Finance and planning ministers talk FY2017-18 budget with the House: House of Speaker Ali Abdel Aal referred the Ismail government’s proposed FY2017-18 budget to the House Budget Committee after Finance Minister Amr El Garhy and Planning Minister Hala El Said briefed MPs on the spending bill yesterday, Ahram Gate reports.

So what’s new with the budget? The government had previously announced it was targeting GDP growth of 4.6% and revenues close to EGP 835 bn in FY2017-18 — the latter around 29.6% higher than the current year. Growth in the state’s top line will be driven mostly by higher tax revenues, El Garhy told MPs yesterday, according to Ahram Gate, which are expected to climb to EGP 604 bn from a projected EGP 458 bn in FY2016-17 and contribute around 14.7% of GDP (vs. 13.4% this year). Improvements to fiscal and tax policies should see taxes as a percentage of GDP rise to 18.5% by FY2021-22, the minister added.

The sectors the government sees growing: Four industries are expected to drive the improvement in overall economic performance: construction and real estate, wholesale trade, manufacturing, and agriculture.

What about spending? Total public spending will grow 21.3% to EGP 1.2 tn in FY2017-18 from EGP 994 bn this year, and El Garhy sees the budget deficit narrowing to EGP 370 bn, or around 9% of GDP from an estimated 10% this year and 12.5% in FY2015-16. The government hopes to narrow the gap further to 5-6% in the medium term, according to El Garhy. As we noted previously, the government is optimistic about delivering Egypt’s first primary surplus in a decade, which is estimated at 0.3%.

So what will the government be spending on? The state will continue to take measures to carefully control its spending and efficiently manage its resources, El Garhy said. With petroleum subsidies falling to 33% of the total subsidy bill in FY2017-18 (compared to 64% in FY2011-12) and electricity dropping to 9%, there is room to increase allocations to social welfare and subsidy programs as well as to the provision of basic goods and services (which together will make up around 42.7% of the subsidy bill, up from 26% in FY2011-12).

Food subsidies alone will be up 29.5% in the new budget to EGP 64.2 bn compared to EGP 49.5 bn bn this year, as the number of beneficiaries increases to around 71 mn citizens, while bread subsidy beneficiaries increase to 76.8 mn. Increased spending on social welfare and subsidies is expected to mediate the “temporary” negative impact that economic reform policies have had on consumers. Spending on healthcare and education accounts for the lion’s share of the state’s EGP 51 bn outlay on “social and human development,” Youm7 reports. That splits as 49% earmarked for healthcare, 28% to education, and 23% to scientific research.

Energy subsidies are projected to cost the state EGP 140 bn, with EGP 110 bn of that figure earmarked for petroleum products and EGP 30 bn for electricity. Spending on major national infrastructure development projects is expected to grow to EGP 135.4 bn from EGP 91 bn this year, of which EGP 65 bn will be financed from state coffers. The balance provided through grants, loans, and other forms of financing, the newspaper adds.

Although GDP growth levels had stagnated during FY2015-16 due to a basket of economic challenges, the first phase of the state’s economic and fiscal reform plan is bearing fruit and restoring investors’ faith in the market, El Garhy said. GDP growth is up, reserves are up, FDI is up, and so are exports, Planning Minister Hala El Said.

Things to look forward to: Output from the supergiant Zohr gas field and other recent discoveries are expected to boost Egypt’s natural gas production by 30% once the stations are operational, El Garhy said. That coupled with a 50% increase in the government’s electricity output once the new Siemens power plants come on stream will add to the Egyptian market’s attractiveness and sharpen its competitive edge in the region, especially as the government pursues further reforms to its fiscal and energy policies.

Egypt’s performance on the bond market merits a credit upgrade, Ahmed Namatalla and Ahmed Feteha write for Bloomberg. “The nation’s debt has had an implied rating of B2 or better for almost three months, according to Moody’s Analytics, one level higher than its official grade.” Egypt’s current credit rating at Moody’s Investors Service is B3, six levels below investment grade, similar to its B- score at S&P Global Ratings. The nation is rated one notch higher at Fitch Ratings. Aberdeen Asset Management’s Anthony Simond says, “Egypt has traded very well due to the positive reform momentum, IMF assistance and general bullish view toward emerging markets … If the government can keep its focus and not water down its plans, then an upgrade should be possible within six to 12 months.” The market is probably right and leading the rating agencies, says Stephen Bailey-Smith, investment strategist at Danish outfit Kolding. He says “the nation’s upcoming bond sale “will do well, as the search for yield is still solidly entrenched in market psyche.”

PICO Group subsidiary Cheiron Egypt has acquired 100% of Engie’s West El Burullus (WEB) gas concession in a transaction announced yesterday. WEB is located in shallow offshore Mediterranean waters with recoverable reserves of c.200 bcf gas and 3 mn bbl of condensates. BNP Paribas, financial advisor on the transaction, said in an emailed statement that “WEB is targeting plateau production of 100 mcf/d with first gas in 2020.” The transaction, it said, supports Engie’s “global strategy to exit E&P sector and focus on renewable energies,” while PICO will diversify its “Egyptian E&P asset base into new geological basins with higher gas component. BNP Paribas invited more than 50 bidders to take part in the process, with more than 10 signing confidentiality agreements. The transaction value has not been released. PICO, which controls assets in Egypt, Romania and Mexico, is owned by the Diab family of Cairo.

IPO WATCH- As the 1H2016 IPO window draws to a close before a long, dry summer, Beltone Financial has been mandated to manager the IPOs of Misr Italia Group and Egypt Foods on the EGX, Al Mal reports. Beltone CEO Ahmed Salem says the investment bank is now preparing Misr Italia for listing and searching for an independent financial advisor; the listing will likely take place in 3Q2017. He says “20% or more” of the company’s shares will be listed to finance expansion plans. Salem also says Beltone Financial is looking to restructure Egypt Foods and get it listed before the end of the year.

M&A WATCH- The merger between satellite channels CBC and Al Nahar has been officially terminated due to “differences in vision and management policies … that made achieving the goals of the merger impossible,” CBC announced in a statement carried by Al Borsa. The two networks had announced their intention to merge last May. Al Borsa had reported in April that the transaction was on the rocks.

Siemens has set a new global record for the execution of fast-track power projects byconnecting 4.8GW of generation capacity to the Egyptian grid, Julian Turner writes for Power-technology. Turner interviewed Peter Ullrich, project director of the three combined-cycle power plants at Siemens Power & Gas Division, who told him the project “sets a new industry benchmark in terms of modern power plant construction — the connection of 4.8GW of new capacity to the grid in only 18 months, 400MW more than promised.” He says the three plants in Beni Suef, Burullus and the new administrative capital — two of them built by Orascom Construction and one by Elsewedy Electric — will be the largest combined-cycle gas-fired plants ever built and operated. “In January 2017, 18 months after the signing, we achieved 4.8GW; in short, 10% more generating capacity than originally promised. Never before has the energy system of an entire country been developed so fast,” Ulrich adds.

The higher efficiency of the power plants saves Egypt an estimated USD 1.3 bn in natural gas consumption each year and Ulrich explains that each 1.5% improvement in efficiency reduces each plant’s carbon dioxide emissions by approximately 320,000 tonnes. He says Siemens is also working on Egypt on expanding renewables as a “combination of high-efficiency combined-cycle power plants and renewable sources are best suited to overcome the power shortages in the country.”

MOVES- Egypt-focused Apex International Energy appointed Willis “Trey” Gilmore as vice-president of corporate reservoir engineering in Houston and Raed Saba as deputy general manager and exploration manager in Cairo. Gilmore most recently served as Manager of Reserves at Sheridan Production Company after holding a variety of leadership roles at Apache Corporation. Saba was the Government Relations Manager and Senior Country Advisor for Shell in Egypt.

Electricity subsidy phase-out delayed, new prices to be unveiled this month: The Electricity Ministry will announce the new electricity prices this month, with the increases on track to be implemented in July, Al Borsa reports, citing ministry sources. The Egyptian Electricity Utility and Consumer Protection Regulatory Agency (Egyptera)’s new tariffs will take into account consumers’ income level and spending. The sources also say the ministry has decided to continue subsidizing electricity for another five years, rather than completely eliminate the subsidies by 2019 as was previously planned. Subsidies will be lifted within three years for hospitals, hotels, and other high-consumption establishments. The new pricing formula reportedly features four, rather than seven, residential consumption tiers:

• 0-100 kWh
• 101-200 kWh
• 201-600 kWh
• 601-1000 kWh and above

Price hikes will be implemented across the board, with the increases varying between each tier.

The Finance Ministry has finished drafting amendments to the Income Tax Law and sent them to the House of Representatives’ Economics Committee for discussion before preparing a final draft for the Ismail cabinet, Al Shorouk reports. The ministry had announced in March its plans to create what it called a “more progressive” tax code that would better serve the interests of achieving social justice. The changes include more generous tax rebates and refunds for citizens in the lower-income brackets of EGP 30-45k a year, according to the newspaper. The Finance Ministry is still on the fence about offering rebates to those whose taxes cross the EGP 200k mark and plans to discuss the matter with MPs. Also undecided is whether to push the minimum taxable income to EGP 7,000-7,200 from a current EGP 6,500.

The Central Bank of Egypt is planning to announce new policies during May to improve access to finance for small and medium-sized businesses, Deputy Governor Gamal Negm said on Monday, Al Mal reports. Banks have extended EGP 101 bn in finance to c. 37 SMEs since the central bank launched the initiative last year, Negm also said.

Advertising and media mogul Tarek Nour gave Al Masry Al Youm a wide-ranging interview yesterday. Nour said claims he has partnered with Ikhwan members are simply ”dumb.” Overall, he says, there is a sense that the state wants the media to “calm things down” a bit. Nour said he did not force firebrand journalist Ibrahim Eissa to quit his show on Al Kahera Wal Nas. He also said no one threatened him that his nearly three-decade-old Le Marché furniture exhibition would be cancelled if he didn’t fire Eissa. Instead, Eissa was the one who opted to resign from the channel willingly to focus on personal projects after Ramadan 2016.

Nour says he is not bothered by state-owned media or the ownership of media by entities affiliated with the state. He says TV channels had asked the state to support them financially as they were on the verge of financial collapse. This does not bother him, he says, and cites the examples of MBC and Al Jazeera as successful examples, caveating this with the need for there to be space for dissent and opposition

On the economy, Nour says he hopes the state’s expansion into business sectors like cement and fertilizers is temporary and to support economic growth. Otherwise, despite it being a critical intervention currently, if it is a more long term presence, he sees investors withdrawing from the market because “no one can compete with the state.” Nour also praised Investment and International Cooperation Minister Sahar Nasr and believes the Investment Act is a positive development. He also thinks the national mega projects drive is a positive investment that will yield rewarding results in the future, but was poorly marketed. Nour believes that state television in the form of the “Maspero” complex needs to be restructured, downsized, and moved out to the Media Production City. Nour also endorsed the notion of President Abdel Fattah El Sisi bidding for reelection.

EARNINGS WATCH- Arabian Cement Company reported a 75% y-o-y increase in net income to EGP 59.7 mn in 1Q2017, up from EGP 34.1 mn in the same period of last year, according to an EGX filing.