AM — Gov’t to trim spending this fiscal year amid inflation, currency pressures

Good morning, folks, and happy hump day. The week flies by when you kick it off with a public holiday — and even more so when you’re looking forward to a day that will be as busy as today is shaping up.

THE BIG STORY here at home is the Madbouly government’s move to make cuts to this fiscal year’s budget in what we’re reading as a bid to help conserve FX and tamp down on inflation. The PM has directed all but “essential” ministries to trim their spending, while new national projects that require foreign currency spending could be delayed as the government works to ease the FX shortage. We have the full story in today’s Economy section.

EGP WATCH- The EGP fell almost 2% against the greenback yesterday to a new low. In the first business day following the long weekend, the official EGP-USD exchange settled at EGP 27.63 from EGP 27.11 on Thursday. The currency is down 11.4% since its level immediately before the central bank allowed it to slip further against the USD on 4 January, and has now fallen 75% from its 15.78 / USD level immediately before the initial devaluation last March.

Where’s the market-clearing rate? Bloomberg suggests the (anemic) parallel market is still at about EGP 31 to the greenback, quoting Goldman Sachs analysis as saying “this signals that there is still a significant volume of unmet FX demand domestically.” But contrary to 2015 and 2016, the parallel market today is a poor indicator: It is small, caters primarily to individuals (thanks to deposit caps on cash), and pricing neither transparent nor consistent.

MEANWHILE- Appetite for the 25% CDs remains strong: As we note in Last Night’s Talk Shows, savers have now poured some EGP 155 bn into the high-yield instruments — up sharply from the EGP 100 bn figure we reported yesterday. The CDs are designed to encourage folks clinging to FX to de-dollarize as well as to suck up local currency liquidity in a bid to tamp down on inflation.

HAPPENING TODAY-

The IMF will hold a virtual press conference on its USD 3 bn financial assistance program with Egypt today at 4pm CLT, the institution said in an emailed statement over the weekend. The presser, held by IMF Mission Chief for Egypt Ivanna Vladkova Hollar, will coincide with the release of the IMF’s staff report on Egypt and other documents related to the extended fund facility.

What will they say? Look for the IMF to make clear that there’s no going back to a pegged exchange rate — and that it wants to see better fiscal discipline, more spending on the social safety net, structural reforms, and the state competing less with the private sector. The document will also lay out the schedule of biannual reviews of our progress, each of which will trigger the release of a portion of the funding.

We’re also hoping to hear details on the release of the first USD 347 mn of the facility, which the institution's executive board approved in December. The IMF has said it expects the facility to help Egypt access as much as USD 14 bn in additional liquidity from our regional and international partners. It won’t be deposits this time, though: The IMF said in December that it believes the fresh funding it will help us access will come from the state privatization program as well as through “traditional” channels such as debt.

ALSO- We might hear more about the government’s privatization plans today when Vice Minister of Finance Ahmed Kouchouk and Sovereign Fund of Egypt (SFE) boss Ayman Soliman discuss the newly-finalized state ownership policy document at an event (pdf) taking place at the Grand Nile Tower Hotel. The conference is being hosted by Thebes Consultancy and Eventor Event Management.

AND- It’s inflation day: The central bank and Capmas will release December’s inflation figures today. Inflation hit a five-year high in November on the back of the devaluation of the EGP and we can expect the acceleration to have continued last month as the impact of the weakening currency continues to feed through into the economy. A Reuters poll of 15 analysts puts the median forecast for last month’s inflation at 20.5%.

On the legislative agenda: Senators continue their two-day debate on how to integrate informal businesses into the economy today.

PSA- The Justice Ministry has launched its online national legislation database: Users can try out the platform — which offers up-to-date information on all the laws proposed, passed, amended, and elapsed — without charge for a week starting yesterday, according to a ministry statement. An unspecified subscription fee will be charged after the end of the demo week.

HAPPENING THIS WEEK-

China’s new foreign minister, Qin Gang, will visit Egypt as part of an African tour that started yesterday, the Chinese Foreign Ministry said in a statement on its website. Qin’s trip, which will draw to a close on January 16, will also see him visit Ethiopia, Gabon, Angola, and Benin. Formerly China’s ambassador to the US, Qin was appointed to the post at the end of December, replacing Wang Yi, who had held the role for a decade.

CIT Minister Amr Talaat is heading a delegation to India to drum up investment by Indian companies in our CIT sector, according to a ministry statement. On the first day of a weeklong visit, Talaat met members of the Confederation of Indian Industry (CII), where he showcased investment possibilities in digital transformation, data centers, outsourcing, and entrepreneurship. Talaat also held a meeting with Ranjeet Goswami, global head of corporate affairs at Mumbai-based multinational IT firm Tata Consultancy Services.

DATA POINT- Beshay Steel has hiked its steel prices by more than 15% to EGP 27.46k per ton, with Al Borsa reporting that competitors are likely to follow with similar increases this week after the latest weakening of the EGP. Steel prices reached a record high of EGP 30K per ton last month, before dropping to around EGP 23.2k per ton.

THE BIG STORY ABROAD remains the fallout of the riots that took place at Brazil’s Congress building on Sunday night. Brazilian authorities have now detained around 1.5k people in connection with the protests, the WSJ and Reuters report. Meanwhile, rightwing former president Jair Bolsonaro — whose supporters stormed the government complex — was admitted to a Florida hospital yesterday with stomach pains, according to Reuters.

FROM THE REGION- Qatari fund eyes Premier League clubs: Qatar Sports Investments is thinking of purchasing stakes in Manchester United, Liverpool FC, or Tottenham Hotspur following the success of the Doha-hosted World Cup, Bloomberg reports citing an unnamed source close to talks.

FROM THE US- Newly elected House of Representatives Speaker Kevin McCarthy took his seat for Congress’ first session yesterday, following a drawn-out voting process to put him in the job that exposed deep rifts within the Republican party. (NYT | WaPo | AP)

SIGN OF THE TIMES- China has set its sights on cornering another green energy market: Hydrogen, writes Bloomberg, noting that “policymakers in Europe and the US are racing to counteract early Chinese dominance of electrolyzers.” Electrolyzers allow producers to harness energy to split water into hydrogen and oxygen — their manufacture here in Egypt is among the potential bonanzas to local industry as Egypt embarks on a world-scale program to build out a green and blue hydrogen industry.

2023 brings the first post-pandemic hajj: Saudi Arabia will remove all covid-era restrictions and allow the number of pilgrims to return to pre-pandemic levels for this year’s hajj season in the summer, KSA authorities said in a statement (pdf). Access was restricted to vaccinated pilgrims aged 18-65 in 2022, when around 1 mn people made the journey to Mecca and Medina, down from some 2.6 mn in 2019. Only a small number of Saudi residents were allowed to perform the pilgrimage in 2020 and 2021.

MARKET WATCH- Kuwait is set to up its diesel exports to Europe fivefold in 2023 and double its airline fuel exports, Bloomberg reports, helping fill a small part of supply set to be lost when the EU’s ban on Russian refined oil imports kicks in on 5 February. Kuwait will increase diesel flows to Europe to some 2.5 mn tons — around 50k barrels a day — and up jet fuel exports to 5 mn tons. Diesel made up around half of the 1.3 mn barrels of Russian oil products that were shipped to Europe every day before the outbreak of war in Ukraine, according to the business news outlet.

CIRCLE YOUR CALENDAR-

The national dialogue will kick off on Saturday, 14 January.

Davos 2023: The usual suspects will descend on the Swiss town for the annual meetings of the World Economic Forum on 16-20 January.

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

*** It’s Going Green day — your weekly briefing of all things green in Egypt: Enterprise’s green economy vertical focuses each Tuesday on the business of renewable energy and sustainable practices in Egypt, everything from solar and wind energy through to water, waste management, sustainable building practices and how you can make your business greener, whatever the sector.

In today’s issue: How do climate and sustainability issues affect our fisheries?

Cabinet announces budget cutbacks amid rising inflation, FX crunch: Prime Minister Moustafa Madbouly has told all but “essential” ministries to make budget cutbacks until the end of the current fiscal year. The order comes as the government works to address a shortage of hard currency and tamp down inflation. Under a directive published in the Official Gazette yesterday, ministries and related authorities will have to reduce operational costs and limit spending on some national projects that require FX for the rest of FY 2022-2023, which finishes at the end of June.

SMART POLICY- Limits on FX spending: Any new national projects that require significant FX expenditure, and where construction has yet to begin, will be delayed, according to the decision. Any FX spending at all by the ministries in question and their authorities will also require the Finance Ministry’s approval.

A number of areas of government have been ring-fenced: The health, interior, defense and foreign ministries have been exempted from belt-tightening, as have agencies responsible for securing food and energy supplies. All other ministries have 21 days to submit reports detailing the exact portion of the budget they intend to freeze until the end of the fiscal year.

Also getting the axe: “Non-urgent spending” will also be delayed. The directive mentions activities including “non-urgent” business travel, recreational activities, attending conferences, and throwing work events. Authorities will also be required to curb spending on grants, awards, and training for staff.

More cutbacks on the operational side: Operating expenditures including office supplies and services will be reduced by 10%, with a portion of that budget frozen for the remainder of the year. Other expenses related to worker compensation — though it’s not clear what expenditures the decision is referring to — will also need to be cut back by at least 2.5%.

CAVEAT- There’s a lot we don’t know: The government hasn’t been clear on the total value of savings it expects to realize as a result of the cuts or which projects will be impacted. The government has earmarked EGP 2.07 tn in spending in its FY 2022-2023 budget.

Yesterday in M&A: Compass Capital got the green light to do due diligence on Egypt’s most sought-after paints company, Speed Medical is considering selling its stake in Speed Hospital in Obour, and ICMI is looking at a number of acquisitions in the textiles and medical sectors.

YOUR TURN, COMPASS-

EGX-listed Paint and Chemical Industries (Pachin) will allow Compass Capital to do due diligence, Pachin said in a disclosure to the EGX (pdf) yesterday. The news comes just days after Compass submitted a bid to acquire a majority of Pachin’s shares.

The bid: Compass last week became the fifth company to bid for Pachin with an offer to purchase 51-90% of the paint manufacturer at EGP 30 a share. The offer is the highest Pachin has so far received, valuing the company at EGP 720 mn.

Other bidders include Eagle Chemicals, which last month offered to pay EGP 29.50 a share for the company, and the UAE’s National Paints Holdings, which offered EGP 29.00 a share. Pachin has not yet responded to the NPH offer, but is expected to do so later this month. Both Universal Building Materials and Chemicals (Sipes) and Saybad Industrial Investment dropped their bids after Pachin turned them down for undervaluing the company.

REMEMBER- The play for Pachin comes amid the government’s privatization push, which should see it reduce its involvement in or exit certain industries to make way for the private sector. Pachin is currently approximately 54% owned by state-owned companies and banks.

Advisors: Al Ahly Pharos is advising Pachin while Shalakany Law Office is counsel. Marei, Fayez, Dardiry & Partners is legal advisor to Compass Capital, which has not yet appointed a financial advisor.

THAT’S NOT ALL FROM PLANET M&A-

ICMI shareholders to discuss Banff acquisition: Shareholders of the International Company for Medical Industries (ICMI) will discuss plans to acquire a 72% stake in Mansoura-based textiles company Banff Non Wovens at a general assembly meeting on 29 January, according to a disclosure to the EGX (pdf). The meeting will also look into allowing the board to finalize acquisitions of stakes in Alfa Medical, New Alfa, and Capital Investments after revising them, it said in a second bourse filing (pdf).

Why’s a company like ICMI interested in textiles companies? Banff produces materials used by the healthcare industry. Its non-woven fabrics are used for goods like masks, surgical gowns and sterilization wraps.

AND- Speed Medical could exit Obour hospital: Shareholders in diagnostics and healthcare firm Speed Medical will discuss selling down its stake in Speed Hospital in Obour in an extraordinary general meeting on 2 February, it said in a disclosure (pdf) yesterday. Speed was not available for comment by dispatch time this morning. Domestic media suggest speed owns 80.25% of the hospital.

GB Auto subsidiary GB Lease has closed an EGP 1.7 bn securitized bond issuance, according to a joint statement (pdf) by Al Ahly Pharos and CIB. The two institutions were joint financial advisors on the transaction alongside the National Bank of Egypt (NBE).

The details: The three-tranche issuance is backed by a receivables portfolio of EGP 2.4 bn, with the tranches rated from AA+ through A by Middle East Rating & Investors Service. NBE, CIB, Banque Misr, Banque de Caire, Abu Dhabi Commercial Bank, and NI Capital all subscribed to the issuance, which marks GB Lease’s third securitization following an EGP 4.3 bn issuance in January 2022 and an EGP 2 bn issuance in January 2021.

We’re coming off a bumper year for securitization: The securitization market saw issuances worth a combined EGP 47.5 bn in 2022, three times the EGP 15.8 bn sold the year before, according to data tracked by Enterprise.

More advisors: Dreny & Partners acted as the legal advisor on the issuance, and KPMG were auditors.

The economy topped the talk shows once again last night, as the pundits focused on Prime Minister Moustafa Madbouly’s budget cutbacks (see our Economy section, above) and the rising tally of investments pouring into the new 25% certificates of deposit (CDs).

Investors have so far poured some EGP 155 bn into the record high-yield 25% CDs released last week by the National Bank of Egypt (NBE) and Banque Misr, NBE Deputy Chairman Yehia Aboul Fotouh told Ala Mas’ouleety’s Ahmed Moussa in a phone call (watch, runtime: 12.:47). Some EGP 105 bn went to the NBE, while Banque Misr took EGP 50 bn, he said, adding that subscriptions were evenly divided between fresh deposits and those who invested after withdrawing from other CDs with lower yields.

AND- The Suez Canal is targeting revenues of USD 8.7 bn in 2023, up 10% on the USD 7.9 bn recorded last year, Suez Canal Authority Chairman Osama Rabie told Ala Mas’ouleety in a phone call (watch, runtime: 3:01). Five of the six companies owned by the SCA are now in the black, up from just one previously, said Rabie. Rabie had joined the talk shows to discuss the details of a bulk carrier that briefly ran aground in the canal yesterday, generating a smattering of local and international coverage reminiscing about the Ever Given saga of 2021 (Ala Mas’ouleety | watch, runtime: 3:57; and Kelma Akhira | watch, runtime, 6:02.)

The Almost-Ever-Given-Again catches the imagination of the int’l press: The top-trending topic in the global press this morning remains the cargo vessel that briefly ran aground in the Suez Canal yesterday before it was refloated. Cue flashbacks to when the 400-meter Ever Given ran aground in 2021, blocking the vital global shipping lane and disrupting shipping traffic. (Bloomberg | AP | Reuters | CNBC)

AND- At least six people were killed when a five-story apartment building collapsed in Upper Egypt’s Assiut, a day after two people died in a similar incident in Alexandria. (AP)

Somali delegation signs MoUs with gov’t: Somali and Egyptian authorities signed MoUs paving the way for closer cooperation and bilateral exchanges in media, culture, religion, and higher education following a roundtable discussion in Cairo yesterday, according to separate cabinet statements (here, here, and here.) Somali Prime Minister Hamza Abdi Barre expressed interest to Prime Minister Moustafa Madbouly in benefiting from Egyptian know-how in agriculture, tech, healthcare, infrastructure, and renewables, according to another statement. Upping bilateral and regional cooperation was the topic of a sit down between Foreign Minister Sameh Shoukry and his Somali counterpart, according to a Foreign Ministry statement.