-long conflict. This story is getting plenty of attention in the foreign press: AFP | The National | Jerusalem Post | Xinhua.

Seven Egyptian construction companies are eyeing projects in Iraq: Arab Contractors, Petrojet, Talaat Moustafa, are among seven companies that have received preliminary approval to begin a variety of housing and infrastructure construction projects in Iraq, Hassan Abdel Aziz, President of the African Union of Construction and Building Contractors told Al Mal. The companies discussed energy, sanitation, road and housing development projects in a series of meetings between Housing Minister Assem El Gazzar and Iraqi Contractors Union president, Ali Al Sanafi — who expressed an interest in contracting Egyptian companies.

ElSewedy Electric subsidiary ElSewedy Electric for Trading and Distribution has signed a EGP 355.5 mn engineering, procurement and construction (EPC) contract to build an electrical substation in Sadat City, according to an EGX disclosure (pdf). The company will complete construction within a 14-month period. Separately, the Egyptian Electricity Transmission Company (EETC) signed a EGP 295 mn contract on Wednesday with a consortium of Chinese companies to build the Alex West transformer substation, Al Shorouk reports. The Chinese firms will complete construction within the next 12 months.

Egypt-focused Aton Resources will execute a reverse stock split sometime in mid-September to finance exploration at its Abu Marawat concession, as well as for “general corporate purposes, the Toronto-listed company said in a statement. The gold miner plans to issue up to USD 5 mn in a private placement of restricted stocks. Aton received preliminary approval for Egypt's first new gold exploration license in 15 years back in February. The license allowed it to explore in the Eastern Desert’s Hamama area for 20 years while retaining rights for the Abu Marawat concession area in the Arabian-Nubian Shield, north of Sukari mine.

The Finance Ministry is considering exempting importers from the 10% development fee on imports of sheet metal following a request from the Chamber of Engineering Industries of the Federation of Egyptian Industries (FEI), the local press reports. Manufacturers are currently exempt from paying the fee, but during a meeting with FinMin officials last week chamber president Mohamed El Mohandes called for extending this to importers because they provide factories with large quantities of steel sheets that they cannot import themselves. The FEI’s Chamber of Metallurgical Industries, however, is opposed to the proposal, warning that exempting importers from the fees will likely harm domestic manufacturers.

The Customs Authority has reduced the time frame for companies to clear shipments idling at the country’s ports to one month from four months previously, Al Mal reports. Although the decision seems to be addressing the presence of unclaimed goods at the country’s ports, the urgency stems from a concern over a Beirut-esque catastrophe that has been ratcheted up by a presidential directive to heighten safety protocols, Al Mal says, citing an unnamed source at the Customs Authority.

When self care just goes too far: The USD 300 mn snail slime cosmetic industry has made its way to Egypt, a TRT World video explores (watch, runtime: 02:38). Egypt’s beauty centers now offer face and body masks with live snails secreting collagen onto the skin to treat imperfections, wounds, wrinkles, and pores while hydrating the area. Snail breeders have also made an appearance in Egypt and are hopeful that the government will lift the export ban on snails and allow them to become international players. Egypt provides the perfect environment for snail breeding, and the powdered version of the snail secretion can sell at a price higher than gold.