AM — Cabinet approves outline of austerity budget as talk rises of another IMF program in the works

Good morning, friends, and welcome to another exceptionally heavy news day, so as we did earlier this week, let’s jump straight in:

The EGP eased another 1.6% against the greenback yesterday, settling at EGP 18.57. The currency has now slid 17.7% since the devaluation on Monday. Two senior bankers we spoke with yesterday suggested the rate may have overshot somewhat, as it did after the 2016 float, with one of them saying it was encouraging that some high-value customers have begun selling FX to the bank. Consensus among international analysts prior to the float on Monday was that the EGP was 15-16% overvalued.

Savers are pouring money into the new 18% CDs launched by Banque Misr and the National Bank of Egypt in the wake of Monday’s rate hike. More than EGP 50 bn has been invested in the certificates since their launch on Monday: EGP 37 bn with the NBE and EGP 14 bn with Banque Misr.

If you care about housing or infrastructure, you’ll definitely want to read this morning’s Hardhat (below), which takes a deep dive into what our new FX reality, rising interest rates and spiraling global commodities prices mean for builders here in Egypt. Hardhat is presented with the generous support of our friends at Orascom Construction.

PSA- It’s cool outside again today, with a forecast high of 18°C in the capital city. Don’t expect the mercury to move any higher tomorrow — and enjoy every last minute of it. Temps in Cairo are on track to rise to the high 30s by the end of next week and to 41°C on Saturday, 2 April (the first day of Ramdan), according to our favourite weather app.

WHAT TO WATCH FOR TODAY-

Price cap here, price cap there… The Supply Ministry is planning to announce in the coming days price caps for wheat milled by the private sector, Al Mal quotes Minister Ali El Moselhy as saying. The announcement comes as private mills — which produce 72% extraction-grade flour used to make bread and other baked goods — face difficulties in importing wheat due to the supply crunch caused by the war in Ukraine. The price at which unsubsidized flour will be sold to private bakeries will be announced once the wheat price has been set, he said.

The announcement comes after the government imposed price caps on unsubsidized baladi and fino bread in a move to tamp down on rising bread prices.

COMING UP-

Ghazl El Mahalla FC’s IPO will kick off by the end of the month, Public Enterprise Minister Hisham Tawfik told Al Borsa. Bookrunner Prime Holding plans to publish the Public Subscription Notice prospectus in the coming days, allowing the retail offering to take place before the end of next week, the newspaper reported.

Refresher: Ghazl El Mahalla is selling a 67.5% stake to investors, and expects to raise EGP 135 mn. It has already attracted EGP 37 mn from institutional investors during the private placement. The transaction will mark the first time a football club is taken public in the Arab world and could pave the way for more IPOs of this sort.

CIRCLE YOUR CALENDAR-

There’s no MPC meeting tomorrow: The Central Bank of Egypt has canceled (pdf) Thursday’s regularly scheduled Monetary Policy Committee meeting after enacting a surprise 100 bps rate hike at a special meeting early Monday morning.

Do you need to dive deeper into e-invoicing? Lynx Strategic Business Advisors are hosting a webinar today to discuss the system. The Arabic-language gathering will take place 12:00-1:30pm with speakers from the Finance Ministry and the Tax Authority and a panel discussion including the CFOs of PepsiCo, Talabat and Unilever. You can register for the event here.

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: Key raw materials used in infrastructure projects have seen substantial price hikes in the last few weeks, with expenses being further driven by energy prices, freight and shipping costs. And the CBE’s decisions earlier this week to hike interest rates, and let the EGP slide against the USD, have added to the pressure for infrastructure players. We ask analysts how these developments could impact Egypt’s infrastructure projects, with most anticipating that large — and in particular, small — contractors will see their margins squeezed. Some also believe they could affect project deliverability, though probably not for high-impact infrastructure projects in key sectors.

GDP forecast downgraded as cabinet signs off on 2022-2023 budget: Egypt has revised downwards its GDP forecast for FY 2022-2023, according to figures in the draft budget that was approved by ministers yesterday. The government sees the economy growing at a 5.5% clip in the coming fiscal year, according to a cabinet statement, down from the 5.7% figure that was forecast before the Ukraine conflict shook global commodity markets and hit state finances.

Prime Minister Moustafa Madbouly had directed the Finance Ministry to restructure the FY 2022-2023 budget to “reassess priorities” amid rising basic commodity and oil prices on the back of the Russia-Ukraine war, an earlier readout from Cabinet had said.

Translation: A combination of austerity and increased social spending. The revised budget will prioritize social protection programs to help support the populations most affected by fallout from Russia’s war in Ukraine. But the Finance Ministry will also need to be disciplined in its spending and should enact austerity measures if necessary, Madbouly said. Each ministry will review its spending in light of current events, he added.

That message was reinforced by cabinet spokesperson Nader Saad last night, who declared that “government austerity is the main headline of the budget” in an interview on Al Hayah TV channel (watch, runtime 9:58). Saad provided no further details on where spending cuts might come.

None of this is surprising given the state is facing bns of EGP in extra costs due to rising commodity prices. The government expects to spend an additional EGP 15 bn this fiscal year due to heightened wheat prices, while oil prices are now in the triple figures — far above the USD 65 price assumed in the state budget.

The statement is light on numbers, but this is what the budget outline looks like:

It turns out that the government is still targeting a 6.1% budget deficit at the end of 2022-2023. This was the preliminary figure announced by the Finance Ministry earlier this year, but just three days ago Minister Mohamed Maait said that the target had been revised to 6.3%. The deficit is expected to narrow to 6.9% at the end of the current fiscal year.

The primary surplus is expected to come in at 1.5%, down from the 2% penciled in for the medium term in the initial draft budget and in keeping with the Finance Ministry’s revisions earlier this week.

The government plans to focus spending on strengthening the social safety net, education, and healthcare, as well as supporting manufacturers and exporters, the statement says, without providing a breakdown of spending.

It’s not going to be investing as much as planned: Public investments in 2022-2023 will rise by 15.2% from the previous year, down slightly from the previous 16.2% target, according to a separate statement.

Still no word on debt: Maait didn’t disclose the ministry’s debt-to-GDP target for the coming fiscal year. The minister said in January that public debt levels were expected to fall to below 90% of GDP in 2022-2023.

This is the latest in a series of moves that remind us of March 2020. The government also announced yesterday EGP 130 bn package of tax incentives and social safety measures that looked a lot like the stimulus and bailout measures introduced in March 2020 to manage the fallout from the covid-19 pandemic. Egypt also revised its budget at the time to factor in the likely impact of the pandemic, cutting the GDP growth forecast to 5.1%.

WHAT’S NEXT? The document should make its way to the House of Representatives, where it will be discussed in committees at the same time as various ministries lobby FinMin for allocations. The final document typically goes up for a vote at the general assembly before the start of the new fiscal year. If the budget doesn’t pass before 30 June, the current budget rolls forward to direct state spending until the new document is passed.

More analysts are speculating that the fiscal stimulus package and monetary policy measures announced Monday will pave the way for a fresh IMF program as the ongoing commodity price shock puts strain on the economy. Since the start of the war in Ukraine, sporadic reports that the government is in discussions with the Fund have surfaced in the press, but the central bank’s decision to devalue the EGP and raise interest rates this week has intensified speculation that the government will soon agree terms for another round of financial assistance.

Many analysts ⁠— including at Goldman Sachs, Moody’s and Capital Economics ⁠— all floated the possibility of a program yesterday after the CBE allowed the EGP to fall 16% and hiked interest rates by 100 bps. If those two moves are not preconditions to landing support from the Fund, they certainly show maturity in policymaking that will make the talks go smoother.

JPMorgan joins the chorus: “This would be in line with what is needed … to potentially reach yet another IMF program, especially as it would be under exceptional access to IMF resources,” JPMorgan said in a note picked up by Reuters.

Exceptional access means more scrutiny: Egypt has exceeded its IMF borrowing quota, meaning any financial assistance will be lent under exceptional access criteria, a person with knowledge of discussions with the IMF told the newswire. This will mean that Egypt will face greater scrutiny from the Fund, they said.

And RenCap: “We agree with consensus that this is a move that the IMF will welcome and could pave the way for some additional support from the Fund within the next month or two,” Charles Robertson, chief economist at Renaissance Capital, wrote in a note yesterday. “I suspect Saudi and other Gulf states will help out too,” he added.

An IMF loan is of “paramount importance” if Egypt is to maintain access to international debt markets, Hootan Yazhari, head of MENA and global frontier markets equity research at Bank of America Securities, told Bloomberg Daybreak yesterday (watch, runtime: 6:05). Egypt has become increasingly reliant on capital inflows for funding in recent years, and an agreement with the IMF now would “go a long way to giving some comfort to international investors” and increasing inflows, he said.

So far, there aren’t any official confirmations that we’re in talks of the fund: IMF and Egyptian government officials have in recent weeks played down the possibility of fresh aid, but an unconfirmed report in Bloomberg last week suggested that the two sides were in talks over either a precautionary and liquidity line or a non-financial support package.

Egypt has turned to the Fund three times in the past six years: It took out a USD 12 bn Extended Fund Facility in 2016 that was tied to a package of economic reforms, among them was the floatation of the EGP. In 2020, it borrowed USD 5.2 bn under a Stand-by Arrangement and USD 2.8 bn under a Rapid Financing Instrument following the outbreak of covid.

Our inaugural Samurai bond issuance is back on: The Finance Ministry plans to sell USD 500 mn in JPY-denominated Samurai bonds in Japan on Thursday, Mohamed Hegazy, head of the ministry’s debt unit, told Enterprise yesterday. The issuance was announced by Finance Minister Mohamed Maait earlier this year, who said that it would take place before the end of the fiscal year in June. The issuance will be in JPY, but the transfer currency can be in JPY or USD, he said at the time.

Doubts about the sale going ahead were cast last week by Vice Minister of Finance Ahmed Kouchouk, who said that the ministry might have to delay its plans due to poor global market conditions caused by the conflict in Ukraine.

Background: The issuance would come a few months after meetings between officials to take the issuance to market in Japan, as part of Egypt’s debt diversification strategy. The government had been mulling selling JPY-denominated bonds back in 2019, as well as RMB-denominated Panda bonds, but Maait said in late 2020 that the planned sales were being delayed until at least FY2021-2022 because of complications caused by the pandemic. Marketing foreign bonds in Asian markets is a different ball game and also requires new ratings assessments by Asian agencies, a senior government official told us in 2020.

OTHER DEBT NEWS-

Planned corporate green bond issuance delayed: A USD 400 mn corporate green bond issuance could take place before the end of the year, Financial Regulatory Authority head Mohamed Omran told CNBC Arabia yesterday (watch, runtime: 3:28). Omran had said earlier this year that the sale — which would be Egypt’s second corporate green bond issuance after CIB sold USD 100 mn of the climate-linked securities last year — would go to market in 1H2022. The issuance will be cross-listed between the EGX and the German or Luxembourg bourses, he confirmed. Omran did not name the issuer.

Transiting the Suez Canal is about to get more expensive: The Suez Canal Authority will raise fees for ships transiting the waterway from the beginning of May, it announced yesterday. Vessels carrying crude and petroleum products will pay a 15% surcharge as of 1 May, up from the 5% currently, the authority said. The decision comes on the back of “significant growth in global trade, the improvement of ships' economics, the Suez Canal waterway development and the enhancement of the transit service," the authority said.

Also increasing: The tolls on laden and ballast liquefied petroleum gas tankers, chemical tankers and other liquid bulk tankers will be raised to 20% of normal dues, from 10% currently. The additional charges levied on laden and ballast dry bulk vessels will increase to 10% of normal transit dues, from 5% currently, while other vessels will have to pay surcharges of 14%, up from 7%.

The surcharges are “temporary” and revised or scrapped based on global shipping conditions, the SCA said.

The fee hikes come as public finances come under pressure from rising international commodity prices caused by the conflict in Ukraine. The government is having to find an extra EGP 15 bn to cover the heightened cost of wheat, while oil prices are way in excess of the level the Finance Ministry budgeted for.

The move will further increase Suez Canal revenues, which hit a record high of USD 6.3 bn last year.

Egypt has already hiked tolls once this year: The SCA raised fees by 6% for most ships at the start of February.

And other pandemic-era discounts have been phased out: Earlier this month, it removed a discount for LNG carriers amid rising natural gas prices.

Catalyst Private Equity has launched a EGP 1 bn impact investment fund that will target Egyptian SMEs, it announced in a statement (pdf) yesterday. The Catalyst Capital Egypt Fund has received commitments from some of Egypt’s largest state-owned financial institutions and is working with the UN Development Program to measure the social and environmental impact of its portfolio companies, it said.

First close next month: The fund expects to reach its first close of EGP 400-450 mn in mid-April, Catalyst Chairman Maged Shawky told Enterprise. The fund should reach its final EGP 1 bn close within the next five years, he said.

Who’s involved? Misr Ins. Holding Company, Misr Life, Misr Ins., Post for Investment, Misr Fund for Finance and Investment, Banque du Caire, Attijariwafa Bank, Ahli United Bank, Suez Canal Bank and Al Baraka Bank are all taking part in the fund as limited partners, Catalyst said, without detailing the size of their commitments. Attijariwafa contributed EGP 30 mn to the fund, Marwa Nabil, head of structured finance at the bank, told Al Mal.

The fund is already studying several potential investments, with a focus on sectors that are defensive in terms of growth and profitability, namely agricultural manufacturing, pharma, and logistics, Al Borsa quotes Shawky as saying. It plans to exit its investments within 5-7 years, with an exit strategy focused primarily on IPOs, he said.

SPEAKING OF FUNDS-

• Banque Misr launched the “Egyptian Sports Fund” on Monday after receiving commitments from local and regional lenders totalling EGP 51 mn, the fund’s managing director Suzan Hamdy told Al Masdar. The fund will support different sports entities across the country, as well as Olympic athletes and national teams, in cooperation with Egyptian Sports Federations, according to a statement (pdf).
• Evolve Investment Holding could double the size of its gold-backed investment fund to EGP 1 bn, CEO Sameh El Torgoman told Al Mal.

IN OTHER INVESTMENT NEWS- Emirati investor eyes Egypt’s retail sector: Emirati businessman Saeed Eid Al Ghafli told Prime Minister Mostafa Madbouly yesterday that he wants to invest in the Egyptian retail sector through malls, hypermarkets and logistics areas, according to a cabinet statement.

Charter flights landing in Egypt will continue to receive cash subsidies from the government until the end of October after the cabinet yesterday agreed to extend incentives designed to boost tourism. The program pays out between USD 1.5k and USD 3.5k per flight to airlines and was supposed to expire at the end of April, but according to a cabinet statement ministers have agreed to extend it until 31 October.

Tourism under pressure: The government is looking for ways to support the country’s tourism industry as it deals with the loss of Russian and Ukrainian tourists. The two countries together account for about 30% of inbound tourist arrivals in Egypt, making us particularly exposed to the fallout from the conflict in Ukraine. Occupancy rates in Egypt’s Red Sea resorts have reportedly fallen by almost half since the start of the year.

The Tourism Ministry is also mounting a new international ad campaign as it tries to attract visitors from other countries. The eight-week “Follow the Sun” campaign has been deployed on social media platforms, targeting people in the UK, Germany, Italy, France and the US.

ALSO FROM THE MEETING-

National projects won’t be delayed because of the commodity price shock, but companies won’t be fined for 2 months for late delivery: Companies that fail to meet deadlines on state infrastructure projects will be exempt from fines for two months in light of rising commodity prices caused by the Ukraine conflict and shipping disruptions. Faced with higher input costs, contractors have called on the government to delay the delivery of some lower-priority projects for three months, a measure which they say may take some of the pressure off as it allows them to hold off on buying materials at current prices.

Decent Life is an exception: The government is considering extending deadlines for the initiative in light of the global situation, and will not impose fines on contractors, according to a separate statement.

MEA fintech startup FlapKap has raised USD 1.2 mn in a funding round led by tech fund A15, according to a company press release (pdf). FlapKap, which bills itself as the first company of its kind in the region, offers AI-based insight to “help optimize advertising spending” for e-commerce and SaaS businesses. FlapKap is designed to help businesses grow without financial constraints, offering them revenue-based flexible payment terms on advertising spend.

FlapKap is already eyeing new regional markets: The company is currently operating in Egypt and the UAE, with an imminent launch in Saudi Arabia and plans for a “wider MEA expansion and rapid merchant acquisition” in the pipeline, the statement said.

Founders: FlapKap is currently led by co-founder Ahmed Coucha, co-founder of MENA digital agency Kijami. Khaled Nassef is the company’s CTO and co-founder.

US President Joe Biden will announce new sanctions on Russia when he travels to Brussels today to meet with European leaders and Nato officials, the White House said yesterday. The “announcement will focus not just on adding new sanctions, but on ensuring that there is joint effort to crack down on evasion,” White House national security adviser Jake Sullivan told reporters at a briefing. The allies will also announce new action on “enhancing European energy security and reducing Europe’s dependence on Russian gas,” said Sullivan, without disclosing further details.

Intense diplomacy: Biden will join an emergency Nato summit and speak at a meeting of the European Council, before traveling to Poland for talks with the country’s president.

Ukraine wants the Pope to mediate: Ukrainian President Volodymyr Zelensky said in a tweet that he spoke to Pope Francis about the “difficult humanitarian situation and the blocking of rescue corridors by Russian troops,” urging him to mediate in the crisis.

ON THE GROUND-

The battle for Mariupol is raging: Civilians said that Russian and Ukrainian forces were engaged in street battles in the middle of the city yesterday, signaling that Moscow could be close to taking the strategic city, according to the Wall Street Journal. Mariupol has faced heavy bombardment from Russian artillery since the start of the war, and there are reports of widespread destruction in the city.

PLANET WAR FINANCE-

Russia’s local currency bonds dropped on their first day of trading, but not by much following a nearly month-long suspension of the Moscow stock exchange, the Financial Times reports. The partial resumption of trading in government-issued bonds, which is part of a phased reopening of Russian capital markets, saw yields on the benchmark 10-year rouble bond climb 19.7% in pre-market trading before settling back to 13.9%, nearly 1.7 percentage point higher than the last trading day before suspension on 24 February, according to Refinitiv data.

This came despite Russia narrowly averting a default with two payments to bondholders made in the past couple of weeks, with both going through successfully in spite of Western sanctions that aimed to cut off the country from the global financial system. Fears of a potential Russian default have spurred outflows from emerging markets, with Bloomberg reporting this week that outflows reached USD 14.3 bn YtD.

Orascom Construction (OC) reported USD 113.4 mn in net income attributable to shareholders in 2021, up 29% y-o-y, according to its financials (pdf). Revenues rose 5% from 2020 to USD 3.5 bn. In 4Q, the company reported a 43% increase in net income attributable to shareholders to USD 37.1 mn, on revenues of USD 1 bn, up 8% on 4Q 2020, the company said in its earnings release (pdf).

OC’s consolidated backlog rose 12% y-o-y to USD 6.1 bn in 2021, with new awards rising 22% for the year, but dipping 13% y-o-y in 4Q 2021. Egypt accounted for the lion’s share of the company’s backlog, comprising 71% of the total, followed by the US (22%) and Saudi Arabia (3%). Pro forma backlog including OC’s 50% share in Besix rose 10% y-o-y to USD 8.9 bn in 2021.

“We maintained our record backlog achieved in the previous quarter, highlighting our successful efforts in pursuing quality projects across sectors,” company head Osama Bishai said. Egyptian projects played a major part in the growth, with the company signing contracts for transport projects, water infrastructure, and the Egypt-Saudi interconnection project. OC signed USD 2 bn-worth of new awards in the Middle East during the year.

The airwaves were all about prices last night, as the impact of the state’s policy decisions continues to unfold.

First up, we have bad news if you’re looking to buy a house: Property prices could increase by around 15-20% in the coming days due to an increase in the prices of building materials on the back of the war in Ukraine and the EGP devaluation, MP Tarek Shoukry, member of the House Housing Committee told Kelma Akhira’s Lamees El Hadidi in a phone-in (watch, runtime 10:55). We’re already seeing an increase of more than 40% in cement and steel prices, for example, he said.

What about units that were sold but not delivered? Real estate developers will bear the losses of units contracted by clients before the price increases, Shoukry told Ala Mas’ouleety’s Ahmed Moussa in a phone-in (watch, runtime 10:57). A request for a three-month deadline extension for project deliveries has been submitted to the Prime Minister, he said, which would allow developers to assess the current situation and its impact on the real estate sector.

** Check out this morning’s Hardhat where we break down how rising building materials prices are affecting companies in the sector.

Next up: Better news on food prices. The price of flour dropped by EGP 1k per tonne in the past two days, following the government's decision to impose price caps on unsubsidized bread, Abdallah Ghorab, head of the bakery division at the Egyptian Federation of Chambers of Commerce, told Ala Mas’ouleety’s Ahmed Moussa in a phone-in (watch, runtime 5:19). Flour will be supplied to private bakeries at the price of EGP 8.6k per tonne within 2-3 days, he said, expecting the price to continue to fall to below EGP 8k per tonne over the upcoming period.

There is no decrease in each eligible beneficiary’s share of subsidy ration cards after the EGP devaluation, said Abdel Moneim Khalil, head of internal trade at the Supply Ministry, Ala Mas’ouleety in a phone-in (watch, runtime 10:07). “These are malicious rumors,” he said, adding that there have not been any changes to subsidies.

There are no immediate plans to expand the export ban of staple food commodities to include more goods, but the government is keeping its options open in case of further disruption, Cabinet spokesperson Nader Saad told Al Hayah Al Youm’s Mohamed Sherdy in a phone-in (watch, runtime 9:58). The government will not hesitate to take similar action, if needed, to ensure supplies and maintain price stability, he said. The Trade Ministry has banned the export of basic food commodities — like wheat, flour, oils, and corn — for three months as it looks to shore up supplies amid turmoil in the global food market caused by the conflict in Ukraine.

Leading the conversation in the foreign press this morning: Monday’s three-way summit between Egypt, the UAE and Israel is getting attention by foreign journos. Reuters, Bloomberg and the New York Times all have coverage. We have more on the summit in this morning’s Diplomacy section, below.

Al Tamimi & Co is opening a new office in Morocco’s Casablanca on 1 April, marking the law firm’s 17th office in 10 markets, according to a statement (pdf). The office will be headed by Nesrine Roudane, who is joining Al Tamimi as a partner as of the beginning of next month.

New details from Egypt-UAE-Israel meeting: We have more details on Monday’s three-way meeting between President Abdel Fattah El Sisi, Israeli Prime Minister Naftali Bennett and Abu Dhabi Crown Prince Mohamed bin Zayed after Ittihadiya yesterday released a read-out of the discussion. The three leaders discussed the effects of the Ukraine conflict on energy, market stability, and food security, as well as a number of other international issues, Ittihadiya said. The talks focused on “bolstering global energy security and market stability” as well as regional stability, an Emirati statement carried by WAM said. The status of the Iran nuclear talks was a topic of discussion, diplomatic sources said on Monday following the meeting.

Is Egypt now part of a contain-Iran axis? “We clearly see the strengthening of an axis that offers another narrative in the Middle East, that we can work together and cooperate on economic and defense matters,” Reuters reported Israel's Deputy Foreign Minister Idan Roll as saying in a radio interview. “Israel is committed to build a good partnership with anyone possible against the radical axis of Iran.”

US State Department spokesperson Ned Price welcomed the three-way talks in a press briefing yesterday. “It’s yet another example of what is possible with normalized relations,” told reporters.

MEANWHILE-

Foreign Minister Sameh Shoukry has met with Pakistan President Aref Alvi in Islamabad, the ministry said in a statement yesterday. The visit came as part of Shoukry’s tour of Asia, during which he also stopped by Indonesia, Malaysia, and Singapore.

AND- The Biden administration appears to be cozying up to KSA, amid supply crunches and heightened oil prices as a result of the war in Ukraine. The two sides are working to arrange a phone call between President Joe Biden and Saudi crown prince Mohammed bin Salman, sources told Bloomberg. Relations between the two sides have been strained as during his presidential campaign in 2018, Biden had called Saudi a “pariah,” following the murder of critic Jamal Khashoggi.