AM — EGP devaluation pushes private sector into sharper decline in January

Good morning, wonderful people. It’s a good-news, bad-news kind of morning as we all continue adapting to our new FX and inflationary realities.

GOOD NEWS- Officials are reportedly considering a delay in collecting taxes owed by domestic investors on capital gains they made trading on the EGX last year. We also have plenty of M&A and investment news for you this morning to keep things interesting.

AND- Foreign reserves inched up again, rising to USD 34.2 bn in January from USD 34 bn the previous month, according to central bank data out yesterday. Reserves have been on a gentle upward slope the past five months and are now up by more than USD 1 bn since the end of August. Reserves fell 20% last spring on the back of the war in Ukraine and tightening financial conditions globally.

BAD NEWS- The Finance Ministry has no intention of scrapping its plan to hike wage taxes, we’re told. The Finance Ministry last month proposed legislative amendments that would create a new 27.5% personal income tax rate on salaries of more than EGP 800k a year — a change that won’t be revised by policymakers, our sources tell us. Annual earnings over EGP 400k are currently taxed at a top rate of 25%.

Oh, and the monthly PMI reading? It was worse in January — hardly a surprise as we all adapt to our new FX reality following last month’s devaluation.

^^ We have the rundown on all of this and more in this morning’s news well, below.

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HAPPENING TODAY-

It’s a busy Monday in the Senate:

• The Financial and Economic Affairs Committee will review a study calling for the expansion of private and public freezones;
• Supply Minister Ali El Moselhi will brief the Industrial Committee on strategic commodities reserves and the ministry’s preparations for Ramadan;
• The Housing Committee will discuss the Housing Ministry's electricity rationing plan;
• The Education Committee will review the government's digital transformation policy;
• The Agriculture Committee will debate hurdles facing the poultry industry;
• The Culture Committee will go over policies to promote religious tourism;
• The Senate will continue debating a report on family violence.

REMINDER- The House is still on break, with MPs due to reconvene on Sunday, 12 February.

Operation Save Lebanon: Egyptian officials are attending an international meeting in Paris called by France to discuss how to end a political impasse in crisis-hit Lebanon, AFP reports, citing statements by the French Foreign Ministry’s spokesperson. Officials from Saudi Arabia, Qatar and the US will also be in attendance.

It’s the last day of the Cairo International Book Fair: Today is your last chance to attend this year’s fair at the Egypt International Exhibition Center.

THE BIG STORY ABROAD-

There’s a presidential election going on in one of our closest EastMed allies: Former Cypriot FM Nikos Christodoulides will face off against leftist-backed candidate and career diplomat Andreas Mavroyiannis in runoff elections on 12 February, according to Reuters. Christodoulides grabbed 32% of yesterday’s first-round vote while Mavroyiannis unexpectedly came second at 29.6%.

MEANWHILE- The global business press continues to be transfixed by the Chinese balloon shot down by the US on Saturday: Reuters | AP | Bloomberg | FT | WSJ | NYT | Washington Post.

AND- Former Pakistani president Pervez Musharraf dies in Dubai: Pervez Musharraf, the army general who seized power in Pakistan’s 1999 military coup and remained president until 2008, died on Sunday at a hospital in Dubai aged 79, following a prolonged illness and years in self-imposed exile, CNN reports.

CLOSER TO HOME- Egypt and Qatar held their first political consultations since patching things up in 2021. Senior officials from the countries’ foreign ministries discussed regional and international developments, including the situation in Palestine, during talks in Cairo. (Egypt Foreign Ministry statement | Qatar News Agency)

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For the iSheep ultras: Speculation is mounting that Apple could be gearing up to launch a new ultra-premium iPhone model carrying a higher spec than the Pro Max. Bloomberg’s Mark Gurman writes that the company has discussed debuting an “Ultra” version of the iPhone above both Pro models in time for the launch of the iPhone 16 in 2024. “It’s unclear how that top-of-the-line model would be different, but it will probably offer further camera improvements, a faster chip and perhaps an even larger display. There also may be more future-forward features, such as finally dropping the charging port,” Gurman wrote in his weekly Power On newsletter.

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COME TO OUR NEXT ENTERPRISE FORUM-

We’re excited to unveil our next C-level event: The Enterprise FDI + Exports Forum, where we will take a deep dive into two of the most critical topics affecting our community.

Exports and foreign direct investment (FDI) have never been more important to our economy — or our businesses — than in the wake of the float of the EGP. We think we have a once-in-a-lifetime chance to build an export-led economy that makes us a magnet for FDI and all the benefits that will come with it for our nation.

Want to join the conversation? Drop us a line on events@enterprisemea.com.

ICYMI-

Missed this week’s Inside Industry? In our weekly vertical exploring all things industry and manufacturing, we looked at the fertilizer industry in Egypt, which is broadly expected to have another strong year in 2023 — albeit with a slight slowdown as market dynamics shift.

CIRCLE YOUR CALENDAR-

Palestine talks in Cairo: Hamas leader Ismail Haniyeh is expected to fly into Cairo this week to hold talks with Egyptian intelligence chief Abbas Kamel and other security officials, a Hamas spokesperson said in a statement picked up by the Jerusalem Post. The secretary of Palestinian Islamic Jihad was in Cairo yesterday for talks, the Israeli newspaper reported. The invite came days after Kamel visited Ramallah for talks with Palestinian President Mahmoud Abbas and other officials in a bid to end the recent violence in the West Bank and Jerusalem.

Inflation: The CBE and Capmas will publish inflation data for January in a few days.

Unis go back this week: The second semester of the 2022-2023 academic year begins for public universities on 11 February.

Petro-show next week: Oil and gas industry figures from Egypt and the region will congregate at the Egypt International Exhibition Center for the Egypt Petroleum Show (Egyps) starting next Monday. The three-day conference runs 13-15 February.

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

*** It’s Blackboard day: We have our weekly look at the business of education in Egypt, from pre-K through the highest reaches of higher ed.

In today’s issue: We look at how edtech could be the perfect fix to address challenges in the Egyptian education sector in the second part of this Blackboard two-parter. Last week, we examined the prospect of the current edtech adoption in Egypt and why British companies want in.

Private sector starts the year with sharper contraction: Activity in Egypt’s non-oil private sector contracted for the 26th consecutive month in January as high inflation continued to weigh on businesses, according to S&P Global’s purchasing managers’ index (pdf).The PMI reading fell to 45.5 in January from 47.2 a month before, dropping further below the 50.0 mark that separates growth from contraction. “The reading indicated a sharp deterioration in the health of the non-oil sector that was one of the quickest seen in the current 26-month sequence of decline,” S&P Global said.

EGP depreciation drives inflation: Purchasing costs rose at their fastest pace in 4.5 years as the January devaluation of the EGP added to inflationary pressures, with half of those surveyed reporting a rise in purchasing costs during the month. Output prices increased at their fastest in nearly six years, as businesses passed on rising costs to clients.

And inflation suppresses activity: “TheP build-up of inflationary pressures led to a marked and faster decline in new business inflows,” S&P wrote. The contraction in activity was exacerbated by ongoing supply issues at some firms thanks to import restrictions and a foreign-currency shortage. Amid this backdrop of high prices, falling demand, and supply shortages, managers cut purchasing at their steepest pace in the 12-year history of the PMI survey.

Employment fell for the third time in four months, though staff costs rose as employers hiked salaries amid high inflation.

Looking ahead: Confidence among purchasing managers hit its third-lowest level in the PMI’s history amid a “gloomy” outlook on inflation, S&P Global Senior Economist David Owen said. Sell-side price hikes suggest “inflation could climb further from December's 21.3% and remain elevated throughout much of the year,” he said, echoing the sentiment of all seven analysts we polled recently. “The USD shortage added significantly to Egypt's economic challenges in 2022 and will likely remain a major problem this year,” he said.

The story is getting ink in the foreign press: Reuters | Bloomberg.

FROM THE REGION-

Saudi Arabia’s non-oil private sector registered its second-fastest growth since September 2021 on the back of easing inflation and rising optimism, according to the country’s PMI (pdf).

Non-oil business activity in the UAE also remained strong in January, with output and new orders both rising sharply, according to the PMI (pdf). This was the lowest PMI reading in a year for the UAE, which has enjoyed a strong recovery from the pandemic since 2021.

EGX investors could be in line for a fresh capital gains tax break: Proposed amendments to the Income Tax Act have been pulled from the House while policymakers consider amending capital gains tax (CGT) rules in response to the current exchange-rate volatility, two government sources told Enterprise. Under the proposal, CGT on gains from stock trades made by resident investors in fiscal year 2022 would not be due until after the new tax legislation is passed. Policymakers are still mulling additional changes to how the CGT may be implemented, including timing.

The thinking: Keep the EGX attractive. Policymakers are considering setting aside the tax to mitigate the negative impact of the EGP’s devaluation on local investors. Their thinking: Local investors have been at a disadvantage (in EGP buying power terms) compared with foreign investors who were able to take larger positions for less (in USD terms). The currency has fallen sharply against the greenback over the past year on the back of global headwinds and a local FX shortage.

This has institutional backing: Among those pushing for the tax break are the Egyptian Stock Exchange, the Financial Regulatory Authority, and several undisclosed financial institutions.

There are no plans to scrap the tax entirely: The government isn’t planning on reversing its decision to re-introduce the capital gains tax, but policymakers are working on a new package of incentives to drive foreign investment in the market, one source said.

This isn’t the first time we’ve seen CGT breaks since its reintroduction: The Madbouly government in March slashed the capital gains tax on gains made from IPOs on the EGX by 50% for a two-year period and created a tax exemption for share-swaps between listed and unlisted companies, as part of an EGP 130 bn stimulus package that followed the March devaluation.

More tax incentives to come: The state is looking into introducing more incentives to draw investments in securities and investment funds, taking into account exchange rate changes and interest levels.

The current rules: A 10% capital gains tax on EGX transactions was reintroduced last January for resident investors (foreign investors in the bourse are exempt). Investors pay the tax on net portfolio earnings calculated at the end of the tax year, minus brokerage fees. Policymakers first said they were going ahead with a CGT in 2015, delayed, then set it aside in favour of a 0.125% stamp tax in 2017 and shelved the CGT for a three-year period. They then put on hold again until the start of last year thanks to the pandemic.

LOOKING AHEAD- We are bracing for more tax changes in the coming weeks: The Madbouly government is set to unveil its tax policy document in the coming few weeks.

The EGX has been on a tear on the back of the devaluation: The benchmark EGX30 index has risen 11.4% since the start of the year; it was up nearly 20% at the start of last week being hit by a wave of profit-taking. The index has almost doubled since falling to six-year lows last June.

Yesterday in M&A: Palm Hills’ second-largest shareholder could be about to sell its entire stake to an Emirati investor. Also yesterday, International Company for Medical Industries shareholders greenlit proposals to acquire a majority stake in a Mansoura-based textiles company.

AAIB ON ITS WAY OUT OF PALM HILLS?

Palm Hills could get new UAE shareholders: Arab African International Bank (AAIB) is looking to sell its entire 12.7% stake in EGX-listed Palm Hills Developments to Emirati investment company Al Ain Holding, sources familiar with the matter reportedly told Asharq Business. Palm Hills representatives were not available for a comment when Enterprise reached out yesterday.

AAIB is Palm Hills’ second-largest shareholder after the company’s founding Mansour family, which collectively owns around 49%. The remaining stake is divided among minority shareholders and freefloat shares on the EGX.

About Al Ain Holding: Founded by UAE royal Sheikh Hamdan Bin Zayed Al Nahyan, the Abu Dhabi-based investment company’s portfolio spans residential, commercial and industrial properties, hotels, and schools. Most of the company’s portfolio is located in the UAE, but it also owns commercial properties in London.

Palm Hills is growing fast: The company posted record-high net income of EGP 911 mn in 9M 2022, up 43% y-o-y, as well as all-time high revenues of EGP 9.5 bn, up 62% y-o-y. New sales rose 36% in the nine-month period.

The market welcomed the news: Palm Hills shares gained 10.3% yesterday to close at EGP 2.24.

Gulf investors are eyeing our real estate sector: The state-owned parent of Heliopolis Housing is in talks with Gulf investors to sell off land and other assets, according to local media. The government is fielding several offers from Arab investors to buy land in hard currency. The UAE’s Aldar and ADQ together acquired more than 85% of upmarket real estate developer SODIC in late 2021. Our Gulf neighbors last year pledged over USD 22 bn in total to support the economy amid the fallout from the crisis in Ukraine, with Abu Dhabi’s ADQ and Saudi’s Public Investment Fund investing a combined USD 3.1 bn in government-owned shares in EGX-listed companies.

ICMI TO PROCEED WITH BANFF ACQUISITION-

ICMI shareholders greenlight Banff acquisition: Shareholders of the International Company for Medical Industries (ICMI) approved plans to acquire a 72% stake in Mansoura-based textiles company Banff Non Wovens after approving the results of a fair value study valuing the company at some EGP 39.2 mn, according to an EGX disclosure (pdf).

Concord to target Egypt’s healthcare sector: US-based, Egypt-focused asset manager Concord International Investments plans to establish a USD 40 mn company to invest in the country’s healthcare sector, Chairman Mohamed Younes told Asharq Business in an interview. The company will deploy funds in feeder industries for the healthcare sector, such as the production of medical equipment and supplies, he said, adding that it will begin raising capital from local and global investors starting the second half of the year.

The company has been involved in Egypt’s healthcare sector for years: Concord was part of a consortium that acquired 98% of Amoun Pharma for USD 500 mn back in 2007, a transaction which the company describes as one of the largest private-equity transactions ever in Egypt.

Concord is the second private-equity player to signal healthcare investment in recent weeks: B Investments and the Sovereign Fund of Egypt announced a partnership last month that could channel more than EGP 2 bn into the local healthcare and pharma sectors. Concord and the SFE had signed a MoU of their own back in 2020 to manage a USD 300 mn healthcare fund though nothing has been heard since.

And that’s not all, folks: Concord plans to establish a new stock fund and another to invest in bonds this year to capitalize on the current bull run on the EGX and higher interest rates, Younes said.

Executives in the Middle East are some of the world’s most optimistic when it comes to new business growth in the year ahead, with expansion overseas a key priority for many of them.

Our latest survey of leaders in companies with revenues of between USD 10 mn and USD 500 mn shows clearly that the preferred strategy to deal with the economic uncertainties created by central banks raising interest rates to fight inflation is to double down on investing for growth.

And it is executives in the Middle East who have the highest expectations of the success of those growth plans.

Of the 1.7k chief executives and chief financial officers we polled across 14 markets, 77% of them were targeting at least 10% revenue growth in 2023. Confidence in achieving that goal is highest in the UAE (93%), followed by India (88%), Mexico (86%), Australia (84%), and Indonesia (80%).

Meanwhile, nearly half (46%) of all respondents say expansion into at least one new foreign market is an investment priority for the year to meet their revenue growth goals. And 40% will seek external investment to support their growth plans.

Those intentions of international expansion align with the reality of the business flows that we see as the world’s leading trade bank.

Middle East trade flows continue to gain pace despite the uncertainty elsewhere, with the strategic location of the region proving to be a particular advantage enabling internationally-minded businesses to expand along the substantial trade and investment corridors that exist with Asia, Europe and the US.

New business verticals, new products, and new supply chains are being formed.

LOOKING AHEAD WITH CONFIDENCE

The focus on growth is the key to how executives plan to address the challenges they see.

Inflation and the cost of living is cited as the top risk by business leaders in the region (38%). Increased interest rates comes next (32%), followed by political uncertainty (27%).

Putting growth in the spotlight is leading to substantial revisions of business plans and deeper analysis of supply chains to see where revenue can be grown or costs can be cut.

Those revisions have also led to re-prioritisations for many companies, with nearly half (48%) of UAE respondents highlighting sustainability as becoming a key business driver. With COP27 in Egypt last year and COP28 being hosted in the UAE at the end of 2023, the focus on sustainability as a growth enabler is likely only to get sharper.

The key takeaway from the research for me is that even in a difficult environment, ambitious, forward-looking businesses will put together a plan to deliver growth, manage supply chains, pay bills, and manage liquidity.

This op-ed was written by Chaker Zeraiki (LinkedIn), HSBC UAE head of global trade & receivables finance and regional head of business origination for MENAT. HSBC’s column in Enterprise appears every second Monday.

Senate committee approves bill handing temporary licenses to informal industrial projects: The Senate Industrial Committee approved a new government-drafted bill that would enable unlicensed industrial projects to temporarily go legit. The two-article bill would grant the Industrial Development Authority (IDA) the power for three years to allow unlicensed industrial projects to operate for a temporary one-year period. The period could be extended for an additional two years by the trade and industry minister upon the recommendations of the IDA.

Hundreds of thousands of industrial projects operate without licenses: The new bill aims to facilitate licensing measures for small-scale industrial projects to join the formal economy. “This bill is important for the Egyptian industry as building and expanding industrial projects can never be possible without first meeting all legal licensing requirements,” said committee head Mohamed Halawa. There are “hundreds of thousands of small-scale industrial projects in different governorates that are operating without having a license and as a result they are considered a part of the informal economy.”

TOUGHER PENALTIES FOR FGM?

Egypt is set to toughen penalties on female genital mutilation (FGM) and child marriage, Social Solidarity Minister Nevine El Qabbaj told the Senate yesterday. “We are currently in the process of drafting a new bill that will toughen penalties on FGM and early marriage crimes,” the minister said on the sidelines of a discussion of a study on family violence.

Still widespread: FGM is still widespread in rural areas, El Qabbaj said, describing the practice as still one of the worst crimes in the country. She said some in rural areas resort to early marriage without official documentation, referring to child marriage as a form of “human trafficking.”

REMEMBER– The House of Representatives approved amendments to the penal code in 2021 that hand jail terms of 5-20 years to people found guilty of committing FGM. Doctors carrying out FGM are subject to harsher penalties of up to ten-year prison terms if they cause permanent disability and between 15-20 years in case of death.

Sameh Qattah was named chairman of satellite operator NileSat by the company’s board of directors yesterday, state-run MENA agency reported.

It was a rather quiet night on the airwaves yesterday: Getting coverage almost across the board was the funeral of former prime minister Sherif Ismail. Ismail, who served as the country’s premier during 2015 to mid 2018, passed away on Saturday at age 67 after a battle with illness. Al Hayah Al Youm (watch, runtime: 6:11), Masaa DMC (watch, runtime: 3:01) and Kelma Akhira (watch, runtime: 1:47) all covered yesterday’s military funeral, which was led by President El Sisi and top state officials.

The mechanism in which the state will facilitate obtaining industrial licenses for investors will be announced soon, Federation of Egyptian Industries (FEI) head Mohamed El Sewedy told El Hekaya (watch, runtime: 18:20). He described obtaining industrial licenses for factories as time-consuming, estimating it at three to six months. “Yet the past period … saw the process accelerating if requirements are met,” he said. His statements came following a meeting with the government where Prime Minister Madbouly expressed keenness to accelerate approvals related to the industrial sector and investment promotion.

Zamalek FC’s ongoing heat with the Egyptian FA received attention: The football club has been blocked by the Egyptian FA from registering new signings due to having unpaid debts. In an interview on Ala Mas’ouleety, former sports minister Khaled Abdel Aziz speculated that there is a “missing link that no one knows” in the conflict but rejected the conspiratorial claims made by the club’s pugnacious head Mortada Mansour (watch, runtime: 3:23). Zamalek is reportedly considering submitting a complaint to FIFA, which could forecast the EFA to register the players, sports pundit Ahmed Darwish told Kelma Akhira. (watch, runtime: 9:57)

INFRASTRUCTURE-

Gov’t denies ADP-Suez Port talks: The Transport Ministry has denied that it’s in talks to sell development and management rights at Suez Port to Abu Dhabi Ports. Asharq Business had reported last month that the ADQ-owned company was in advanced talks to take over management of the port under a usufruct contract, citing sources it said had knowledge of the matter. In a statement yesterday, the ministry denied talks were taking place and called the report “completely false and baseless.”

PHARMA-

Ibnsina Pharma signs second distribution agreement with an int’l drugmaker in as many weeks: Ibnsina Pharma will distribute treatments by German pharma giant Boehringer Ingelheim — including for diabetes, hypertension, respiratory diseases, and stroke — under a new agreement between the two firms, it said in a press release (pdf) yesterday. Ibnsina last week inked an agreement with Swiss pharma giant Sandoz to distribute its OTC medications in Egypt.

REAL ESTATE-

NUCA approves support for real estate players: The New Urban Communities Authority (NUCA) has approved measures announced last week by the Madbouly government to help developers weather a tough economy, according to a statement. The measures grant developers a 20% deadline extension on their projects, allow them to mark projects as complete earlier in the construction timeline, and reduce the interest rate they pay on installments for state-owned land.

TELECOMS-

Telecoms regulator reportedly paving the way for WiFi calling services: The National Telecom Regulatory Authority is working to make WiFi calling services available at some point this year, Al Borsa reports, citing unnamed sources. The regulator is in talks with the country’s mobile network operators on how to implement the service, which would allow mobile phone owners to make calls using their WiFi connection.

Energy, food and fertilizer were among the topics of discussion between El Sisi + Romanian PM: Romanian Prime Minister Nicolae Ciucă agreed to increase exports of Romanian wheat to Egypt during talks with President Abdel Fattah El Sisi yesterday, according to a statement from the Romanian PM’s office. The two also discussed upping Egyptian fertilizer exports to Romania, the statement said. El Sisi and Ciucă talked about strengthening energy ties in light of the impact of the Russia-Ukraine war on global energy supplies, according to Ittihadiya.

Exporting natural gas to Romania? State-owned gas company EGAS signed an MoU with Romanian state-owned gas pipeline operator Transgaz on natural gas transportation, according to a cabinet statement. The agreement will see the two sides work on developing infrastructure for transporting natural gas, the statement said, without providing further details.

Madbouly calls for more Romanian investment: Prime Minister Moustafa Madbouly invited Romanian investors to step up involvement in Egypt’s health, renewable energy and industrial sectors during the Egyptian-Romanian business forum yesterday, according to a statement by the Cabinet. More than 100 Romanian companies are currently operating in Egypt and have invested a combined USD 104 mn, he said.