AM — Cabinet sees budget deficit widening — and announces smart investment incentives for green and emerging industries

Good morning, wonderful people, and welcome to almost-THURSDAY, which longtime readers know is how we prefer to think of the day normals call “Wednesday.”

THE BIG NEWS TODAY has to be the ongoing policy maturity the Madbouly government is showing in what are indeed “very challenging times” (to recycle a crazily overused corporate euphemism that makes us miserable every time we read it). Vice Minister of Finance Ahmed Kouchouk was out yesterday noting that the ministry is revising the budget deficit target in light of a hit to the commodities line item and ministers have given the green light to price caps on unsubsidized baladi bread. We hate price controls almost as much as we do subsidies, but this is common sense in light of what’s happening now. Ministers should go a step further and make clear that there’s a sunset clause for the price caps.

Ministers are also showing more willingness to deploy smart incentives. Measures expected “within hours” (we’re as tired of that phrase as we are of “very challenging times”) will give farmers incentives to plant more wheat — with a corresponding requirement they sell more of their harvest to the state.

And looking beyond the current crisis, Cabinet announced a series of on-point incentives to drive investment in the green economy as well as other priority sectors including artificial intelligence, education, and localizing industry. More of this, please.

^^ We have chapter and verse on all of this and more in this morning’s news well, below.

WHAT’S HAPPENING TODAY-

An African Development Bank (AfDB) delegation is in town to talk COP 27. Led by VP Kevin Kariuki, the team is holding talks with several ministers to discuss our preparations for the climate summit, which will take place in Sharm El Sheikh in November. Foreign Minister Sameh Shoukry (who is double-hatted as president of COP 27), International Cooperation Minister Rania Al Mashat, Environment Minister Yasmine Fouad, and Electricity Minister Mohamed Shaker are all meeting with the delegation to discuss how the bank can assist the government with its preparations. The visit wraps up tomorrow.

Also from the AfDB: The development bank plans to invest USD 1 bn to boost wheat production in African countries, noting that much of the continent is heavily reliant on imports from Russia and Ukraine, Bloomberg reports. AfDB will channel the money into “climate-resilient technologies” that will help 40 mn farmers on the continent raise their output of wheat and other crops, the bank’s president, Akinwumi Adesina, told the business news information service.

It’s Fed decision day: The Federal Reserve will end its two-day meeting to review interest rates today and is expected to kick off its long-signposted tightening cycle with a 25-bps hike. The market previously anticipated the central bank to go bigger and raise interest rates by 50 bps, but now expects the uncertainties triggered by the conflict in Ukraine to have changed its calculations. Look for an announcement this evening, Cairo time.

The Central Bank of Egypt will hold its policy meeting next week on Thursday, 24 March, and analysts are increasingly expecting policymakers to raise rates in response to surging global inflation.

Are the Saudis really serious about ditching the petrodollar in favor of the yuan? Analysts tell Bloomberg that talks between Riyadh and Beijing to sell some of its oil in yuan is more about geopolitical posturing than a serious reconfiguration of how global oil is traded. “I don’t know if it is really real,” said one strategist. “It happens at a moment when the geopolitical order is moving. The Saudis are trying to play with what they can. It is just a signal sent to the US they want more consideration.” US-Saudi relations deteriorated with the election of Joe Biden as president, who described it as a “pariah state” during his election campaign. Riyadh reportedly refused to take Biden’s phone call last week as his administration accelerates its pursuit of a nuclear agreement with Iran.

CIRCLE YOUR CALENDAR-

Swvl is on course to hit the Nasdaq on 31 March: Egyptian mass transportation firm Swvl will go public on the Nasdaq “on or around the 31 March” should the shareholders of its SPAC, Queen’s Gambit Growth Capital, approve the listing in a meeting on 30 March, the company said in a statement (pdf) confirming that the merger has received the greenlight from US regulators. The company will list 35% of its shares on the tech-heavy exchange following a merger with Queen’s Gambit, and will trade under the tickers “SWVL.”

Backing the listing: The SPAC has raised USD 300 mn from investors and has secured USD 121.5 mn in PIPE investments from the EBRD and several US-based investors, Abu Dhabi-based Chimera Capital and Kuwaiti VC Zain Group.

A busy year for Swvl: The company has entered two new continents via its acquisition of Barcelona-based Shotl and the South American firm Viapool, which operates transit services in Chile and Argentina.

A call for agribusiness SMEs: CARE Egypt is calling on SME owners to apply for a training program aiming to equip agripreneurs to raise funds. You can apply for the program here.

Green energy forum: The German Arab Chamber of Industry and Commerce is hosting the Egyptian-German Green Energy Forum next Tuesday, 22 March. The event runs 5:30-9pm CLT at the InterContinental Cairo Semiramis.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

*** 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, and urban development, as well as social infrastructure such as health and education.

In today’s issue: The commodity price shock is pushing up prices of building materials in Egypt, with local steel and cement prices soaring since the start of the Ukraine conflict. Local manufacturers say that these price increases are necessary as they face soaring input costs, including the prices of key energy sources such as coal and pet coke. Contractors, on the other hand, are feeling the pinch, and are lobbying for government support to help them absorb the shock.

The Madbouly government sees the FY 2021-2022 budget deficit target widening to 6.9% from 6.7%, Vice Minister of Finance Ahmed Kouchouk told Al Arabiya. This comes as war-related global price surges putting a strain on the state budget. The ministry expects to have to find an extra EGP 15 bn to cover the higher costs of importing wheat.

Softer targets were flagged by Finance Minister Mohamed Maait last week, casting doubt on the government’s ability to keep to the 6.7% target in light of higher commodity prices and the loss of Russian and Ukrainian tourists. The ministry is also revisiting its spending and fiscal targets for FY 2022-2023, he said. The updated draft budget is due to be presented to the House of Representatives on 31 March.

It’s looking more and more as if the Central Bank of Egypt may be prompted to raise interest rates: EFG Hermes’s Mohamed Abu Basha has become the latest analyst to forecast a rate hike when the central bank meets later this month, telling Al Arabiya that policymakers could raise rates by 100 bps to help tamp down rising inflation. A rate hike would also support portfolio flows as inflation eats into the country’s real rate, which is among the highest in the world.

Higher interest rates = higher debt burden: The government is considering offering more short-term treasury bills to reduce the cost of a rate hike, Kouchouk told the broadcaster. Treasuries are typically perceived by investors as being lower risk than long-term bonds and carry lower interest rates as a result.

What does that mean for the debt diversification strategy? The ministry has been working to lengthen the average maturity of its debts by issuing fewer treasury bills and more long-term bonds. It’s aiming to extend the average tenor of its debt to five years, up from 3.4 years currently.

Our samurai bonds are on the chopping block (for now): Egypt’s first samurai bond issuance will likely be delayed due to the deterioration of market conditions, Kouchouk said. The Finance Ministry had aimed to sell around USD 500 mn of JPY-denominated bonds in Japan by the end of June as part of its debt diversification strategy.

In case Ahmed Kouchouk’s warning wasn’t enough, the IMF also thinks emerging markets including Egypt will need to hedge against the economic risks associated with the war in Ukraine, IMF Director for ME and Central Asia Jihad Azour told CNBC Arabia (watch, runtime: 15:43). Egypt’s budget will likely face pressure on the back of surging commodity prices, while the decline in tourists from Ukraine and Russia — two of our most important tourism markets in volume terms — will affect economic growth, he said.

What does the IMF recommend? We need to focus on food security issues resulting from our reliance on Russia and Ukraine for wheat imports, according to Azour, and protect the most vulnerable in society by widening the social safety net. This needs to come hand in hand with measures to both curb inflation and reach our targeted 1.5% primary surplus for the current fiscal year.

What food security issue? Russia and Ukraine together account for 80% of our wheat import. The spillover effect of grain price hikes is already apparent here at home, with global price hikes threatening to cost the government up to EGP 15 bn this fiscal year in additional wheat import costs. The price of unsubsidized bread has doubled since the war broke out, and the government is soon to impose price controls on unsubsidized bread (see story below) and raised the price it will pay farmers for what it buys during this year’s domestic harvest.

The war is also threatening about a third of our inbound tourism market by volume. IMF boss Kristalina Georgieva also pointed to the threat the war poses to our tourism industry last week, noting that it “will be sharply hit by the collapse of the Ukrainian and Russian markets.”

On the bright-ish side: “The development of Egypt’s oil and gas industry will help it weather the volatile price hikes of oil due to the war,” Azour said. Oil Minister Tarek El Molla made a similar suggestion recently, saying that gas exports could compensate for part of the cost of importing oil and petroleum products. Oil has soared to 14-year highs over the past few weeks due to the war, hitting USD 130 last week before sliding more than 20% on hopes that Russia and Ukraine were moving towards a peace agreement.

Egypt has not yet approached the IMF with requests for a support package, Azour said, confirming comments by Planning Minister Hala El Said earlier in the week. We last secured from the lender a USD 12 bn facility tied to much-needed economic reforms amid the EGP flotation, followed by another USD 8 bn to support the economy through the pandemic.

Expect the IMF to cut our growth forecast next month: The IMF will likely be revising downwards its forecasts for MENA countries’ economic growth, Azour said, echoing comments made by Georgieva last week, who said it will downgrade its global growth outlook in response to the conflict. The Fund currently expects the Egyptian economy to grow at a 5.6% clip this fiscal year. It will publish its latest World Economic Outlook ahead of its Spring Meetings in April.

Gov’t to fix price and specifications of unsubsidized baladi bread: President Abdel Fattah El Sisi ordered the government to set a fixed price for unsubsidized bread yesterday, in the latest move to hold down local prices amid surging global inflation, according to an Ittihadiya statement.

Local bread prices have climbed rapidly since the conflict in Ukraine began, with some reports suggesting that prices have doubled in recent days.

How much will it cost? The exact details will be announced “within days,” but industry professionals expect the unsubsidized loaf of baladi bread to cost around EGP 0.75 and to weigh around 90 grams, said head of the bakeries division at the Cairo Chamber of Commerce Attia Hamad in a phone-in with Ala Mas’ouleety’s Ahmed Moussa (watch, runtime 9:21). The decision sees the government providing flour to private bakeries at set prices for the next four months to ensure they sell them to consumers at the fixed price, Hamad said.

El Sisi has also told the government to offer incentives to farmers to ramp up wheat production to ensure sufficient supplies amid the global supply crunch. Incentives will be announced “within hours,” Deputy Agriculture Minister Mohamed El Kersh said last night in a phone-in with Al Hayah Al Youm (watch, runtime 4:42).

Farmers will be nudged to sell more of their wheat harvest to the government, according to a document seen by Bloomberg. The business information service appears to suggest that farmers taking incentives to plant more wheat will need to sell a minimum quota to the state. Farmers could also be prevented from selling the rest of their crop to other buyers without first getting a license, the document reportedly said.

More wheat, less expensive fertilizer: Farmers who provide at least 90% of their yield to the government this season will receive subsidized fertilizers for the summer, according to the document. Officials from the supply and trade ministries declined to give comment to Bloomberg.

The new measures come as the government tries to bump up local wheat cultivation (and to buy more of it to put in reserves) to make up for the shortage of Russian and Ukrainian wheat, whose exports have been heavily curtailed due to the conflict. The two countries provide around 80% of Egypt’s wheat and account for more than a quarter of global supply. The government is now aiming to buy more than 6 mn tonnes of domestic wheat this harvest season, up from its previous 5.5 mn-tonne target.

The government is upping its storage capacity to make space for additional supplies: The Supply Ministry now has space for 5.4 mn tons of wheat, up from around 3.4 mn tons previously, the cabinet said in a statement.

A wheat shipment is currently on its way from France, Reuters reports. A vessel with about 30,000 tonnes of French wheat is incoming, in what appears to be a sale to a private importer, not state-buyer GASC, the news agency said.

Food protectionism is growing: Morocco became the latest country to introduce export curbs yesterday, announcing limits on tomato exports to hold down prices ahead of the Ramadan season, according to Bloomberg. Argentina and Indonesia have taken similar measures to cut back specific exports, while Russia and Ukraine have in recent days announced export bans of food staples.

Egypt has put in place bans of its own, last week announcing that exports of food staples such as wheat, flour, corn and oils will be prohibited for the next three months.

Gov’t announces tax breaks to boost green economy + other emerging sectors: The government has widened the number of companies eligible for tax incentives under the Investment Act as it looks to stimulate investment into strategic areas of the economy. Companies working on a wider range of renewable energy and manufacturing projects will now be able to deduct 30-50% of their investment costs from their tax bills under a decision announced yesterday by Prime Minister Moustafa Madbouly, cabinet said in a statement. Certain activities in the education and sports sectors have also been added to the legislation.

Who’s eligible? Companies working on the following projects will now benefit from the tax incentives in the 2017 legislation:

• green hydrogen and green ammonia production, storage and export;
• the manufacture of plastics-alternatives;
• establishing schools, technical education colleges, and universities;
• setting up sports facilities.

What incentives will they get? Companies who invest in specific sectors and areas of the country see tax breaks calculated on the amount invested in the project. The legislation also hands companies a flat 2% customs rate on machinery imported for the project, and a five-year exemption from stamp duty and notary fees on certain expenses.

You also need to be in specific areas of the country to get the most benefit: Projects in priority development areas such as the Suez Canal Economic Zone, the new capital and Upper Egypt receive 50% of their investment dedicated from their tax bills, while investment into “sector B” areas receive the 30% deduction. Sector B projects must be either labor-intensive, SMEs, powered by renewables, or export-oriented, according to the law.

Further incentives will be on offer for companies working in other sectors: Companies investing in the green economy, AI, research and innovation, workforce upskilling, and localizing industry will be granted other incentives, the statement said, without providing further details.

Cabinet ministers approved the tax breaks last week, as part of a wider package of incentives put forward by the General Authority of Investment and Freezones.

OTHER INVESTMENT NEWS-

Lamar is looking to invest EGP 500 mn over the next three years: Alexandria Agricultural Company (Lamar) is looking to invest at least EGP 500 mn over the coming three years to expand production and strengthen its transport fleet, CFO Youssef Talaat told Bloomberg Asharq. The firm also plans to build new factories within three to five years, he added. The dairy and juice maker invested EGP 250 mn last year, Talaat said.

Optimism fades in Ukraine peace talks: The latest news out of the ongoing peace talks between Russia and Ukraine isn’t quite as optimistic as it was a few days ago, with a senior Ukrainian aide saying yesterday that there are “fundamental contradictions” between the two sides. Writing on Twitter, presidential adviser Mykhailo Podolyak said that the ongoing talks are “very difficult,” while adding that there is “certainly room for compromise.”

The sentiment was echoed by Putin: Ukraine is “not showing a serious attitude toward finding mutually acceptable solutions,” Russian President Vladimir Putin told European Council President Charles Michel yesterday. Talks are nevertheless scheduled to continue today.

In what can only be called a baller move, European leaders traveled to Kyiv in show of support for Ukraine: The Prime Ministers of Poland, Slovenia and the Czech Republic arrived in the capital yesterday and met with Ukrainian President Volodymyr Zelensky to confirm the EU's unequivocal support for Ukraine, the Wall Street Journal reported.

Biden heading to Europe to meet with Nato allies: US President Joe Biden will travel to Brussels next week for an extraordinary Nato meeting, in his first trip to Europe since the war broke out. “We will address Russia's invasion of Ukraine, our strong support for Ukraine, and further strengthening NATO's deterrence & defense,” Nato Secretary-General Jens Stoltenberg wrote on Twitter.

China seeks to distance itself from Russia’s war after US warnings: “China is not a party to the crisis, nor does it want the sanctions to affect China,” Foreign Minister Wang Yi said in a phone call with his Spanish counterpart José Manuel Albares, according to a statement. His statement came a day after US officials voiced worries about Beijing’s close ties with Moscow, and warned China not to assist Russia’s military campaign. Hong-Kong listed Chinese stocks have plummeted in recent days on fears that Chinese companies will face western sanctions.

PLANET WAR FINANCE-

Russia could take years to recover from a default, with its current debt valuation near the levels of severely indebted countries like Venezuela and Argentina, the Wall Street Journal reports. The country’s government bonds have fallen below 10 cents on the USD since the US and EU battered its financial markets with sanctions, with uncertainty clouding a key interest payment on a USD-denominated bond expected today.

Today is key: Russia is due to make a USD 117 mn payment on two USD-denominated bonds today but has so far given mixed signals about whether it will pay in RUB. Ratings agencies say that the government will officially be in default if it opts to pay in RUB or fails to pay in USD during the 30-day grace period, though with most of its reserves frozen under the US’ sanctions regime, it remains unclear whether it is able to pay bondholders in USD.

The war won’t see European banks banned from dishing out to shareholders, as was the case during the pandemic, European regulators told the Financial Times. Dividend payouts and share buybacks were banned for almost a year as the pandemic plunged the global economy into recession, but regulators don’t appear as worried about the health of banks’ balance sheets during this latest crisis. European banks are expected to pay out EUR tens of bns in dividends and share buybacks this year.

Bread prices were still the topic du jour last night on our airwaves. The talking heads dedicated major chunks of their shows to the price controls on unsubsidized bread. Head to our commodities section (above) for all the details.

Topping coverage on Egypt in the foreign press this morning: The US will likely provide Egypt with F-15 fighter jets, head of US Centcom Gen. Frank McKenzie has said. “I think we have good news in that we're going to provide them with F-15s, which was a long, hard slog,” he told a congressional hearing yesterday. McKenzie didn’t disclose how many of the Boeing aircraft would be sold or when the sale would take place. Reuters and Politico have write-ups of the general’s comments.

Meanwhile: The US should help east Mediterranean countries export gas to Europe to decrease the continent’s reliance on Russian hydrocarbons, an opinion piece in the Hill argues. To do this, Washington needs to support Egypt and Israel to increase their LNG capacity and encourage the UAE and Qatar to invest more in LNG.

More details on the EV charging station company PPP: The private sector partners in the soon-to-be-established company for EV charging stations will hold a 55% stake (including a 25% stake for the operating and managing firm), Masrawy quoted Public Enterprises Minister Hisham Tawfik as saying. The remaining 45% will be owned by the ministry. Each stakeholder will put up a corresponding portion of the venture’s initial EGP 150 mn capital, with another EGP 300 mn to be raised from local banks. The company will set up 3k charging stations within 18 months in Cairo, Alexandria, Giza, Sharm El Sheikh and several highways.

Reminder: Companies looking to operate and manage the company have until this Thursday, 17 March to submit their bids, with the ministry set to announce the qualified bids the following Thursday, 24 March. The private sector partner selected to manage and operate the company will be locked in with a medium-term contract for its services in exchange for a portion of the company’s net income.

ALSO- Shatablee is partnering with EGX-listed Contact Financial Holding to provide financing options for its customers (pdf). The interior design startup recently received USD 1.2 mn in investment.

Other things we’re keeping an eye on this morning:

• British energy services company Petrofac will conduct an early-stage feasibility study on a new green hydrogen / ammonia facility for a subsidiary of low-carbon energy firm Mediterranean Energy Partners, which is chaired by Alaa Arafa, industry magnate and founder of Dolphinus Holdings.
• Pepsico spent USD 100 mn on expanding production and upgrading the tech infrastructure of its Egyptian business lines in 2021.
• Hitachi Rail will prepare a feasibility study for the operation and maintenance of the fourth metro line.

Climate change adaptation and climate finance for developing countries were at the top of the agenda in a COP27-focused meeting between Foreign Minister Sameh Shoukry and Malaysian environment minister Tuan Ibrahim Tuan Man, according to a cabinet statement. Shoukry was in Kuala Lumpur as part of an Asian tour that will also see him visit Singapore, Indonesia and Pakistan.

Binding emissions targets on the table? The pair also discussed “strengthening countries for their nationally determined contributions [NDCs] under the Paris Agreement.” Egypt has signed onto the original Paris Agreement and the updated COP26 pledge, but (unlike Malaysia) we haven’t submitted any NDCs — binding targets for specific emissions reductions. Egyptian authorities may announce a net-zero carbon emissions target at November’s COP27 climate summit in Sharm El Sheikh, Oil Minister Tarek El Molla has said previously.

Russia says it got its guarantees, paving the way for an Iran nuclear agreement: Russia’s Foreign Minister Sergei Lavrov said he has received written guarantees that his country’s cooperation with Iran will not be impacted by ongoing Western negotiations to restore the 2015 Iran nuclear pact, Reuters reports. It is unclear if Russia has dropped its demand to protect trade with Tehran, but Lavrov’s comments signal that Moscow won't block the finalization of the long-awaited agreement — which could remove sanctions on the Islamic Republic and restore Iranian oil to the market.

With sanctions relief in sight, Iran is reviving efforts to export LNG: Iran’s National Oil Company has invited investors to submit proposals for the construction of mini liquefied natural gas units, Bloomberg reports. The announcement comes just as European buyers look to replace Russian gas flows in retaliation for its invasion of Ukraine. Russia provided about 40% of the EU’s gas last year.

There’s pressure on GCC producers to step up oil production:

• The UK wants the Gulf to pump more oil: UK PM Boris Johnson will travel to the UAE and Saudi Arabia this week to lobby them to step up oil production in light of the Ukraine conflict, which has triggered serious volatility in the oil markets, Bloomberg says.
• Burn: Joe Biden has also tried to get the ears of the Gulf states, only for Riyadh and Abu Dhabi to refuse to take his calls.