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Thursday, 11 October 2018

In their own words — Maait, Kouchouk discuss debt control, tax reform, bonds with investors

** #1 EXCLUSIVE- In their own words: Maait, Kouchouk discuss debt control, tax reform, bonds with investors. We had exclusive access yesterday to an EFG Hermes investor call during which Finance Minister Mohamed Maait and Vice Minister of Finance Ahmed Kouchouk spoke on everything from debt control to tax reform and bond issuances. The two are currently on nondeal roadshow in Asia, timed to coincide with the IMF and World Bank annual meetings in Bali, for an upcoming USD 5 bn eurobond issuance. More than 400 participants joined the call, including equity and fixed-income investors and corporations with an interest in Egypt. Highlights of the discussion:

Ambitious targets of the debt control strategy: The Madbouly Cabinet’s debt control strategy was the major topic of discussion. Maait said it aims to bring Egypt’s debt level to 72% of GDP by FY2021-22, down from a current 92%. It also aims to bring debt service levels down to below 20% of GDP from a current 38%. The ministry hopes to achieve this, in part, through the introduction of a cap on foreign borrowing of 27% of GDP by 2022, said Kouchouk. Foreign borrowing had reached 37.2% of GDP in FY2017-18, he noted. The two said President Abdel Fattah El Sisi will likely sign off on the policy in the coming two weeks.

Selling bonds in a debt-control environment: One of the key planks of the debt strategy is to diversify sources of funding by tapping new markets, Kouchouk noted — hence the current roadshow’s focus on Asian markets. Egypt plans to go forward with the USD 5 bn eurobond issuance in early next year, noted Maait. Finance Ministry sources had told us on Tuesday that the ministry intends to sell some USD 20 bn through foreign currency-denominated bonds through to 2022.

As for domestic issuances, Kouchouk said the focus will be on longer-tenor bonds starting from this year. He noted that this is already underway, with issuances in the first quarter of the state’s 2018-19 fiscal year already approaching the total number of issuances that took place in FY2017-18. The ministry had been forced to cancel four bond auctions in September as yields rose significantly.

Foreigners held USD 14 bn in Egyptian debt as of the end of September, Kouchouk said.

Strong appetite on the roadshow signals investors don’t think Egypt is vulnerable to “EM contagion”: The response from investors in South Korea during the roadshow was very encouraging and appetite appears strong for the eurobond issuance, said Maait. Investors are convinced that the Egyptian economy is resilient to the shocks of the emerging market selloff, he added.

Taxes will not rise for at least four years: Maait could not stress enough that the amendments to the tax code on which the ministry is currently working are procedural in nature and will not impact tax rates. Tax rates will be stable for the coming four years, he said, a policy promise in line with that made by his predecessor, Amr El-Garhy. The changes now being discussed aim to simplify or streamline procedures and to automate them wherever possible as part of an overhaul of the Tax Authority.

New industry incentives on the horizon? Maait revealed that the government is working on new legislation that would expedite the allocation of land to industry, but provided no further color. (We do know that making land available for industrial use is a top priority for the Industrial Development Authority, which plans to offer about 30 mn sqm of land for industrial purposes through 2020, up from 9.5 mn sqm in the period between 2007 and 2016.)

Budgetary impact of rising oil prices has been overblown: While rising oil prices have had a negative impact on the budget, it has apparently not been as pronounced as previously thought. The rising price of oil has seen the treasury overshoot its fuel budget for 1Q2018-19 by only EGP 1 bn, Maait stressed. Government sources speaking to the press (including us) have put the impact for the first quarter at EGP 10 bn, with some estimating the total impact for the fiscal year would be EGP 100 bn. Maait said the lower-than-expected results largely came from a decline in consumption of fuel, especially diesel, which have balanced out the price hikes. He also confirmed that the government was still considering reviving the fuel hedging strategy, but implied that no decision has been taken yet.

Current account deficit looks good but more needs to be done on FDI: The Q&A session saw the conversation shift focus slightly to Egypt’s current account deficit over the coming 13 months. Kouchouk effectively sees little but sunshine heading into the coming 13 months as the supergiant Zohr discovery and other natural gas fields ramp up production. Maait chimed in to say that savings from Zohr will amount to USD 150 mn a month and around USD 1.5-2 bn per annum. Kouchouk did note, however, that more needs to be done to improve foreign direct investment, which has consistently failed to meet targets. Egypt’s current account deficit narrowed by 58.6% y-o-y to USD 6 bn in FY2017-18, while FDI dipped to USD 7.7 bn, down from USD 7.9 bn the previous year, on a target of USD 10 bn.

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