AM — Inflation hits three-year high on food price hikes but slows on a monthly basis

Good morning, ladies and gentlemen, and get ready for what should be an interesting week ahead. We hope you spent a restful weekend by the beach (and the AC) as some international schools have begun their summer breaks.

Summer should give us a slight break today after a sweltering weekend, as yesterday’s scorching highs of 43°C give way to a cooler 35°C in the capital today, according to the Egyptian Meteorological Authority (EMA). Our favorite weather app is more or less backing up the EMA forecast.

THE BIG STORY here at home is the latest inflation reading, which saw consumer prices rise at their fastest annual pace since May 2019, driven once again by rising food prices. The silver lining: Prices didn’t rise quite as much as analysts were expecting and even slowed on a monthly basis, with some analysts saying inflation could peak by summer.

BUT THAT’S NOT ALL- We may be going out with our first (and long awaited) future flow securitization transaction, courtesy of our friends at CIRA. We have more in the newswell below.

There’s no one BIG STORY ABROAD dominating the front pages of the foreign press this morning — though macro matters continue to preoccupy the business papers as US price pressures see petrol at the pump soar past a record USD 5 a gallon (see this from the Wall Street Journal and this from the Financial Times.) We have more on the battle US monetary policymakers are waging against inflation, and its impact on the markets, below.

RELEVANT TO THE REGION- US President Joe Biden has admitted for the first time that he may be making a visit to Saudi Arabia later this summer (though he hasn’t yet made his mind up for sure), Bloomberg reports. If Uncle Joe does visit, he’ll have more than just oil on his agenda and would plan a “larger meeting” on regional security, Biden told reporters yesterday.

Why do we care? Axios has reported that the Biden administration is working with Israel, Saudi Arabia and Egypt to finalize the transfer of Tiran and Sanafir islands from Egypt to Saudi Arabia, a move that it believes could lead to a normalization of ties between Riyadh and Tel Aviv.

WHAT’S HAPPENING TODAY-

Subscription for the retail portion of Ghazl El Mahalla FC’s IPO kicks off today: The club is selling 98 mn shares to the public at EGP 1.02 apiece. Subscription will be open until 1 July at the latest but could close early after the first ten days, according to a disclosure (pdf) on Thursday. Investors buying in must purchase between 1k and 2 mn shares each, the statement said.

Ghazl El Mahalla wants to raise EGP 135 mn in the sale: The club hopes to raise EGP 98 mn from the retail offering, after having already received EGP 37 mn from institutional investors in the private placement back in November. In total, the IPO will see the club sell a 67.5% stake to investors.

HAPPENING THIS WEEK-

It could be a big week for our gas export ambitions: Hopes will be high this week that Egypt can ink an agreement to increase exports to the EU when EU Commission President Ursula von der Leyen lands in Cairo for talks with President Abdel Fattah El Sisi. According to a draft document seen by Bloomberg earlier this month, the EU is expected to sign an MoU with Egypt and Israel that will see more Israeli gas shipped to Egypt’s LNG facilities where it will be exported across the Mediterranean. The pact could also see the three sides work to curb methane gas emissions, the business newswire reported.

The EU could help fund new infrastructure: More details on the potential MoU were reported by Reuters over the weekend, which got its hands on a draft document that is set to be sent out to European governments for approval. According to the plan, the EU could help to finance new infrastructure, provided it’s not in breach of its rules to end investment in fossil fuels. The newswire provided few details beyond saying that the EU could also fund projects that reduce emissions and decarbonize natural gas.

More details: The agreement between the three sides would last for nine years, and offer Egypt the ability to purchase some of the additional gas sent by Israel.

Also on the agenda: European support to combat food insecurity in the Middle East will also be a topic of conversation between the two leaders, von der Leyen told the EU parliament on Wednesday. The EU is preparing to disburse EUR 100 mn in funding for Egypt to expand wheat storage capacity and support small farmers.

BY THE BY- It’s not just Europe who are keen on our plans to become a regional new energy player. British Ambassador to Cairo Gareth Bayley called Egypt “an emerging renewable energy power” last week, according to Ahram Online, and said that more than 10 British firms want in on our ambitious green hydrogen plans.

It’s also an important week for global efforts to prevent the food crisis from escalating. Trade ministers will gather today through Wednesday in Geneva for a World Trade Organization (WTO) conference, where the focus will be on stemming the recent wave of food protectionism that has seen more than two dozen countries place export restrictions on food and fertilizer, according to Bloomberg.

India is threatening to block a proposal backed by more than 50 countries to address the protectionism crisis, asking for certain provisions to be watered down, according to Bloomberg. In May, India placed restrictions on wheat exports, piling pressure on food supply chains that has seen prices spiral to their highest levels on record. We’ve also extended our own ban on wheat exports — though we could still do trade with India in a potential wheat-for-fertilizer pact that has drawn criticism from some other nations.

We’ll be advocating for net-importing + developing countries at the meeting: Egypt has submitted a draft resolution to the WTO on the issue on behalf of Arab and African nations and less developed countries, a Foreign Ministry statement read. The resolution aims to provide “practical solutions to support farmers and producers” and boost local grain and other crop production, the statement read, without going into more details.

MARKET WATCH-

Red-hot US inflation data raises fears of huge Fed rate hike; tanks stocks: US stocks suffered their worst weekly loss since January after inflation unexpectedly accelerated to a fresh 40-year high in May, raising fears among traders that the Federal Reserve will turn even more hawkish when it meets this week. The S&P 500 fell 2.9% and the tech-heavy Nasdaq tumbled more than 3.6% in response to the inflation data on Friday, which showed that consumer prices rose to 8.6% last month, its highest rate since November 1981.

All eyes on the Fed: Traders now see a 50% chance that the Federal Reserve will raise interest rates by 75 bps when it meets on Tuesday and Wednesday this week. Policymakers were broadly expected to go ahead with a second 50-bps increase but the poor data has increased the likelihood they will go aggressive to try and put a ceiling over the worst bout of inflation in a generation.

Over in Europe, the ECB is giving the markets flashbacks of 2011: European shares dived and bond yields jumped on Friday after the European Central Bank (ECB) indicated it would move to raise interest rates next month, reviving memories of the eurozone debt crisis early last decade. Borrowing costs for Italy and Greece — two of the bloc’s most heavily indebted Mediterranean economies — have spiked in recent days as investors worry about the sustainability of their debts after the central bank begins to raise rates. The Financial Times has more.

CIRCLE YOUR CALENDAR-

There’s a handful of conferences coming up:

• The EU-Egypt Sustainable Food Value Chain conference, which will take place at Grand Nile Tower Hotel this Thursday.
• The Aswan Forum for Sustainable Peace and Development,will take place in Cairo later this month on 21-22 June (Tuesday-Wednesday).
• The Big 5 Construct Egypt (pdf) construction industry exhibition runs from 25-27 June at the Egypt International Exhibition Center (EIEC) in Cairo.

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

*** It’s What’s Next day: We have our weekly deep-dive into what makes and shapes pre-listed companies and startups in Egypt, the UAE and KSA, touching on investment trends, future sector insights and growth journeys.

In today’s issue: After looking at how Nigeria attracted USD 1.8 bn in startup funding in 2021, and what could be next for StartupLand over there, we now take you on a tour of a few startups we’ve either personally met or heard about during our trip to Lagos a few weeks ago.

Inflation rose to a three-year high in May but came in lower than expected and even slowed down on a monthly basis. Annual urban inflation rose to 13.5% last month from 13.1% in April as rising global commodity prices and the EGP devaluation pushed consumer prices upwards for a sixth consecutive month, according to figures released by statistics agency Capmas on Thursday. This is the highest level since May 2019, though it came below the expectations of analysts polled by Reuters, which predicted a median forecast of 14.2%. It was, however, above the Central Bank of Egypt’s target of 7% (±2%).

Rising food prices are behind the surge (yet again): Food and beverage prices — the biggest component of the basket used to measure inflation — rose 24.8% y-o-y in May, down slightly from 26% in April, as the war in Ukraine continued to hamper supplies of basic food staples. The increase was mostly driven by a significant jump in the cost of grains and bread (up 32.4% y-o-y), according to Capmas figures (pdf).

Monthly momentum slowed: Urban inflation slowed on a monthly basis for the first time since November, falling to 1.1% from 3.3% in April. This was thanks to a slowdown in food prices, which grew 0.6% compared to 7.6% in April.

Annual core inflation rose to 13.3% y-o-y, according to central bank data (pdf). Core inflation strips out volatile items such as food and fuel.

Global commodity prices + the EGP devaluation are pressuring prices: “The continued higher level inflation readings are predominantly a reflection of both cost-push factors (including higher global commodity indices and a weaker EGP) and lower supplies,” Naeem Brokerage’s Allen Sandeep told Enterprise.

Making the most of the wheat we’ve got: Millers are reportedly using more wheat bran in their flour in efforts to stretch supplies, Bloomberg reports, citing Magdy El Waily, member of the grain chamber at the Federation of Egyptian Industries. The measure will increase the volume of flour made from a ton of wheat by around 6% to 875 kgs, and will be introduced by the Supply Ministry starting next month.

Prices could continue climbing: “We expect headline inflation to continue gaining momentum as the rise in global commodity prices reflects on the domestic market, coupled with base effect,” Beltone’s Alia Mamdouh wrote in a note. Inflation could reach up to 17% this year, Farouk Soussa, Goldman Sachs’ MENA economist, recently told Bloomberg TV, before falling back into the CBE target range by the end of next year.

Inflation could peak in July or August on higher electricity + fuel prices: Expected changes to electricity and oil prices could push headline inflation towards 15-16% by July or August, Arqaam Capital Associate Director Noaman Khalid told Enterprise. “We think this could be the peak of inflation,” Khalid said. Households could see their electricity bills rise by as much as 21% from 1 July, according to the government’s schedule to phase out subsidies by 2025. Meanwhile, the government’s fuel pricing committee will meet at the end of June to review prices at the pump.

What does this mean for interest rates? Some analysts are predicting another hike: Al Ahly Pharos is expecting another 200-bps hike in the coming meetings, “most probably front-loaded” this month, due to global monetary tightening and high food and energy prices, Al Ahly Pharos economist Esraa Ahmed wrote in a note last week. Arqaam sees a 100-150 bps hike this month, Khalid said.

Others forecast rates to remain unchanged at least until August: Meanwhile, Beltone’s Alia Mamdouh thinks policymakers will hold off making further adjustments to the policy rate. “We believe it is still too early for a full reflection of the introduced interest rate hikes on inflation momentum; we expect maintained interest rates in the upcoming meeting,” she wrote.

The CBE has already raised rates by 300 bps in the past three months, with a 200-bps hike in May following the 100-bps increase during the emergency meeting in March. The CBE said last month that it would “temporarily tolerate” the elevated annual headline inflation rate relative to its target until 2023.

Inflation is getting attention from the international business press: Reuters | Bloomberg.

CIRA could issue Egypt’s first future flow securitized bonds next month: The Financial Regulatory Authority (FRA) has approved a program that would see EGX-listed private sector education outfit CIRA issue EGP 2 bn of future flow securitized bonds over three years, CIRA CEO Mohamed El Kalla told Enterprise. The first tranche will be worth EGP 800 mn, with the bonds sold at EGP 100 apiece, the company said in a disclosure to the EGX (pdf) on Thursday.

The sale could take place next month: “We’re looking at a window of issuance sometime towards the end of July,” El Kalla said.

A quick recap: What exactly is future flow securitization? The debt instrument allows public or private service providers to raise capital by selling securitized bonds to investors using so-called “future flows” — the money they could reasonably expect to make at a future date — as collateral. We have more info in our recent explainer.

Funds from this first issuance will be used to cover CIRA’s growth plans in the next three years, including expanding its university and K-12 offering, said El Kalla. CIRA is looking to open three new schools at the beginning of the coming school year in September — two in Sixth of October’s Cosmic Village and one in Qena — and to establish an international school in Assiut that will open in 2024. It’s also partnering with privately-owned investment company Elsewedy Capital Holding to build and run a private university in New Damietta, and plans to launch Egypt’s first private sector technical college in September 2023.

What this says about the business of education in Egypt: “The fact that the FRA is moving ahead with this as the first securitized bond issuance is a reflection of how education is being seen more and more as a key industry in the country,” El Kalla said.

More future flows in future? Contact Financial Holding is also in talks with the FRA to securitize future flows in 2H 2022 on behalf of “one of the largest corporate firms in Egypt,” CFO Ayman Elsawy told Enterprise earlier this year.

Advisors: EFG Hermes are financial advisors on the transaction, Zulficar & Partners are legal counsel, and PWC are auditors, El Kalla told Enterprise.

IN OTHER DEBT NEWS-

Raya subsidiary Aman plans to issue securitized bonds worth EGP 500-650 mn to finance its medium and long-term activities, Raya Holding announced in an EGX disclosure (pdf). Raya is also considering a sukuk issuance program soon to fund small and medium sized enterprises (SMEs), as well as credit facilities worth EGP 500-700 mn to fund its consumer finance activity, the statement said. The company did not disclose an expected timeline for the issuances.

This would be Aman’s fourth round of securitization: Aman sold EGP 1.65 bn of securitized bonds across three issuances between 2019 and 2021, according to the disclosure.

Securitization SPV coming soon: The company is still finalizing procedures with the Financial Regulatory Authority for its new special purpose vehicle for bond issuances, Aman Securitization, the statement said.

Raya Holding looks to issue securitized bonds worth a total of EGP 2 bn this year for several of its subsidiaries, CFO Hossam Hussein said in February.

The Egyptian Belgian Company has new Saudi owners: Saudi food conglomerate Savola has signed an agreement to acquire 100% of the Egyptian Belgian Company — best known for its Ole-branded baked goods — for EGP 622.4 mn, its advisor, Al Ahly Pharos, said in a statement (pdf) Thursday.

Savola isn’t new to our market: The company is behind popular local cooking oil, ghee, pasta, and sugar brands including Rawabi ghee, Afia oils, and El Maleka and Italiano pastas. Its products are sold across the region, including in the Gulf, Sudan, and Turkey. The company has been looking at acquiring more food companies in Egypt since last year, saying at the time it would look at companies who produce items not covered by its existing portfolio.

What’s next: Savola plans to pour EGP 740 mn into the factory it acquired from Ole, which is set to reopen within six months, Savola Chief Strategy Officer Mohamed Badran was quoted as saying by Al Borsa. Savola hopes to achieve sales from the factory of around EGP 2 bn annually, worth some 16% of the local baked goods’ market, according to Badran.

ADVISORS- Al Ahly Pharos acted as exclusive buy-side advisor to Savola on the transaction, while Zilla Capital was sell-side advisor. Zaki Hashem & Partners provided counsel to the buyer and Adsero was sell-side counsel. The National Bank of Egypt was the escrow agent for the transaction.

Japanese conglomerate Sumitomo has chosen Egypt as the site of its largest ever factory, inking an MoU with the General Authority for Investment and Freezones (GAFI) on Wednesday to set up an industrial complex in Tenth Ramadan City, according to a cabinet statement. The factory will produce pigtail cables used in cars and cable harnesses and is expected to begin operations by the end of 2023.

The 150k sqm complex will be the largest of its kind in the world, Ahmed Magdy, managing director at Sumitomo Egypt, told Enterprise. The company plans to invest USD 100-150 mn in the project initially, he said.

A boon for Egyptian exports: All of the company’s products are exported to automakers in the MENA region and Europe, the statement said. The government is aiming to increase the value of exports to USD 100 bn a year within the next five years in a bid to narrow the trade deficit and improve the balance of payments.

And new jobs: The factory will double the company’s headcount in Egypt from around 10k currently, according to the statement.

About Sumitomo Egypt: The Japanese automotive electrical systems manufacturer already has a 10 Ramadan City pigtails cable factory that exports to Europe. It was recognized as the top freezone exporter by the Trade Ministry earlier this year.

Tech and AI startup DXwand has closed a USD 1 mn pre-series A investment round led by Huashan Capital and with participation from angel investors Mohsen Abulleil and Ahmed Bakeer, according to a press release (pdf). US-based venture capital firm SOSV also “supported the due diligence and syndication of this fundraising round.” SOSV had previously invested in DXwand’s seed round.

About the company: The company has developed a conversational AI and digital assistant tool that understands English and Arabic slang “and can extract insights from conversations and display them on dashboards for businesses to make instant, informed decisions” on sales, customer acquisition, and customer retention.

DXwand will use the funding to finance its regional expansion and increase its market share, the statement said, without specifying the markets into which the company plans to expand. The startup also plans to use the funding to “accelerate its AI research to further differentiate its solutions in the market.”

Gov’t privatization plans get more parliamentary pushback: The Senate is this week set to discuss a report in which it calls for the government to reconsider plans to fully exit from certain sectors of the economy, according to Yasser Zaki, deputy chairman of the Senate’s financial and economic affairs committee.

What report? The Senate doesn’t debate the annual budget — but it can debate the adjacent sustainable development plan and budget from the Planning Ministry. Both budgets are currently making their way through the House of Representatives. The Senate will use its financial committee’s report on the Planning Ministry’s budget to discuss some reps’ objections to the wider privatization plan, which is set to see the government fully withdraw from as many as 79 industries over the next three years as part of plans to restructure the economy in favor of the private sector.

What they said: “We think that the state’s dominant role, going hand in hand with the private sector, should be maintained in order for the country to be able to stand up to global economic crises, absorb their shock and mitigate their negative impact on vulnerable classes,” the report reads. It also calls on state-owned industrial firms to be restructured to maximize exports and foreign-denominateed earnings, “instead of privatizing or selling off these companies.”

REMEMBER- This is all part of the normal cut and thrust of parliamentary politics (and some reps don’t love to hear the word “privatization”). Some MPs in the House of Representatives have also been voicing their opposition to the state’s plans to sell stakes in state-owned assets to local and international investors — and any mention of privatization has long spooked a certain segment of elected officials. And remember, the impetus on this is coming from Ittihadiya, so it is unlikely to be swayed by the opposition.

The will-they-won’t-they of the GERD negotiations is back: Ethiopia is interested in returning to the negotiating table with Egypt and Sudan to seal an agreement over the filling and operation of the Grand Ethiopian Renaissance Dam (GERD), according to statements made by a senior Ethiopian official at the weekend. In a meeting with US envoy Mike Hammer, Ethiopia’s Ambassador to the US Sileshi Bekele “highlighted Ethiopia’s interest to resume the African Union-led trilateral negotiation over the GERD,” the country’s foreign ministry said Friday.

There’s just one problem with that: Egypt and Sudan have rejected the AU-led process and have called for new mediators to be brought in to manage the negotiations. Ethiopia has insisted that it will only continue talks with the AU at the helm while Egypt and Sudan have refused to negotiate unless Ethiopia agrees to a new intermediary.

This came just a day after El Sisi reiterated our position on GERD: President Abdel Fattah El Sisi on Thursday told Tanzanian Foreign Minister Liberata Mulamula that Cairo still seeks to preserve its water security and historical rights to Nile water through a legally binding agreement on the filling and operations of the dam, a statement by Ittihadiya read. Mulamula delivered a letter from Tanzanian President Samia Suluhu Hassan updating El Sisi on the implementation of the Julius Nyerere Hydropower Plant and Dam that Elsewedy Electric and Arab Contractors are building in Tanzania.

The GERD negotiations have been ongoing for almost a decade: The dam has been a growing source of tension between Ethiopia and the two downstream countries in recent years as Addis Ababa persisted with filling the reservoir despite not reaching an agreement with Cairo and Khartoum. Negotiations have been stalled since last summer when Ethiopia embarked on the second filling even as Egypt lodged a formal appeal to the UN Security Council to force it to the negotiating table.

Ethiopia will start the third filling by the end of summer: Last month, the dam’s project manager Kifle Horo said that Ethiopia will start the dam’s third filling in August and September, adding that it is an “automatic process” that cannot be stopped. Sudan responded by reiterating its demands for a “fair and binding” agreement before Ethiopia continues to fill the reservoir.

GERD has pushed Egypt to put water security front and center: Egypt has for years made water security a top priority, working to limit the impact of GERD on our water supply. More than 85% of the water that flows into the Blue Nile originates in Ethiopia’s highlands, and the threat remains that Ethiopia will fail to release water from the hydroelectric GERD in the event of a drought downstream.

The Associated Press took note of the news.

OTHER DIPLO NEWS worth noting in brief include:

• World Bank directors talk development + COP27 + economy during visit: Egypt’s development priorities, measures to mitigate the economic fallout from the Russia-Ukraine war, and preparations for COP27 topped the agenda for a delegation of executive directors from the World Bank Group that wrapped up on Thursday, according to a statement (pdf).
• Drumming up climate finance: International Cooperation Minister Rania Al Mashat talked about boosting financing cooperation on climate with European Investment Bank (EIB) President Werner Hoyer in Luxembourg on Thursday, according to a ministry statement. The pair discussed how to mobilize more finance for climate mitigation and adaptation and local energy, transportation, agriculture, and water resources projects.
• Egypt and Jordan will work together on oil and natural gas, petrochems, and mineral resources as per an MoU the two countries signed on Thursday, according to an Oil Ministry statement.

It was a slow day on the talk shows front, with the Pharaohs’ devastating 2-0 loss to Ethiopia and debate on whether coach Ehab Galal should get the boot dominating the airwaves.

No new coach — yet: The Egyptian Football Association released a statement to clarify that coach Galal has not gotten the boot — though the EFA is assessing other coaches CV’s “in case of any circumstances that could arise in the next few days” before it takes a final decision. (EFA) head Gamal Allam had seemed to suggest Galal was on the way out in an earlier interview with Ahmed Moussa’s Ala Mas’ouleety (watch, runtime: 5:16). Kelma Akhira’s Lamees El Hadidi (watch, runtime: 0:24) also covered the football crisis.

AND A FACT CHECK- There have been no price hikes for household natgas, Oil Ministry spokesman Hamdy Abdel Aziz told El Hekaya (watch, runtime: 7:21), denying reports on social media that prices had increased for natural gas piped into homes. “All news on price increases are unfounded,” Abdel Aziz said, adding that there has been no change in prices since January.

Egypt’s shock defeat to Ethiopia in the 2023 Afcon qualifiers is also getting attention in the global sports press, topping coverage over the weekend with AFP, BBC and ESPN picking up the story.

Also making headlines:

• We could be welcoming back over USD 3 mn of antiquities: Officials plan to recover five Egyptian antiques, valued at over USD 3 mn, seized from the Metropolitan Museum of Art after the former head of the Louvre was arrested on smuggling charges. (ABC News)
• A deep dive into Narmer, the first Egyptian pharaoh: Who was he, how did he die and where does he currently rest? (National Geographic)
• Our dinosaur discovery is still getting ink from the foreign press: Last week the remains of a dinosaur with a face like a bulldog were unearthed in Egypt's Western Desert. (ABC News)
• Locals in Sharm El Sheikh share how they think COP27 will impact the city and its fragile surrounding ecosystems. (The National)
• On Alaa Abdel Fattah: The Interior Ministry says it has footage disproving reports that imprisoned activist Alaa Abdel Fattah has been on hunger strike for weeks now, which his sister Mona Seif requested be shared with his family. (AFP)

The Egyptian Tax Authority (ETA) has established an investors’ support unit to resolve hurdles facing investors as part of the government’s privatization push, according to an ETA statement.

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

• President Abdel Fattah El Sisi approved an SEK 5 mn grant from Sweden as part of a cooperation agreement on urban transport and express buses. (Al Borsa)
• State-owned firm e-Finance will help digitalize Libyan government finances under an MoU signed with the country’s Finance Ministry.. (Statement)
• El Sewedy Electrometer signed a MoU with Energie Electrique Du Congo to export expertise on smart metering systems. (Statement)
• An Alexandria court has sentenced to death a man accused of killing a priest in the coastal city in April, after the Grand Mufti approved the sentence. (Ahram Online)
• Two Egyptian students kidnapped in South Africa since mid-May have been released. (Foreign Ministry Statement)