AM — IMF calls for Egypt to make “decisive” reforms as loan talks continue

Good morning, friends. We have a packed issue for you this morning as the tl;dr above suggests — and expect a very busy news day — so we’re going to dispense with the pleasantries and jump straight in:

WHAT’S HAPPENING TODAY-

It’s Fed day: The Federal Reserve is expected to announce its second consecutive 75-bps interest rate hike when it concludes its two-day policy meeting later today. Better-than-expected tech earnings lifted spirits in US markets in after-hours trading yesterday, reversing a nervy day of trading as investors contemplated how hard the Fed will go to curb rampant inflation. The S&P 500 ended 1.2% in the red, while the tech-heavy Nasdaq was harder hit, losing 1.9%. Treasury yields were flat ahead of the decision.

How high will the Fed go? That depends on what happens with inflation, and there’s little consensus on Wall Street about how this will play out. Analysts at JPMorgan think that inflation has now reached its peak, allowing policymakers at the Fed to start to dial back the tightening cycle. Goldman Sachs, on the other hand, doesn’t see inflation going away anytime soon and is girding for an extended period of rising interest rates. Morgan Stanley’s chief equity strategist agrees, saying that “sticky” inflation will force the central bank to continue raising interest rates despite rising recession fears. Bloomberg has more.

THE BIG STORY ABROAD- Two stories dominate in the global business press this morning:

#1- US tech earnings have started to roll in, with Microsoft and Google parent Alphabet both reporting their 2Q 2022 results yesterday. The takeaway: Not as bad as many had feared. We have more on this in this morning’s Planet Finance, below. (FT | Bloomberg | CNBC | Wall Street Journal New York Times | The Guardian.

#2- Changing of the guard at Credit Suisse: Thomas Gottstein is set to leave as CEO of the embattled Swiss bank as it looks to bounce back from its involvement in a series of scandals including the implosion of hedge fund Archegos Capital last year and allegations that it helped launder drug money. The bank is expected to name Ulrich Koerner, who is currently running the bank’s asset-management division, as its new head along with its quarterly earnings release, out later today. (FT | Bloomberg | Wall Street Journal | Reuters)

GOOD NEWS for the UN-brokered wheat pact? The Joint Coordination Center (JCC) in Istanbul — established to monitor the shipments of wheat from Ukrainian ports as part of a landmark pact between the UN, Turkey, Ukraine and Russia to resume grain exports through the Black Sea — has begun operations, Russia’s Defense Ministry confirmed in a post on Telegram. This comes a couple of days after Russia fired missiles at Ukraine’s port city of Odessa, casting doubt on whether or not the agreement will succeed at unblocking 20 mn tons of grain stuck in Ukrainian ports.

Russia (seems to be?) cooperating: The Russian delegation to the JCC was set to arrive in Turkey yesterday to begin work, which includes ensuring the “prompt resolution of all necessary issues for the initiative to enter the stage of practical implementation,” according to the defense ministry’s statement.

MEANWHILE- State-owned energy company Naftogaz has become the first Ukrainian company to default on bond payments. The news comes after bondholders refused a two-year debt freeze, the company said. Creditors could move to seize the company’s overseas assets — which include concessions in Egypt’s Western Desert — and Switzerland. Reuters says the default would also threaten the country’s winter gas supplies and a crucial EUR 300 mn loan from the EBRD.

FURTHER AFIELD- EU, US, and Canada approve monkeypox vaccine by Danish company: Biotechnology company Bavarian Nordic got the official green light from the European Commission for its Imvanex vaccine against monkeypox, following similar clearances in Canada and the US, the company said in a disclosure. The approval comes just one day after the World Health Organization declared the monkeypox outbreak as a global health emergency.

CIRCLE YOUR CALENDAR-

The FRA will hold public hearings on its 2022-2026 strategy next Sunday, 31 July, the authority said in a press release (pdf). The dialogue will include representatives from the FRA’s capital markets advisory committee, the EGX, Misr for Central Clearing, Depository and Registry, the Investor Protection Fund, the Egyptian Capital Market Association, and the Fixed Income Association in Egypt. The strategy, which the authority released late May, aims to double the EGX’s market cap to EGP 1.6 tn by 2026.

PSA- Your deadline to catch a 65% break off late payment fines for your taxes is coming up on 31 August, the Finance Ministry made sure to remind us in a statement today. The waiver applies to late payment fees for customs tariffs, income, real estate, and sales taxes, VAT, and stamp duties among others. The remaining 35% of your due payments will need to be paid before next March, the statement noted. This comes after the House of Representatives approved amendments to help reduce late payment fees before it ended its legislative cycle earlier this month.

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: Egypt’s infrastructure isn’t where it needs to be for e-commerce players to run the show in an orderly fashion: E-commerce players are having a hard time accessing the infrastructure needed to run their businesses seeing that the demand for e-commerce-suitable infrastructure outweighs what the country has to offer, industry players tell us. E-commerce businesses typically require physical infrastructure such as warehouses and distribution facilities, tech infrastructure for their platforms to be online, and delivery services to get their products into their customers’ hands. All three areas raise different problems for businesses, with smaller players often having a harder time than others, our sources suggest.

IMF wants Egypt to move faster, more decisively on reforms: The IMF yesterday called on the Egyptian government to take “decisive” steps on fiscal and structural reforms, a message that comes as we are locked in talks on a new assistance package from the fund to help us through the current economic crisis. Egypt remains vulnerable to external shocks due to its high debt load and large gross financing requirements and requires deeper reforms, the IMF said in a newly released assessment (pdf) of the country’s USD 5.2 bn standby loan program agreed in 2020. “Decisive progress on deeper structural reforms is needed to boost the economy’s competitiveness, improve governance, and strengthen its resilience against shocks,” the executive board said.

Egypt has been in talks with the IMF for fresh financing (and potentially other help) since March: A confluence of factors — including the broad economic fallout from Russia’s war in Ukraine and rising interest rates in the US — has added bns of USD to Egypt’s import bill and triggered USD 20 bn of capital outflows, putting pressure on our balance of payments and prompting us to return to the Fund for what would be its third loan program in six years.

We’ve been given a B on our standby program report card: The board said the program succeeded in achieving its main goal of maintaining macroeconomic stability through the economic crisis caused by the covid-19 pandemic. The government met the agreed conditions and was able to strengthen domestic and external confidence. However, the Fund said that “greater exchange rate variability … could have been entrenched to avoid a buildup of external imbalances.”

We’ve seen a more flexible EGP this year: The central bank has allowed the currency to ease more than 20% against the greenback in response to the war in Ukraine.

The Fund also wants less state, more private sector: The IMF’s assessment called on the government to take meaningful steps to reduce the state’s involvement in the economy and boost private sector development.

The government has been vocal about its commitment to privatization in recent months and is currently consulting with members of the business community on its plans to dramatically shift the balance of economic power towards private businesses in the coming years. Prime Minister Moustafa Madbouly has said the government wants to double the private sector’s role in the economy over the next three years, while President Abdel Fattah El Sisi has set a target of raising USD 40 bn by selling off state assets to local and international investors over the coming four years. The challenge: Global market conditions mean that the primary buyers of Egyptian assets will be the UAE and Saudi Arabia — and price pressure works in the buyers’ favour right now.

So where, exactly, is the gap? An economic advisor to Prime Minister Moustafa Madbouly said this week that the two sides continue to have “different perspectives” on certain issues, but stopped far short of getting into detail.

The IMF has revised downwards its global growth outlook for this year and next, warning that gathering headwinds are pushing the world closer to recession. In its updated World Economic Outlook (pdf) released yesterday, the Fund cut its 2022 forecast by 0.4 percentage points and now sees the global growth weakening to 3.2% from 6.1% last year, as the spillover effects from the war in Ukraine, rising interest rates and continued disruptions caused by the pandemic heap pressure on economic activity around the world.

It’ll get worse next year: The IMF expects global growth to weaken further in 2023 as tightening financial conditions start to bite. It is now forecasting 2.9% growth against the 3.6% it had predicted in April.

The report is titled “Gloomy and More Uncertain” for a reason: “The outlook has darkened significantly since April,” IMF Chief Economist Pierre-Olivier Gourinchas wrote yesterday. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”

There are “overwhelming” downside risks to the outlook: Europe being entirely cut off from Russian gas supplies, a 30% drop in Russian oil exports, persistently high inflation, and tighter monetary policy could come together to push the eurozone to near-zero growth and escalate debt crises in emerging markets. Under this “plausible” alternative scenario, the IMF expects growth to fall even further to 2.6% this year and 2.0% in 2023.

No end to inflation in sight: The Fund has revised upwards its forecast for inflation to 6.6% (up 0.9 percentage points from April figures) this year in advanced economies, and 9.5% (up 0.8 percentage points) in EMs and developing economies on the back of rising food and energy prices.

IMF wants policymakers to prioritize inflation above all else: “Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers,” Gourinchas said. Tighter monetary conditions will hit the global economy but delaying it “will only exacerbate the hardships,” he said.

THE EGYPT / REGIONAL OUTLOOK-

The Egyptian economy isn’t looking too bad: The IMF left Egypt’s FY 2022-2023 growth forecast unchanged at 5.9% but cut our 2023 outlook to 4.8%. The IMF has twice upgraded its outlook for the Egyptian economy this year, despite surging commodity prices and rising interest rates knocking business confidence and squeezing public finances.

“Egypt has been hit by the impacts of the war in Ukraine,” particularly due to our reliance on Russia and Ukraine for about 80% of its grain imports and for a substantial portion of our tourism revenues, Jihad Azour, the multilateral lender’s head of Middle East and Central Asia, told CNBC Arabia (watch, runtime: 14:12). This has reflected on food prices, tourism revenues, and portfolio flows, he added.

Countries in the MENA, Central Asia and sub-Saharan Africa regions bucked the trend: The outlook for countries in these regions remains “on average unchanged or positive,” the IMF said, as the effects of rising fossil fuel and metal prices for major commodity exporters in the regions buoy the overall forecast.

Emerging markets will still see growth next year, but risks remain: The Fund now expects growth in EM to come in at 3.6% this year, before rising slightly to 3.9% next year — down 0.2 and 0.5 percentage points respectively from April’s forecast. The negative revisions came mainly on the back of the slowdown in growth in major emerging markets China and India over the past quarter.

Infinity + AFC plan USD 4 bn investment to double Lekela’s capacity: Our friends at renewables player Infinity Group and Africa Finance Corporation (AFC) want to raise USD 2.5-4 bn over the next four years to double the capacity of the newly-acquired Lekela Power, AFC CEO Samaila Zubairu told Bloomberg in an interview. The buyers are looking to ensure Lekela keeps its position as the “largest renewable pure play in Africa.”

This comes a week after Infinity and AFC agreed to acquire 100% of Lekela from private equity firm Actis and Irish wind / solar developer Mainstream Renewable Power. The transaction reportedly valued Lekela at USD 1.5 bn and will hand Infinity and AFC a 2.8 GW portfolio of wind projects across Africa, making Infinity the largest renewables company on the continent. The acquisition is expected to close in 4Q.

Enter the DFIs: Development finance institutions that AFC has worked with will likely provide the bulk of the finance, Zubairu told the business newswire. These include French lender Proparco, Germany’s KfW and the US International Development Finance Corporation, he said.

Infinity + AFC want to bring most of Lekela’s pipeline online by 2026: The funding will make it possible for Lekela to bring online 50-75% of its 3 GW pipeline over the next four years.

This would at least double current capacity: Lekela currently has 1 GW of operating assets while Infinity and AFC own facilities generating 400 MW. Lekela has >1 GW of installed capacity at projects located in Egypt, South Africa and Senegal. It has another 1.8 GW of projects in the pipeline that are expected to close in the near future. The company started generating at its 250-MW wind farm in West Bakr last November.

Orascom Financial sells Beltone stake to Chimera: Chimera Investments will acquire at least 56% of Beltone Financial after Orascom Financial Holding (OFH) decided on Monday to sell its entire stake in the financial services firm, according to a disclosure to the EGX (pdf) from OFH yesterday. The Abu Dhabi-based investment company is bidding to acquire up to 90% of Beltone and needed shareholders to sell 51% of the company’s shares through the ongoing mandatory tender offer (MTO) for the transaction to go through. Shareholders have until 3 August to respond to Chimera’s offer.

The offer: Chimera has offered to pay EGP 1.485 per share for up to 90% of Beltone, valuing it at around EGP 690 mn.

The remaining 45% of the company’s shares are publicly-traded. The EGX will announce the result of the MTO when it expires next week.

Market reax: Beltone’s shares fell 1.8% on the EGX following the announcement yesterday while OFH gained 1.6%.

Advisors: Matouk Bassiouny & Hennawy is providing counsel to Chimera Investments.

Aman pushes EGX debut to next year: Raya Holding’s non-banking financial services outfit, Aman Holding, has reportedly become the latest Egyptian company to delay plans to IPO on the EGX as global economic headwinds batter financial markets. The company was planning to go public this year and had already appointed an investment bank, but will not go to market before next year, Al Masdar quotes Aman Financial Services CEO Hazem Moghazi as having said.

This comes a week after the local press reported that Banque du Caire had decided to push its IPO plans until the market stabilizes. The state-owned bank was also planning to debut on the EGX this year.

The EGX has suffered so far this year: Rampant inflation at home and abroad, rising interest rates in the US and now Europe, and significant macro fallout from Russia’s war in Ukraine have together helped drive the EGX into a bear market this year. Foreign investors have retreated from the market amid a broad risk-off sentiment in emerging markets, leaving the benchmark EGX 30 index at lows not seen since November 2016. The benchmark EGX 30 is down nearly 22% for the year so far.

Aman’s IPO has been a long time coming: Raya initially announced plans to list Aman in 2020, with hopes for the subsidiary to make its debut in 2021.

Also from Aman:

• Aman could soon welcome new shareholders: Raya is looking to sell 10-15% of its 76% stake in Aman before the end of the year to fund its expansion plans at home and abroad, Moghazi said. The National Bank of Egypt owns the remaining 24% of the company, after acquiring the stake in 2020.
• Saudi expansion on the horizon: Aman is in discussions to establish a unit in Saudi Arabia and provide consumer finance services to the Saudi market.
• Another round of securitization is in the works: Aman is to sell EGP 500 mn worth of securitized bonds in the coming three months, Moghazi told Hapi Journal.

Another 1 million families will be brought into the Takaful and Karama social security program as part of the Sisi administration’s bid to protect vulnerable people against the rising cost of living, Ittihadiya said yesterday. This will bring the total number of people in the program to 20 mn.

This is more than we expected: In a televised address announcing the package of social protection measures earlier this month, Prime Minister Moustafa Madbouly said the program would expand to cover another 450k families.

About Takaful and Karama: The government launched the Takaful and Karama program in 2015, supported by USD 400 mn from the World Bank. The program provides income support to the country’s most vulnerable citizens via cash transfers.

The decision is part of an EGP 11 bn package aimed at mitigating the impact of the economic crisis on the poorest. It will also see emergency aid distributed for the coming six months to 9 mn families, people with pensions lower than EGP 2.5k a month, and public sector workers earning less than EGP 2.7k. Action to improve food security will see 2 mn cartons of subsidized commodities a month, targeting vulnerable families.

The breakdown: There are 1.6 mn (represented in 340k families) public sector workers earning less than a monthly EGP 2.7k, eligible for the state’s emergency aid and 5 mn families where the breadwinner is receiving a pension lower than EGP 2.5k a month and there are an additional 4 mn vulnerable families also eligible for aid.

DOMESTIC REAX- Trade Minister Nevine Gamea used a call to Ala Mas’ouleety’s Ahmed Moussa (watch, runtime: 13:02) to break down the list of beneficiaries from the state’s six-month emergency aid program. The story dominated last night’s talkshows, as we note below.

Is tax relief still on the table? Madbouly said earlier this month that the government is planning to raise the personal income tax exemption threshold to EGP 2.5k from EGP 2k, taking many low earnings out of tax. Ittihadiya didn’t mention the plan in its statement yesterday.

Inflation has hit Egypt hard this year: Inflation has risen to three-year highs this year on the back of surging global food and energy prices caused by Russia’s war in Ukraine, and the devaluation of the EGP, which has seen the currency decline more than 20% against the USD. The result: A jump in the cost of everything from food and fuel to transport and consumer goods, piling pressure on household finances.

Egyptian startups should reel in a combined USD 850 mn of investment by the end of 2022, Communications Minister Amr Talaat said yesterday, according to a ministry statement that cites a government projection.

How does that target compare? That figure would be 73% higher than the USD 490 mn worth of funding the ministry says it recorded as having landed in 2021. Our own in-house Enterprise tracker for 2021 puts the figure at around USD 373 mn, with fintech and e-commerce businesses taking the lion’s share of the year’s investments.

We’d need a serious thaw of the coming VC winter for this to happen: Egypt’s startups have raised around USD 288 mn so far this year, according Enterprise data. Although this figure is an approximation (since many startups do not disclose the exact amount they’ve raised in a round), it suggests that Planet Startup has locked in only around 29% of what the government expects, requiring a serious reversal of the economic headwinds that are causing VCs around the world to tighten their belts.

MCIT’s policy priorities: The ministry plans to set up 19 new digital training and innovation hubs — dubbed Centers of Digital Egypt Creativity (Creativa) — to provide technical CIT training and support tech-driven startups, Talaat said. The ministry is also partnering with undisclosed global tech companies to train over 225k Egyptians during the current fiscal year at a cost of EGP 1.3 bn.

ALSO FROM PLANET STARTUP-

Egyptian fashion e-commerce platform The Fashion Kingdom (TFK) has closed a USD 2.6 mn seed round co-led by CVentures and A15, according to a press release (pdf). A15, alongside fashion industry veterans Paul Antaki and Nasser Chourbagi, made follow-on investments in the round. Lotus Capital, Raba Capital, Sunny Side Venture Partners, Foundation Ventures, and the Cairo Angels also invested in the company.

About TFK: TFK is an online fashion store featuring local and international brands. Founded in 2020 by Fadi Antaki, Marianne Simaika, and Karim Abd El Kader, the company now sells clothes from more than 200 brands and has more than 135k customers. Order volumes have more than tripled y-o-y and TFK expects the same in 2022.

Where the money is going: The funds raised will be used to support hiring and build scalable technology, the statement says. It also wants to expand its B2B services and aims to launch a one-stop-shop that offers operations, co-marketing, omnichannel, and digital content creation services to fashion brands.

Misr Finance, the financing arm for Misr Ins. Holding Company (MIHC), has appointed Mahmoud El Sakka (LinkedIn) its new chairman. Ahmed Deif has been named managing director and CEO, Al Mal reports, citing sources with knowledge of the matter.

Leading chatter on the airwaves last night was President Abdel Fattah El Sisi’s announcement that another c. 1 mn families will join the flagship Takaful and Karama welfare program. Coming as it does at a time of surging inflation, the move couldn’t have come at a better time, economist Hany Genena told Kelma Akhira’s Lamees El Hadidi (watch, runtime: 13: 31). Genena noted that folks earning EGP 1-3k a month have been particularly hard hit since the slowdown in economic growth that started with the emergence of covid-19 in the spring of 2020.

Financial support > subsidies. The state has in recent years channeled more and more of its welfare spending into direct cash payments to welfare beneficiaries rather than its old practice of making commodities available at subsidized prices. That helps ensure help goes to those who need it most, Genena said. He expects Egypt will continue to see rising prices through year’s end because it takes a while for global price hikes to be translated into the Egyptian market, he added, forecasting that inflation at its peak will be in the 18-20% range.

More coverage: Masaa DMC (watch, runtime: 4:42) and Al Hayah Al Youm (watch, runtime: 7:50) also had the story. We have the full breakdown of the new package in our Social Security section, above.

Also on the airwaves last night:

• The IMF’s growth forecast (global and for Egypt) received attention from Al Hayah Al Youm (watch, runtime: 12:26) and Masaa DMC (watch, runtime: 3:13).
• Some 95-96% of folks getting covif in the current wave are experiencing mild cases, presidential health advisor Mohamed Awad Tag Eldin told Ala Mas’ouleety (watch, runtime: 3:08).

Are carbon credits back on the agenda? The Financial Regulatory Authority (FRA) has received a request from a “local authority” to set up a fund for trading carbon credits to coincide with the COP27 summit in November, Al Mal reports. A proposal has been submitted to the cabinet, urging them to allow carbon credits to be traded in Egypt, Mahmoud Gebril, a senior official at the FRA, said at a roundtable, the newspaper reports.

Talk, but little action: The idea of setting up a local carbon trading scheme has been talked about by government officials since 2018 but little progress has been made over the past four years. The EGX and the Environment Ministry looked to have resuscitated the idea in February this year when Chairman Mohamed Farid said that they would submit a proposal to set up a carbon market to the cabinet, but nothing has been heard since.

Separately: An investor has submitted a proposal to the regulator to set up a EGP 1 bn fund to invest in Egypt’s agriculture sector, Gebril said.

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

• EK Holding, listed on the EGX and the Borse Kuwait, will convert 6 mn EGX-listed shares owned by a single shareholder from EGP to USD. Following the transfer, the company will have 700 mn USD-denominated shares and 462.8 mn shares that change hands in EGP. (Al Borsa)
• E-commerce website builder zVendo will integrate Fawry Accept services into its platform as part of a partnership agreement between the two companies. (Statement)
• Portuguese system integrator Celfocus has chosen Intro Group’s Advansys ESC to help it establish and operate its first service center in Egypt. (Statement, pdf)