FY2017-18 budget deficit narrows to lowest point in six years: Egypt’s budget deficit for FY2017-18 narrowed to EGP 433.9 bn, or 9.8% of total GDP, dropping below the 10% marker for the first time in six years, Finance Minister Mohamed Maait announced at a press conference on Thursday on the final figures from Egypt’s FY2017-18 budget, according to a ministry statement (pdf). The deficit fell from 10.9% in FY2016-17. Nonetheless, the deficit was EGP 100 bn shy of its target, he said at the conference, which came a day after Planning Minister Hala El Saeed had announced that that Egypt’s GDP growth accelerated to 5.3% in FY2017-18. Maait attributed the shortfall to “unrealized non-tax revenues,” which fell to EGP 160 bn from a projected EGP 230 bn.

Egypt achieved a primary budget surplus of 0.2% for the first time in 15 years during FY2017-18. The EGP 4.4 bn surplus was used to make interest payments on sovereign debt, which rose by 38.3% y-o-y to EGP 438 bn at the end of June, according to Maait.

State revenues rose 18.5% y-o-y to EGP 781.1 bn in FY2017-18 on tax revenues of EGP 566.14 bn, which rose EGP 157 bn over FY2016-17 collections. This can be attributed to a EGP 78 bn increase in income taxes collections EGP 304.5 bn and EGP 79 bn increase in VAT collection to EGP 261.6 bn. Taxes from real estate grew to EGP 2 bn, while the Tax Dispute Act also helped bring in EGP 16.6 bn Meanwhile, customs revenues grew 6.7% y-o-y, coming in at EGP 36.6 bn.

Increased spending on social welfare and subsidy programs saw state expenditures climb 17% y-o-y in FY2017-18 to EGP 1.2 tn. Total subsidy spending reached EGP 324.4 bn, up from EGP 276.7 bn in the previous year. Commodity subsidies saw the biggest jump, rising by 69.3% y-o-y to EGP 80.5 bn, up from EGP 47.5 bn in the previous fiscal year. The state had also allocated EGP 17.5 bn to cash subsidy programs Takaful and Karama in FY2017-18, an increase of EGP 10 bn over FY2016-17, as the number of beneficiaries grew last year. State coffers also contributed EGP 52.5 bn to pension funds, up from EGP 45.2 bn in FY2016-17. Spending on fuel subsidies also rose, coming in at EGP 121 bn from a projected EGP 110 bn, while Electricity subsidies reached EGP 29 bn.

Portfolio outflows reach EGP 3-4 bn: Meanwhile, Foreign holdings in Egyptian treasuries reached USD 17.5 bn at end-FY2017-18, Maait also said (pdf). “The number represents a sharp drop from the end of March, when holdings stood at USD 23.1 bn,” Reuters notes. Maait blamed the EGP 3-4 bn in foreign outflows from local treasury bonds on the wider EM sell off, which was triggered by rising US interest rates and a strengthening dollar, and exacerbated by a potential trade war between the US and China. “But our yields are still the best among the emerging markets,” he added.

As for oil prices, Maait said that that every USD 1 increase over the USD 67/bbl average set in the FY2018-19 budget would result in a deficit of EGP 3-4 bn.The Oil Ministry had been given the greenlight last week to sign fuel hedging contracts with international banks to prevent higher oil prices from further straining the budget.

Looking ahead, diversifying the sources of state income will be a top priority for the government, which is hoping raise as much as EGP 8-10 bn from the first wave of the state privatization program. Also serving that end will be the EGP 200 bn sovereign wealth fund that Egypt intends to launch later this year.

A wider tax base and more efficient taxation system are also expected to boost inflows into state coffers. Maait — who had previously told us that tax code amendments and policy changes to streamline tax procedures would top its legislative agenda in the fall — said that previous legislative amendments to the income and real estate tax codes, as well as legislation earmarking 5-15% of ministerial slush funds to state coffers, would help drive up revenues for the current fiscal year. Slush funds alone are expected to contribute some EGP 4 bn to state coffers in FY2018-19, he added.

Regulating public spending will also be at the head of the agenda, with a plan already in motion to restructure public sector salaries to clear existing imbalances and redundancies. The transition to a paperless economy through the Government Accounting Act and other policies that ban the use of paper and make electronic payments mandatory is also expected to help the government cut back on costs.

LEGISLATION WATCH- Parliament just won’t let the idea of a wealth tax die: It is looking increasingly likely that the House of Representatives will push legislation that will see some form wealth tax imposed. A new amended to the Income Tax Act is currently being drafted that would see those making over EGP 1 mn per annum pay an income tax of 30%, up from a current 22.5%, House Legislative Committee member Rep. Mostafa Bakri tells Youm7. His justification for the law is one we’ve heard time and time again, which is that a wealth tax would shift the tax burden to the rich from the poor. His statements imply that this current draft runs with a proposal presented by Rep. Mervat Alexan last month, which see salaries of more than EGP 500k per year taxed at a 25% rate. Bakri added that the legislation would be introduced in the fall session of the House and that businessmen and business associations will be consulted on the amendments when it goes through “a national dialogue.”

You can partially blame those blue-blooded reds for the proposal’s popularity: Bakri noted that the encouragement from in House to push through the legislation comes from “the support such a measure has in the business community.” He specifically referenced an oped by the head of the Union of Investors Associations Mohamed Farid Khamis in support of Alexan’s proposed wealth tax. Bakri insisted that the move would also not impact investments.

We said it once, we’ll say it again — stop talking about net salary: These representatives are looking at the wrong factors here to justify such a move (either intentionally or unintentionally). Just about every single employee in Egypt is quoted a net salary, meaning a salary after businesses remit wage taxes, social insurance, et cetera. No salaried employee in Egypt remits a tax return of his or her own unless they have outside income, so the working poor would never feel the impact of such a tax.

EXCLUSIVE- Sarwa Capital to list up to 40% of shares in September: Our friends at Sarwa Capital say that they will list 30-40% of their shares on the EGX in September, a source close to the transaction told Enterprise last week. 80% of the shares that will list will be offered to international institutions. The initial public offering will see our friends the Egyptian American Enterprise Fund (EAEF), who hold a majority stake in Sarwa, sell off a portion of their stake. The sale is expected to bring in around EGP 2 bn, which will be used to expand the company’s reach in the non-banking financial sector, as the firm looks to launch insurance and factoring operations. The company has officially applied for approval to list its shares with the Financial Regulatory Authority (FRA) and expects to receive final approval in around a month, the source added.

Advisers: Beltone Financial is running the transaction.

CORRECTION: The version of this story appearing in our e-mail edition incorrectly identified the investment bankers on the transaction. It is Beltone.

CIHC hopes to raise over EGP 3 bn from sale of stake in Eastern Company, Abu Qir Fertilizers: The Chemical Industries Holding Company (CIHC) is hoping to raise more than EGP 3 bn from the sale of stakes in Eastern Company and Abu Qir Fertilizers on the EGX later this year, CIHC Chairman Emad El Din Mostafa told Al Mal. CIHC intends to sell 1.5% of its 6.5% stake in the fertilizers producer — which is set to see as much as 30% of its shares offered on the bourse in December as part of the state’s privatization program — and 4.5% of its stake in Eastern Company.

State-owned investment bank NI Capital is set to launch a limited tender to investment bank to select a bookrunner and manager for the transaction soon, as well as a legal advisor, according to Mostafa. Heliopolis for Housing and Development, the Alexandria Mineral Oils Company (AMOC), and the Alexandria Container and Cargo Handling (ACCH) are also preparing to sell more shares on the before year’s end. A second wave of companies is expected to follow in 1Q2019.

On a related note, AMOC says it plans to double its investments this year to EGP 3 bn, from EGP 1.5 bn, as the company continues to expand and implement upgrades, Chairman Amr Moustafa said on Thursday, Al Mal also reports. This includes the company’s USD 500 mn oil refinery project, whose details will be made public by the end of August as soon as Dutch company Fluor completes feasibility studies and arrives at a final investment cost and financing options, Moustafa said. AMOC had denied reports back in March claiming it had reached an agreement with international financing institutions to fund its USD 500 mn project.

REGULATION WATCH- Listed companies can now split their stocks more than once a year under new simplified procedures: The EGX’s board of directors approved a decision last week that allows listed companies to split their stocks as many times a year as they want, as opposed to only once previously, the bourse said in a Thursday statement (pdf). Companies will not be required to apply for regulatory approval as long as their share turnover rate is below the market average. If the turnover rate is higher, however, the bourse and Financial Regulatory Authority (FRA) would have to sign off on the transaction beforehand.

The decision was made with the state’s privatization program in mind as it is expected to facilitate necessary restructuring at various state-owned companies set to offer stakes on the EGX soon, according to EGX boss Mohamed Farid. Removing restrictions on share splits will boost overall stock market activity by reducing share prices and making the market more accessible to all possible types of investors, Farid said, adding that it will also make it easier for companies to raise capital when they need to.

REGULATION WATCH- FRA creates registry for financial advisory firms: The Financial Regulatory Authority (FRA) issued a decision Thursday ordering the establishment of a registry for research houses that conduct financial valuations and fair value studies, FRA Chairman Mohamed Omran said in a Thursday press release picked up by Al Mal. Under the new regulations, companies will be required to renew their registration every three years. If they are found to be in violation of any laws, companies will be removed from the registry and risk losing their operating licenses, according to Omran.

Registration is mandatory for financial advisors, which have six months to comply with the new regulations. The move means to boost market transparency and is the latest in a series of regulatory amendments that seek to align policies with newly-issued legislation such as the Capital Markets and Companies Acts.

INVESTMENT WATCH- Jade Apparel to build USD 50 mn factory in Ismailia Freezone: The US-based Jade Apparel is planning to build a USD 50 mn clothing factory in the Ismailia Freezone, unnamed sources tell Al Mal. The factory is slated to start producing ready-made garments and textiles by the start of 2019, with 100% of output geared towards exports. The factory will be the company’s third in Egypt, with two facilities already in 10 Ramadan City and Borg El Arab.

ING Groep suspends credit for Egypt wheat shipments in latest wheat drama: Egypt is at risk of attracting fewer numbers of offers in its wheat tenders after Dutch lender ING Groep reportedly decided to “suspend lending for wheat shipments sold to [Egypt’s] state-run buyer,” sources familiar with the matter told Bloomberg. The decision was the result of the General Authority for Supply Commodities’ (GASC) “slowed processing” of wheat transactions in recent years, which has seen ING “hit by payment disputes involving cargoes sold by AOS Trading DMCC to GASC,” according to the sources.

Egypt, however, objected to the news, saying that payments were late due to delays in delivery. “Egypt issues payments for the cargoes once suppliers have fulfilled the terms of the contract,” Supply Ministry adviser Nomani Nomani told the news service, “adding that suspending lending tarnishes the country’s image.”

Background: GASC had removed Dubai-based trader AOS from its list of approved suppliers earlier this month after repeated delays in the delivery of a shipment in June. The state-buyer had also cancelled two orders of Russian wheat from AOS. Egypt had made its most expensive wheat purchase since 2015 last week, paying an average USD 235.65 per tonne, after a drought hit Europe and the Black Sea region.

Egypt accounted for nearly half of the International Finance Corporation’s (IFC) MENA investments in FY2017-18, Chief Investment Officer for the MENA region Deepak Khanna tells Gulf News. Of the USD 2.4 bn the IFC invested across the region throughout the fiscal year, the organization channeled USD 1.3 bn to Egyptian companies in the solar, agri-business, micro-financing, and oil and gas sectors. “We believe Egypt is coming back and the environment continues to improve, we are seeing more private activity there and plan to invest more in the future,” Khanna said. The IFC has committed to extending as much as USD 2 bn in funding to Egypt’s private sector until 2019 under the country’s cooperation framework with the World Bank Group. According to Khanna, the organization will focus on closing infrastructure gaps in the power and transport sectors in Egypt and other countries in the Middle East.

Meanwhile, the Japan International Cooperation Agency’s (JICA) provided a USD 350 mn funding package for the EGP 12 bn 580 MW Gabal El Zeit wind farm , which President Abdel Fattah El Sisi inaugurated last week. JICA support 17 power projects in Egypt with some USD 2.1 bn in funding, the organization said in a release.

The USD 1.6 bn Egypt-Saudi power interconnection project has reportedly been pushed to 2022 from 2020, Electricity Ministry sources said on Thursday, Al Mal reports. The plans for the power lines that are meant to run through Saudi Arabia will have to be redrawn with the kingdom planning to establish its USD 500 bn Neom City project. Talks are ongoing with the companies that had bid for the project, including Siemens, ABB, Alstom, and China’s State Grid Corporation, to agree on the best course of action, the sources added. The winning bid was set to be announced in June and the contracts for the interconnection project, which should see Egypt and Saudi exchange up to 3 GW of electricity, were expected to be signed some time this summer.

LEGISLATION WATCH- President Abdel Fattah El Sisi signed into law on Thursday amendments to the income tax code that would set a 2.5% tax on the quick sale value of real estate assets — whether in the form of a building or unoccupied land, AMAY reports. Under the new stipulations, property owners would not have access to basic services such as power and water until they are able to present proof that they have paid the necessary taxes.

El Sisi also ratified on Thursday a law that shields senior military officials from prosecution, Youm7 reports. Under the new law, any legal action against senior military officers requires permission from the Supreme Council of the Armed Forces. Officers will also be granted the same status as diplomats under the newly ratified law. The move is receiving coverage in the foreign press, with pickups of the AP stating that the law would protect officers from prosecution from the violence witnessed in 2013.

He also signed into law legislation to reduce the pensions of ministers, governors, and their deputies, according to Youm7. Under the law, pensions for these positions will be reduced to 25% of their pre-retirement wages, down from an original 80%.

Other legislation ratified by El Sisi last week include amendments to the Police Act, which forms the a disciplinary council for the police, according to Akhbar Al Youm. He also ratified a USD 300 mn grant from China to support the launch of a new Egypt satellite.

Youth Conference focuses on education reform and the end of rote memorization: The latest iteration of the Youth Conference, which took place at Cairo University, saw a detailed discussion and presentation led by Education Minister Tarek Shawki on Egypt’s reforms to the K-12 education system. The key highlight of the presentation: Students’ grades and GPAs will also no longer be entirely reliant on end-of-year exams, and will instead be calculated based on the best five scores from 10 open-book exams administered throughout the school year.

New exam system wants to lay Shou Ming to rest forever: In hopes of ending Egypt’s issues with cheating, the ministry will be administering tests remotely by sending them directly to students’ tablets, where the students will also be required to solve them. The strategy essentially cuts out all the middlemen that have the chance to leak an exam. This shift will also significantly reduce the cost of administering Thanaweya Amma exams, which cost state coffers around EGP 1.3 bn per year, a significant chunk of which is earmarked for printing the exams and proctors’ bonuses, according to Shawki. You can catch Shawki’s presentation of the system here (watch, runtime: 15:29).

Taking care of teachers: Raising teachers’ salaries by EGP 1,000 would require the state to spend an additional EGP 15 bn, President Abdel Fattah El Sisi said at the conference. The president said that he is acutely aware of the need to raise wages across the country, but stressed that teachers are top priorities (watch, runtime: 19:22).

GERD’s project manager found shot dead in his car: The project manager of the Grand Ethiopian Renaissance Dam (GERD), Simegnew Bekele, was found shot dead in his car in Addis Ababa on Thursday, Reuters reports. While there has been no official line, the case is widely suspected to be a homicide and the word “assassination” has even been used by witnesses at the scene, who said that police recovered a pistol from the car. It is hard to ascertain as of yet how this would impact GERD talks between Egypt, Sudan and Ethiopia, which saw a breakthrough last month, when President Abdel Fattah El Sisi and Ethiopian Prime Minister Abiy Ahmed vowed to iron out their differences peacefully, after months of souring ties.