AM — Central Bank of Egypt leaves rates on hold against expectations

Good morning, friends. We’re back in Omm El Donia after a week in Dubai — and reveling in the fact that it is now fall (ie: The Official Favorite Season of Enterprise). The national weather service tells us that Friday was the autumnal equinox, meaning we’re in for about 89 days of the pumpkin spice season.

We have a big issue for you this morning, but before we get started:

Today is also our birthday. Enterprise turns eight this morning. We sent the very first (public facing) version of Enterprise to 50 people (you can see it here — feel free to chuckle, but you can see traces of our DNA in there). Our August 2022 readership figures show that there are now 215k of you out there who choose to regularly start your mornings with us, whether on email or the interwebs.

What were we writing about eight years ago this morning? Renewable energy was just becoming a thing in Egypt as we prepared for a UN climate summit — and CBS had released a teaser for President Abdel Fattah El Sisi’s first televised interview in America. The EGP was weakening (oh, for the days of EGP 7.44…) and we still had daylight saving time.

A huge thank you this morning to the folks who keep the A/Cs and lights on around here. Everything we do is made possible — and available to our readers without charge — thanks to the generous support of:

• EnterpriseAM: HSBC Egypt | EFG Hermes | SODIC | Infinity | SomaBay | Moharram & Partners
• EnterprisePM: Palm Hills Developments | Etisalat Misr
• Enterprise Climate: HSBC | Infinity Power
• Our industry partners: CIRA | Orascom Construction | Infinity | Industrial Development Group | EFG Hermes

Thanks also this morning to everyone who has ever written us, sent in a correction or note of encouragement, recommended us to a friend or colleague, said something nice about us, or otherwise done something to help build this amazing community. Writing to you each morning is the highlight of our professional lives — thank you, one and all.

SIGN OF THE TIMES- Overheard at the customs lineup at Cairo International Airport, terminal 3, on Thursday evening:

“Uh, sir? What are the chunky metal things in your bag?” asks the Finance Ministry guy running the X-ray machine. He’s only mildly curious and is gesturing with his hands that the offending items are “about this big.”

“Break pads.”

“Oh, thank you. Go right ahead.”

HEY, EGYPTAIR — YOU READING THIS MORNING? The business class cabin crew of MS 913 on Thursday, 22 September? Simply excellent.

HAPPENING THIS WEEK-

Is the Madbouly government holding an economic conference this week? After two weeks’ of chatter about a three-day economic conference at the end of the month, we’re still none the wiser about what the plan is — or whether it’s even taking place. A number of government officials (here, here, here) have appeared on the airwaves in recent days to talk about the agenda — from what we know, the government’s privatization strategy and import substitution industrialization would be two of the main topics of discussion — but key details such as date and location are TBD.

Our friends at HSBC are hosting an energy transition webinar series this Tuesday through Thursday (27-29 September). The series will look at the “latest climate analysis in relation to the global energy market and transition to net zero” in six different sessions covering energy security, what is required to ensure the success of COP27, financing and investment needs for the energy transition, and the scaling up of renewables in the region, among other topics. You can register for the series here.

A Spanish business delegation will be in town this Tuesday and Wednesday (27-28 September) for the Egypt-Spain Multilateral Partnership Forum, organized by the Spanish Institute for Export and Investment, according to a press release (pdf). The two-day conference will include seminars and panel discussions on trade and investment in transport, energy, and water with Egyptian ministers and representatives from government bodies, alongside officials from international financing institutions and Spanish Secretary of State for Trade Xiana Méndez Bértolo. The agenda for the conference is available here (pdf).

The Africa Women Innovation and Entrepreneurship Forum will take place at the Cairo Marriott Hotel on 26–27 September.

NEXT MONTH-

Our elected representatives will return from Sahel to start the new legislative session in the House on Saturday, 1 October, according to a presidential decree in the Official Gazette. Senators will return for the opening session on Tuesday, 4 October next week.

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

THE BIG STORY ABROAD-

It’s a mixed picture in the international front pages this morning:

• Protests in Iran are getting coverage in the New York Times and Reuters.
• The latest from Ukraine and Russian FM’s Sergei Lavrov’s appearance at the UN General Assembly are getting attention from Bloomberg, the Associated Press and Reuters.
• The negative market reaction to the UK government’s Reaganite turn earns a place on the front-pages of the Financial Times and CNBC.
• Also: The Wall Street Journal reports that US pension funds are staring at more heavy losses at the hands of private equity investments, while the Washington Post looks at the Trump-DeSantis rivalry that will set the tone for the battle for the Republican presidential nomination.

COUNTDOWN TO COP27- Expect a whole lot of green financing agreements at COP: The government will announce a number of green financing allocations in partnership with Japan, China, the European Investment Bank and the European Bank for Reconstruction and Development, on the sidelines of COP27 in November, International Cooperation Minister Rania Al Mashat told Bloomberg Asharq (watch, runtime: 4:59). The financing will target sustainable development and green transportation projects, she said.

“Who pays for the climate crisis”: Developing nations are taking aim at the IMF and the World Bank. The question that is quickly coming to dominate the conversation in the lead-up to COP is now being turned on the Bretton Woods institutions — the IMF and the World Bank — by developing nations who are arguing that the post-war global financial system may no longer be fit for purpose, as rich nations fail to meet their climate finance pledges and ignore pleas for debt relief. During her speech at the UN General Assembly, Barbados Prime Minister Mia Mottley said the IMF and the World Bank “no longer serve the purpose in the 21st century that they served in the 20th century,” and called on international lenders to offer sustainable, long-term financing for poorer nations struggling with the effects of climate change, the pandemic and the economic crisis caused by the war in Ukraine.

WATCH THIS SPACE- Could Egypt host the Olympics? Egypt will bid to host the 2036 Olympics, the Youth and Sports Ministry said Saturday. President Abdel Fattah El Sisi approved a request to apply to host the competition, Youth and Sports Minister Ashraf Sobhy said yesterday follow[ing a meeting with International Olympic Committee President Thomas Bach in Cairo.

Who could we be up against? It’s still early in the bidding process, but several countries including Turkey, Mexico, Indonesia, India, and the UK are reportedly interested in bidding for the games.

We’ve been after all the major sporting events: Egypt, Saudi Arabia and Greece are rumored to be in discussions to mount a joint bid for the 2030 World Cup.

CBE reaches for another tool in the toolbox: The Central Bank of Egypt (CBE) left interest rates unchanged on Thursday, a move that went against market expectations. The Monetary Policy Committee (MPC) left the deposit rate at 11.25%, the lending rate at 12.25%, and the main operation and disc. rates at 11.75%, it said in a statement (pdf) following its policy meeting. Almost all analysts surveyed by Enterprise ahead of the meeting expected the central bank to hike rates in a bid to curb rising inflation and the weakening EGP, with most forecasting a 100-bps increase. This is the third consecutive time that the CBE has held rates steady, and the second meeting with Hassan Abdalla at the helm.

Tightening by other means: The central bank bumped up its reserve requirement for all banks to 18% from 14% currently, which it said would “complement the tightening stance that the CBE is maintaining.” The reserve ratio regulates how much capital commercial banks are required to hold in their reserves. By raising the ratio, the central bank is aiming to restrict lending, tighten financial conditions, and support the currency — all without raising the cost of borrowing for the government or the private sector.

What they said: “The MPC concurs that the current key CBE rates coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term,” the CBE said. The central bank reiterated that it will “temporarily tolerate” inflation above its target of 7% (±2%) on average in 4Q 2022 as it continues to assess the impact of the 300 bps worth of hikes made earlier this year, and again stressed that price hikes are the result of external supply-side pressures resulting from the war in Ukraine. Inflation increased to 14.6% in August, its highest level in more than 3.5 years on rising food prices.

Why not raise rates? Hiking interest rates is unlikely to bring foreign investors back into the carry trade amid rising US rates and uncertainty about the EGP, nor would it do much against the impact of imported inflation. Another rate hike would have also raised the government’s borrowing costs and put more pressure on the budget, said Pharos' Esraa Ahmed, who was the only analyst in our poll to forecast a hold. “The central bank chose the most appropriate solution to contain inflation during this stage and manage liquidity instead of directly raising the cost of borrowing, which would have raised the cost to the state budget significantly,” she said.

But pressure for action could be greater in the next meeting, according to economist Mona Bedeir, who before the meeting predicted a 100-bps hike. Leaving rates on hold “will translate to more pressure on exchange rates and higher monetary tightening expectations in the coming meetings,” she told Bloomberg Asharq (watch, runtime: 00:40).

A win for Team Deval in November? BNP Paribas expects the central bank to hike rates by 100 bps at its next meeting in November alongside a devaluation of the currency ahead of an agreement with the IMF. “We think the next rate hike is likely to be deployed in tandem with a surprise devaluation of at least 10%, which would help achieve convergence with the parallel market rate,” BNP Paribas MENA economist Mohamed Abdelmeguid wrote in a note last week.

The bank expects the EGP to fall to 22-23 against the greenback by the end of the year and the central bank to raise rates by another 200 bps by its December meeting.

So far, so gradual: The EGP has been on a slow decline in recent weeks, falling almost 2% since Hassan Abdalla was appointed to head up the central bank in mid-August. The currency has fallen nearly 24% since the devaluation in March to stand at around EGP 19.52 as of this morning.

New inflation targets ahead? The central bank will announce new inflation targets soon, a CBE source told CNBC Arabia. The central bank is currently targeting a 7% (±2%) rate of inflation, far below the 14.6% urban rate in August.

While the CBE held steady, central bankers everywhere pushed forward with tightening: Analysts were expecting the CBE to follow through with a rate hike in response to the Federal Reserve’s third successive jumbo-sized 75 bps rate hike last Wednesday, which the Fed signalled was a bid to tame inflation and external growth risks. A number of major central banks hiked rates last week following the Fed decision, including those of Switzerland and the UK.

The story got attention in the foreign press: Reuters | Bloomberg.

Talks for an IMF facility could wrap in another month or two, Finance Minister Mohamed Maait told Bloomberg (watch, runtime: 14:28) in a wide-ranging interview that tackled everything from the IMF loan to Egypt’s rising debt levels, devaluation of the EGP, and future bond issuances.

Maait again refrained from providing a range for the size of the IMF loan, saying only that this will be decided in the final stage of negotiations. Maait has previously signaled that the sum will be significantly lower than the USD 15 bn that some analysts have forecast, while some in the market are now expecting a package in the USD 3-5 bn range. Egypt has been in talks with the IMF since March in a bid to secure financial assistance following the economic shocks brought on by Russia’s war in Ukraine, rising interest rates in advanced economies, and a global risk-off hitting emerging markets.

ON THE DEVAL-

Maait declined to say whether a further depreciation of the EGP is expected. “I cannot say how the markets will move,” he said, when pushed on whether the currency would weaken further should the USD continue to rise. The economy is facing a “difficult” time because of the combination of pressures including inflation, rising interest rates, commodity prices, and portfolio outflows.

Debt levels are rising thanks to the deval: Some 4.0% of our debt-to-GDP ratio — which stood at 87.2% as of June — is due to the change in the USD-EGP exchange rate, Maait said.

Remember- Planning Minister Hala El Said has made it clear that the government is on board with a flexible exchange rate policy. The EGP has been inching down against the greenback in recent weeks as the central bank appears to pursue a gradual devaluation policy. The EGP currently stands at around 19.52 to the USD — down nearly 24% since the initial devaluation in March. Most market watchers are forecasting a double-digit depreciation by the end of the year.

THE SEARCH FOR FX-

“Affordable” loans from China + Japan? Egypt is in talks with Japan for a USD 500 mn loan, part of which will go towards environmentally friendly projects, Bloomberg quotes Maait as saying. Maait also reportedly said the country is in talks with China on securing loans at a reasonable cost as part of a “package of alternatives.” The government is looking to China and Japan for new avenues to raise foreign currency following a major hit to portfolio inflows amid the global economic turbulence.

Remember- China has emerged as a competitor for the IMF in recent years by shelling out discreet emergency loans to “crisis-hit” countries with no strings attached. Egypt has reportedly been getting a slice of the pie, though it’s not clear how much we’ve received from the country.

The gov’t is scouting out several less-expensive alternatives for FX: Maait also reiterated plans to issue sukuk, CNY-denominated panda bonds worth more than USD 500 mn, and a “green” JPY-denominated bond, following the ministry’s maiden samurai bond issuance in late March. “With the conditions of capital markets, we have to rely on nontraditional, cheaper sources of foreign currencies,” Maait said, adding that debt diversification has helped us manage a “huge outflow” of 22 bn USD in hot money. Maait told us in August that Egypt is in talks with Chinese officials to issue panda bonds and is still on the hunt for bookrunners for the issuance.

Another green bond in the works? The government is also looking at the possibility of issuing a green eurobond “if market conditions allow,” Maait added. The Finance Ministry in January signaled that it is looking to take to the green bond market for a second time with another USD 750 mn issuance, matching the 2020 issuance that saw Egypt debut sovereign green bonds in the MENA region.

NO HEDGING FOR NOW-

The government is still looking to hedge against commodities like wheat but will wait for the markets to cool further, Maait said. “When wheat prices come back under USD 300 per ton, I think we may say that’s a reasonable cost for hedging which can support us to go for such a decision,” he said. International wheat prices have fallen back from record highs in recent weeks as supply problems ease, but remain elevated due to the impact of the war in Ukraine. Hedging could allow the state to purchase commodities at a fixed price during times of market volatility.

Egypt wants to double natgas receipts: Egypt wants to increase revenues from natural gas exports to USD 1 bn per month from USD 500 mn currently “in the coming period,” Finance Minister Mohamed Maait said at a Bloomberg forum on Thursday. His statements come days after Oil Minister Tarek El Molla said that Egypt eyes generating USD 8.5-10 bn in natural gas revenues in FY 2022-2023, up from USD 6.5 bn last year.

Electricity rationing is partly to thank: The government’s electricity rationing strategy as being a key driver for the higher expected revenues, El Molla said last week, with Egypt able to make additional shipments in August due to lower domestic consumption.

The gov’t has dotted the i’s and crossed the t’s on its state ownership policy: The Madbouly government has finalized its state ownership policy ahead of the economic conference that’s being planned for the end of this month, Prime Minister Moustafa Madbouly said Thursday. The document is the product of three months of consultations with the both state and private-sector stakeholders and is expected to lay out a roadmap for large-scale privatization of the economy.

Refresher: The policy document was first launched by Madbouly in May as part of a wider plan to restructure the economy in favor of the private sector. The strategy envisions more than doubling the private sector’s role in the economy to 65% over the next three years, and attracting USD 40 bn in investment by 2026. The new privatization drive came following the economic crisis triggered by the war in Ukraine and during talks with the IMF for a new loan program.

A focus on competitive neutrality: The government’s privatization strategy will look to put in place a legal framework to safeguard market competition and prevent monopolistic practices by state-owned enterprises, Mahmoud Momtaz, head of the Egyptian Competition Authority, said. A competitive neutrality authority chaired by the PM has been set up to review legislation and draft competition rules. “You can't open the market for the private sector without first instituting clear-cut rules necessary for fair and transparent competition on the market,” Momtaz said.

What’s next? The draft document will head to the cabinet to be reviewed for approval, before it is brought to the National Dialogue for debate.

Not all doom and gloom on Planet Startup: Kashat, the region’s first provider of nano-loans, has landed funding from both Plug & Play and Launch Africa as part of its ongoing fundraising drive. Kashat uses machine learning to underwrite credit, providing fast turnaround on productive, short-term loans.

The news comes amid increasing reports of a slowdown in venture funding for startups (see this morning’s What’s Next, below) and as the high-profile failure of Capiter, the non-bank financial services outfit, has sent chills through the community.

What they said: “We are happy to continue to back Kashat in their mission to provide easy lending to everyday Egyptians,” said Launch Africa Managing Partner Zachariah George. “We are proud to back team Kashat as they cross the 100k transaction mark. Egyptians need productive liquidity intervention — and I trust Kashat will be a relief for those in need,” Plug and Play’s Diego Arias García said. Plug and Play bills itself as one of the most active venture capitalists in Silicon Valley.

BACKGROUND- Launch Africa last backed Kashat in a private round a year ago, a couple of months before senior NCR exec Marija Zivanovic-Smith joined Kashat as an independent board member. The company operates in 24 of the nation’s 26 governorates, having expanded this past August to nine more.

Some 11 new marinas for tourist yachts could be set up on the Red Sea and Mediterranean coasts, under an agreement between the Transport MInistry’s Maritime Transport Sector and several government agencies, Al Mal reported on Thursday, citing an unpublished document said it has seen.

Refresher: In an effort to capitalize on and standardize the country's burgeoning yacht tourism industry, the Madbouly government recently approved regulations to control yacht activity in domestic ports. All aspects of yacht travel to and from Egypt are spelled out in these rules, including the paperwork that must be completed, the services that will be offered by various government agencies, the responsibilities of yacht owners, and the docking fees that will be assessed once they arrive. Sources have told us that yacht tourism could prosper with these rules in place and with the help of our advantageous geographical position.

The proposed new marina locations are set to be spaced around 100 km apart to cover the length of Egypt’s coasts, according to Al Mal. The suggested spots include East Port Said; west of Gamasa; Alexandria’s Montazah area; a tourist resort in Rashid; the Galala Resort in Ain Sokhna; Port Ghalib; and a marina at the port of Berenice.

Yacht tourism can be a solid source of FX inflows, considering that it’s wealthy individuals who own or have access to yachts. The daily spend of those visiting Egypt via yachts is 94% more than the average tourist, former tourism minister Khaled El Anany previously said. Globally, the size of the yacht tourism economy, excluding onshore spending, hovers around the EUR 12 bn mark.

OTHER INFRASTRUCTURE NEWS-

A new berth at West Port Said port could be up and running in October 2022: The General Authority for the Suez Canal Economic Zone expects the first phase of the EGP 1.4 bn Abbas berth to open in West Port Said port in October, Al Mal reported, citing sources it claims have knowledge of the matter.

The Central Bank of Egypt’s decision to leave interest rates unchanged dominated the airwaves over the weekend. We have the full story in this morning’s news well, above.

Who’s celebrating? Unchanged rates is good news for the state budget, seeing as every rate hike comes bearing massive costs — a 100 bps increase in rates could cost the state some EGP 30 bn, banking expert Sahar El Damaty told Yahduth Fi Masr (watch, runtime: 5:12).

Who’s not? Banks. Faced with stricter reserve requirements, commercial lenders could raise their lending rates in efforts to make up some of the lost cash, economist Hany Genena told El Hekaya’s Amr Adib (watch, runtime: 4:00). This means higher borrowing costs for the businesses, public sector bodies and individuals that have taken out loans. Banks could start issuing certificates of deposit (CDs) at competitive rates in efforts to pull EGP liquidity into the banking system, El Damaty told Kelma Akhira’s Lamees El Hadidi (watch, runtime: 7:15). Banks could also start revising downward their forecasted income or increasing their fees for certain services, as they work to find methods to make up for this lost income.

There’s no end in sight to the import crisis, Elsewedy Electric CEO Ahmed El Sewedy told Adib (watch, runtime: 6:14).The CBE’s new rules for facilitating FX for imports have little to no impact on the import restrictions, he said, adding as long as there is no USD in the country, it will remain difficult to import materials and components essential for production. “It’s all about the availability of the USD in the country.” If the situation continues as is, factories will start to shut operations and people will lose their jobs. Mohamed Al Bahi, board member at the Federation of Egyptian Industries, also weighed in on the matter (watch, runtime: 6:15).

Egyptian Gulf Bank (EGBank) will invest EGP 2 bn in non–banking financial companies over the coming three years, CEO and Managing Director Nidel Assar told Bloomberg Asharq. The bank will acquire direct and indirect stakes in a number of companies in the sector, he said, without disclosing which markets the bank is targeting.

The Health Ministry has inaugurated a vaccine storage and distribution complex at state-owned vaccine maker Vacsera’s Sixth of October facility with the capacity to hold between 100-150 mn vaccines, according to a statement. The automated cooling complex was implemented in cooperation with China’s Sinovac and built by China State Construction Engineering.

Food security, climate and the Grand Ethiopian Renaissance Dam (GERD) all featured prominently in Foreign Minister Sameh Shoukry’s address to the UN General Assembly last night. Highlights from the 20-minute speech (watch, runtime: 18:20) in New York include:

#1 Food security- The food crisis reflects the international community’s failure to achieve its sustainable development goals, Shoukry said, calling for a strategy that tackles the root causes of food insecurity. “We need to develop sustainable farming and food systems and meet the urgent needs of food importing developing countries,” he said, adding that Egypt is ready to cooperate with the international community to build a global hub to store, supply and trade grains.

#2 Climate change- Shoukry called on advanced economies to provide more aid to developing nations to help them fight climate change.

#3 Debt relief- Shoukry urged creditor nations to get serious on providing debt relief to developing economies, many of which are threatened with debt crises on the back of the pandemic and the spillover effects from the war in Ukraine.

#4 GERD- The minister again spoke of the need for Egypt, Ethiopia and Sudan to find a way out of the GERD crisis, and called on the UN and UN Security Council to put pressure on Ethiopia for unilaterally filling the dam’s reservoir, which he said contravened international law.

Also from the UN General Assembly:

• “So world, show me the beef” was Shoukry’s message in New York on climate finance, as he called for wealthy countries to step up and allocate both loans and so-called “loss and damage” funds for developing nations, who contribute the least to climate change but are facing the worst of its effects, according to the New York Times.
• Talks with Lavrov: Shoukry called for a diplomatic resolution to the Ukraine crisis in a meeting with Russian Foreign Minister Sergei Lavrov. Reaching a political settlement with Ukraine is especially important “in light of the negative repercussions on the global economy,” Shoukry told Lavrov, stressing the impact of concurrent food and energy crises on developing countries including Egypt.
• A renewed push on the Israeli-Palestinian conflict? Shoukry attended a meeting to discuss reviving the two-state solution with counterparts from Jordan, the UK and France, as well as UN and EU representatives. The meetings came as Israel’s new PM Yair Lapid declared support for a two-state solution during his address, becoming the first Israeli leader to do so in recent years.
• Talks with UK, Irish FMs: Shoukry also discussed upping investment to Egypt with the British and Irish foreign ministers.
• Shoukry holds talks with US, regional allies: US Secretary of State Anthony Blinken stressed the US’ commitment to regional security and economic prosperity during talks with officials from Egypt, the GCC, Iraq, Jordan and Yemen on Friday, the State Department said.

MEANWHILE- El Sisi meets Al Burhan: President Abdel Fattah El Sisi held talks with Sudan’s military leader, Gen. Abdel Fattah Al Burhan, in Cairo yesterday, Ittihadiya said in a statement. The two discussed trade as well as military and economic cooperation, the statement.