The EastMed Gas Forum is now real

We’re looking forward to next week almost as much as we’re looking forward to the weekend. Friday and Saturday are awesome — but next week, we’ll gather (socially distanced) in the office as a team for only the second time since March. We’re not the only ones wondering when to go back to the office full-time. And we’re not the only ones debating whether a “post-covid world” (whatever the [redacted] that might be) could mean four days in the office and one day a week from home.

That’s why we’ve asked companies across the spectrum about their stands on WFH vs. back to the office for a poll you can catch in tomorrow’s issue.

Tomorrow is interest rate day and the emerging consensus points to a hold when the Central Bank of Egypt’s Monetary Policy Committee meets. All 11 economists and analysts surveyed in an Enterprise poll said interest rates will likely remain unchanged as the central bank looks to support the EGP and protect the carry trade. A Reuters poll out yesterday suggested much the same.

It’s day three of EFG Hermes’ virtual investor conference, where more than 650 institutional investors with aggregate AUM north of USD 17 tn are connecting for discussions on the macroeconomic and industrial outlook for frontier and emerging markets. The conference runs until next Thursday, 1 October. You can visit the conference website here.

US stocks rebounded yesterday as investors bought the dip following another covid-19 inspired spell of volatility: The S&P 500 and Nasdaq both saw a four-session losing streak come to an end, while the Dow saw gains for the first time in three days. Global stocks fell across the board on Monday, as nerves over the global recovery, the surge in covid cases, the US election and the FinCEN banking leaks coalesced to spook investors.

Asian markets are mixed in early trading, and futures point to the same for Europe and Wall Street later today.

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The Health Ministry reported 113 new covid-19 infections yesterday, down from 126 the day before. Egypt has now disclosed a total of 102,254 confirmed cases of covid-19. The ministry also reported 19 new deaths, bringing the country’s total death toll to 5,806. We now have a total of 91,143 confirmed cases that have fully recovered.

Investors are going risk-off on high-yield emerging-market debt, as doubts about the global economic recovery increase, says the Financial Times. While the broader asset class has been on a tear in recent weeks, some non-investment grade issuers are struggling to attract both foreign and local investors. Moody’s data shows that FX-denominated issuance by low-rated sovereigns has fallen by a third to USD 33 bn this year, while countries with investment-grade ratings have already surpassed the USD 119 bn they issued through 2019. “The normalisation of financial conditions since April is starting to lose speed,” said Rahul Ghosh, Moody’s senior VP for EM research. “We are going to see investors make a pivot to thinking about the prospects for economic recovery, and what that means in terms of financing deficits and debt sustainability.”

The first-ever virtual UN General Assembly kicked off in New York yesterday. Secretary-General Antonio Guterres wasn’t in a laughing mood, warning world leaders the world is facing an “epochal” health crisis, an “economic calamity,” the threat of a new Cold War between the US and China, and rising tides of populism and nationalism worldwide, the Associated Press reports.

China pledged to achieve carbon neutrality by 2060 during its address, right on the heels of President Donald Trump blasting China for its “rampant pollution,” and calling the Paris climate agreement a “one-sided [agreement],” Reuters reports.

President Abdel Fattah El Sisi’s pre-recorded speech also aired in NY yesterday: We have coverage in this morning’s Last Night’s Talk Shows, below.

Turkey and Greece will restart talks in Istanbul to try and settle their decades-long territorial dispute in the EastMed, the Greek Foreign Ministry said in a statement on Tuesday, without providing further details. Turkey said dialogue could resume before the end of the month, Reuters reports, citing an unnamed senior official who described “positive developments.” Regional tensions have escalated sharply in recent months as Turkey ploughed ahead with gas exploration in disputed maritime territory. Ankara said earlier this week that it is willing to make peace with its neighbors, signalling that it wants to join the EastMed Gas Forum to expand regional energy cooperation.

US ELECTION WATCH- Republicans line up behind Trump on Supreme Court: Key Senate Republicans have given their backing to Donald Trump, who is pushing to fill the Supreme Court seat held by Ruth Bader Ginsburg ahead of the presidential election in November. Democrats, who are vehemently opposed to an appointment so close to the election, saw their efforts to prevent the move crumble as Republican senator and prominent Trump-critic Mitt Romney came out in support of the appointment. The story is covering the pages of the foreign press this morning: Associated Press | Financial Times | New York Times | Washington Post | Wall Street Journal | BBC.

*** 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 as well as social infrastructure such as health and education.

In today’s issue: As we hurtle towards a water scarcity crisis, why is it that Egypt wastes so much water?

El Sisi gives virtual address at UN General Assembly: Masaa DMC’s Ramy Radwan (watch, runtime: 3:53), Yahduth Fi Misr’s Sherif Amer (watch, runtime: 4:17) and Ala Mas’ouleety’s Ahmed Moussa covered President Abdel Fattah El Sisi's address to the UN General Assembly. El Sisi focused on the crisis in Libya and the dispute over the Grand Ethiopian Renaissance Dam, calling for a political settlement in Libya in line with the Berlin process and Cairo Declaration, and a timely resolution of the talks with Ethiopia and Sudan. The president stressed that the effects of the Libyan conflict aren’t confined to its borders, but have broad regional implications that jeopardize Egypt’s national security, and warned countries against sending mercenaries to fight in the conflict. El Sisi reiterated his red lines and issued an implicit warning to Turkey that any attempt to cross the “Sirte-Jufra” line would be met with force. You can check out the full speech here (watch, runtime: 20:36).

EastMed Gas Forum inauguration: Al Hayah Al Youm’s Mohamed Sherdy spoke with Oil Ministry spokesperson Hamdy Abd El Aziz on ​​the EastMed Gas Forum which was officially inaugurated yesterday. He said that the seven-member forum welcomes other Mediterranean countries, provided they abide by the conditions set by the founders (*cough* Turkey). He stressed that the forum will be the platform through which Egypt will emerge as a regional energy center (watch, runtime: 5:49).We have more on this in this morning’s Speed Round, below.

Nile flooding: Sherdy spoke with Irrigation Ministry spokesperson Mohamed El Sibai, who discussed the ministry’s efforts to tackle and make use of this season’s Nile flooding. The Aswan High Dam will be used to shore up the water, which will then be carefully distributed down canals, he said, adding that water quality and pollution rates will also be addressed in the 13 governorates affected by the flooding (watch, runtime: 8:01). Moussa also spoke to Sibai (watch, runtime: 5:28). Radwan spoke with Walid Haqiqi, the head of the ministry’s Central Department of Water Resources, who discussed the warnings issued to citizens ahead of time in case evacuations become necessary. He said that the trapped water will be used to improve soil quality in agricultural lands (watch, runtime: 9:49).

A little piece of advice: Don’t take investment advice from the talking heads. Nady Naguib, head of the gold division at the Federation of Egyptian Chambers of Commerce, told Amer that the recent drop in gold prices is thanks to oversupply and that a rebound to record highs is in the cards soon (watch, runtime: 2:10).

Egypt takes a major step towards its regional energy hub ambitions with the formalization of the EastMed Gas Forum: The Eastern Mediterranean Gas Forum is now officially an established organization headquartered in Cairo after six of the seven founding states signed its charter yesterday, marking another key step in Egypt’s path to becoming the region’s premier energy hub, according to a cabinet statement. The organization will serve as a market platform for natgas producers, consumers, and transit countries in the region to develop existing resources and develop the infrastructure for future exploitation, in addition to regulating natgas policies in the region that protect the rights of member states to preserve their resources, the signatories said in a joint statement after the online ceremony. The seventh member, Palestine, did not attend the ceremony but will sign at a later date.

How is this all going to happen? Through the forum, member states will exchange information and seismic data studies on potential gas wells and delineate new gas finds that straddle maritime borders, Medhat Youssef, former chairman of Egyptian General Petroleum Corporation tells Enterprise. Member states could even get preferential rates on each other’s gas supplies, as well as preferential access to liquefaction facilities, he said.

The forum is already looking at growing its mandate beyond natgas exploitation to potentially cover electricity and renewable energy, Cypriot Energy, Commerce, and Industry Minister Natasa Pilides told reporters.

Who’s in? In addition to Egypt, the founding member states are Greece, Cyprus, Italy, Israel, Jordan, and Palestine. France had formally requested to join the forum as a member while the US asked to be a permanent observer. Private and public sector companies will also be included as members of an advisory committee, although it was not made clear whether the committee would only include companies from member states.

The door is not yet closed to others who want to join — ahem, Turkey: Other countries can apply to join “as long as their goals match those of the forum,” Oil Minister Tarek El Molla said. The forum is not designed to gang up against any other players and is instead meant to create a coalition that works together “without causing problems,” Egypt’s ambassador to Cyprus Mai Khalil said. Turkey signalled earlier this week that it is willing to make peace and become a member of the forum, rather than be left out in the cold. Greek Energy Minister Kostis Hatzidakis encouraged the forum earlier this year to bring Turkey into the fold, provided Ankara respects international law.

Background: The charter has been in the works since the forum’s first launch meeting last year, in which the founding members agreed to move ahead with creating a regional market to develop the eastern Mediterranean’s estimated 122 tn cubic feet of gas reserves.

The meeting hasn’t escaped the attention of the foreign press, with Bloomberg, Reuters and the Times of Israel picking up on the story.

Remittances from Egyptians working abroad rose 11% to USD 2.9 bn in July, up from USD 2.6 bn reported in July of 2019, according to state news agency MENA. Egyptians working abroad sent some USD 17 bn into the country during the first seven months of the year, up from USD 15.7 bn in the same period last year. Remittances, particularly from the GCC, are a crucial source of foreign currency for Egypt and helped narrow the current account deficit at the height of the outbreak in 3Q2019-2020 to USD 2.8 bn from USD 4.5 bn a year earlier.

Wait, what? The fact that remittances are still rising five months into the largest economic schism in our lifetimes runs counter to what all the grand wizards of economic orthodoxy were shouting about as the realities of covid-19 set in. We’re looking at you, Institute of International Finance, Fitch, Moody’s, S&P. We could go on…

Egyptian banks’ profits shrank by 20% in 1H2020 to an aggregate EGP 50.05 bn in comparison with EGP 62.49 bn over the same period in 2019, according to a Central Bank of Egypt report (pdf). Revenues came in at EGP 169.22 bn, while spending increased to EGP 119.17 bn over the same period.

The picture isn’t much better if you focus on the country’s top 10 lenders: Profits at Egypt’s 10 largest banks fell 17% to EGP 41.44 bn in 1H2020, according to another report (pdf). Egypt’s biggest banks are state-owned National Bank of Egypt (NBE), Banque Misr, and Banque du Caire, as well as our friends at CIB, the Arab African International Bank, QNB Alahli, Bank of Alexandria, Credit Agricole, Faisal Islamic Bank of Egypt, and the Housing and Development Bank.

Keep this in perspective, though: Profits are down, but the banks are far from being in the red. Few corporate actors are as conservative as Egyptian banks, particularly in the wake of the system-wide cleanup and wave of consolidation orchestrated by the Central Bank of Egypt in the early 2000s. Banks entered the covid-19 pandemic stable, generally well-managed and ready to cope with both the crisis and the pressure on net interest margins created by the extraordinary 300 bps interest rate cut this past March.

What’s driving the drop? The key factor is loan loss provisions: Egyptian banks have been setting aside money on their income statements in the form of provisions against the possibility that covid-19 would force more borrowers to default on loans, Masrawy reported in May, citing central bank sources. Loan loss provisions are allocated by banks to protect themselves against non-performing loans and bankruptcies, and are marked as expenses on banks’ financial statements. Essentially, they are a way for banks to accurately assess the consequences of potential losses of income from upcoming loan repayments. If the borrower makes good on their obligations, the banks can “write back” the provisions later and book the profits.

A handful of the biggest banks said earnings took a hit because of potential credit losses from loans: CIB, for example, saw its earnings dip 4% in 2Q2020 to EGP 2.6 bn. The bank has always been conservative about taking provisions and was even more so in the first half to cover itself in case loans on its books went bad because some borrowers were swamped by the impact of the virus. The bank’s loan loss provisions for the first six months of the year tripled y-o-y to EGP 2.26 bn. The Arab African International Bank reported (pdf) USD 34.39 mn in expected credit loss during 1H2020, up almost 50% from USD 23 mn the year before.

This isn’t just the case in Egypt. Banks the world over are reporting lower profits for the same reasons: QNB AlAhli, which has an arm in Egypt, said the regional group has raised its loan loss provisions by USD 320 mn during the first half of the year, which drove down its overall profits down 13% y-o-y. China’s biggest banks reported the steepest y-o-y drop in 1H2020 net profits “in recent years” as lenders penciled in credit costs they now expect to keep elevated for the rest of the year, according to S&P Global. Small Japanese lenders have also more than doubled their loan loss provisions in 1Q2020-2021 (which runs from April-June), putting them on track to end the fiscal year with earnings at an eight-year low, S&P Global said.

The CBE called on local banks to calculate their expected credit losses and to deliver reports from their auditing and risk assessment departments within a month, in a circular issued on Monday. The aim is to assess and potentially revise their models for calculating losses in light of the pandemic and now that they are compelled to comply with the latest International Financial Reporting Standards (IFRS9) to ensure best practices, the bank said.

IPO WATCH- Raya mulls listing Aman on EGX in 2021: Raya Holding could debut its non-banking financial service business outfit Aman Holding on the EGX in 2021, Raya’s CFO Hossam Hussein told Al Mal, without disclosed the size of the potential offering. Raya is still considering its options for the listing, which could include floating existing shares, raising new capital or a mix of the two.

The exact details of the IPO will be worked out after the National Bank of Egypt (NBE) closes its acquisition of 20-25% of Aman, Hussein said. The NBE is currently conducting due diligence on Aman before it makes a final offer. The bank tapped Grant Thoronton earlier in September as its financial advisor on the transaction, working alongside Matouk Bassiouny & Hennawy as legal counsel.

DEBT WATCH- Banks could get another USD 100-200 mn from EBRD to on-lend to SMEs: The European Bank for Reconstruction and Development (EBRD) is in talks with two unnamed local banks to deploy USD 100-200 mn for on-lending to SMEs before the end of the year, associate director and deputy head of the bank’s Egypt unit Khalid Hamza told Al Mal. The loan agreements would be the EBRD’s first with these banks, Hamza said. The EBRD has ramped up its SME financing operations through Egyptian banks since the beginning of the pandemic, which managing director for the SEMED region Heike Harmgart told us was key to channelling liquidity to cash-starved firms. The bank has provided USD 400 mn for SME on-lending since June, handing CIB, the National Bank of Egypt, Banque Misr, and the National Bank of Kuwait USD 100 mn each.

M&A WATCH- DPI and Adwia shake hands on USD 200 mn acquisition: UK private equity firm Development Partners International (DPI) and pharma manufacturer Adwia have reached an agreement that will see DPI buying 100% of Adwia for USD 200 mn, Adwia Chairman Hossam Taher told the local press. Adwia is currently 90% owned by the Taher family, with the remaining 10% held by several healthcare professionals. The acquisition is expected to close within three weeks. Negotiations had broken down last month after the two sides failed to agree on a valuation. Adwia rejected DPI’s proposed USD 150 mn valuation as being too low in light of the pharma industry’s recent pandemic-fueled growth.

Advisors: Zaki Hashem & Partners is acting as legal counsel to Adwia, while Matouk Bassiouny & Hennawy is advising DPI on the transaction.

M&A WATCH- Has Sawiris just bought a controlling stake in FC Masr? Sports investment company Zed has reached an agreement to acquire a majority stake in FC Masr football club, Hapi Journal said yesterday, without sourcing its claims. Earlier in the day chairman Onsi Naguib Sawiris said that the company will be purchasing a majority stake in an undisclosed club, without providing further details. The company is also considering setting up local branches of Borussia Dortmund’s academy and ATP Tennis, he said.

Broadcast ads are exempt from VAT, but subject to stamp tax and VAT on production inputs: Intermediary goods and services used to produce ads are subject to a 14% value-added tax (VAT), the Tax Authority said in a directive (pdf) to clarify how tax legislation treats ads. The cost incurred by an advertiser to broadcast fully-finished ads, meanwhile, are VAT-exempt and subject to a separate 20% stamp tax. This is not a new decision, but removes confusion or lack of clarity on the tax treatment of ads, Mohsen El Gayar, director of Taxpayer Services at the Tax Authority, told Enterprise.

What was the confusion about? The Tax Authority treats advertisements as an end product created through the integration of several goods and services, El-Gayar said. Outdoor ads, for instance, involve an advertising agency paying the state or a property owner to rent billboards, creating a large-scale print, and paying for services to have the print installed. A similar process applies to video and TV advertising and print ads in newspapers, with several intermediate steps including shooting videos, animation, and design and consulting services. All of those processes are subject to VAT, which is remitted by a seller of any mid-way good or service. Broadcasting the ad itself — or the fee paid to book airtime or slots in a magazine or outdoor — is VAT-exempt as it’s already subject to a separate, indirect stamp tax.

This tax treatment will remain in place until an in-the-works overhaul to the VAT Act that would apply the tax to both ad inputs and final products is complete. The overhauled bill would scrap the indirect stamp tax on ads as a final product. It’s unclear where we stand on the proposed changes, which the Finance Ministry finalized in June and which received approval from the cabinet economic group a week later.

Small businesses are getting access to EFG Hermes’ online payment platform PayTabs Egypt’s gateway services for three months at no charge, according to a statement (pdf). This option will be available for businesses that process EGP 100k per month in online transactions. The PayTabs gateway allows businesses to integrate cash flows from various sources on a single platform and is a joint venture between global payment solutions provider PayTabs and EFG Hermes.

Background: EFG set up PayTabs Egypt in April in its bid to expand its range of non-financial banking services, which it hopes will account for 50% of its profits by the end of 2021. EFG also offers a number of consumer finance products (ValU), e-payments (PayTabs), and microfinance (Tanmeyah), as well as other services including leasing and factoring.

INVESTMENT WATCH- Emaar still bullish on Egypt’s real estate industry, eyes new capital + Sixth of October investments: Emaar Properties could be announcing within a few months fresh investments in the new administrative capital and Sixth of October City as it maintains a positive outlook on Egypt’s real estate industry, Emaar Properties Chairman Mohammed AlAbbar tells Al Arabiya. The Emirati businessman did not give any further details on the scale or value of the planned investments. AlAbbar said earlier this week that Egypt has proven to be the company’s top-performing market during the pandemic.

Emaar Misr was the only one of Egypt’s five largest real estate developers to report profit growth in the second quarter as the economic slowdown caused by the government’s lockdown roiled the sector. Profits among the top five companies fell 31% during the period. Analysts cited by Reuters expect a rebound in the sector in the coming months, provided a second wave of the virus doesn’t result in further disruption.

Consumer spending program to end 26 October: The consumer spending initiative launched by the government in July will come to an end on 26 October, Finance Minister Mohamed Maait said yesterday. The program aims to boost consumer spending by offering discounts on select goods such as electronics, furniture, appliances and clothes. Consumers are able to purchase products via a dedicated website, where merchants offer discounts of at least 15%. Some 7 mn people have visited the website since the initiative began, purchasing over 65k items from 1,631 outlets nationwide, Maait said at an event celebrating companies that achieved the highest sales under the initiative.

Some EGP 13 bn has been allocated from the public treasury to cover the discounts for ration card holders, he said. The government offered an additional 14% discount on goods for ration card holders, and allowed them to carry over unused sums from their monthly food subsidies to purchase products.

Background: The government launched the initiative to stimulate some EGP 125 bn-worth of consumer spending. Nearly 1.2k manufacturers and merchants signed up to offer discounts on some 4.2k products.

Two more signs the cement crisis is getting worse: Demand for cement is on track to drop to 45 mn tonnes in 2020, down from 49 mn tonnes last year, Arabian Cement CEO Sergio Alcantarilla said at a presser yesterday, according to Al Mal. While Alcantarilla did not offer a view on what’s driving the contraction this year, it is likely a result of a temporary slowdown in the real estate and construction industries due to the covid-19 pandemic, paired with the government’s six-month suspension of new construction permits. The onset of the virus has only aggravated a pre-existing supply crisis that has for the past few years forced companies to slash prices in a bid to stay afloat.

Improvements in global trade in July didn’t do much for exports: Egypt’s cement exports fell 12.5% to USD 14 mn in July, Al Shorouk reports, citing a report by the Export Council for Building Materials. This leaves exports during the first seven months of the year down 21% from the year before. Egypt’s traditional cement export markets including Yemen, Syria and Libya are currently in … disarray.

Background: The supply glut began in 2016 but was exacerbated when the state inaugurated a USD 1.1 bn cement factory in Beni Suef in 2018. Several factories have already suspended operations permanently such as the National Cement Company, while Tourah Cement and El Nahda Cement temporarily suspended their operations with six more on their way to leave the market. Market conditions have not put off Egyptian Cement, which is planning to inaugurate a EGP 4.5 bn cement factory in Sohag next year, CEO Ahmed Abou Hashima had said. We took a deep dive into the cement industry earlier this year, when prospects for the sector already looked bleak.

CABINET WATCH- Vocational schools accreditation body receives cabinet approval: A draft law recently drawn up to establish a government body to accredit institutions offering technical learning and training programs received a nod from the Madbouly cabinet in its weekly meeting yesterday, according to a statement. Government schools and private institutions, which will both be under the authority’s oversight, will have no more than five years to meet the authority’s quality standards and obtain accreditation once the bill makes it through the House of Representatives and its executive regulations are published. We have background on the new authority and its role here.

A proposal to set up an Egyptian-Sudanese livestock farming JV was also approved “in principle” at yesterday’s meeting. The company will be jointly owned by Egypt’s Holding Company for Food Industries (HCFI) and Sudan’s Etegahat Group. The statement gave no further details on the JV beyond saying that its products will be either sold in Egypt’s domestic market or earmarked for export.

KUDOS- Egyptian courts now recognize that there is no such thing as an “original” email, Girgis Abd El-Shahid, managing partner at Shahid Law Firm, tells us. Even after the passage of the e-signature law, courts were “reluctant to rely on emails, considering the requirement set in that law to ‘ensure’ its authenticity,” he says, “In this judgment (pdf), the court confirmed that it is unjustifiable for a counterparty to insist on the ‘original’ email to be submitted, as this does not exist. Instead, the court confirmed that email will be relied upon unless the counterparty proves that it is fraudulent.”

MOVES– CI Capital has asked Ahmed Sobhy (Linkedin) and Neveen El Tahri (Linkedin) to join its board of directors, according to an EGX filing (pdf). Sobhy is head of principal investments and capital markets at Banque Misr (which recently took a 15% stake in the investment bank), while El Tahri is Chairperson of Delta Shield for Investment.