Rising remittances curb current account deficit in 3Q2019-2020: A rise in foreign remittances helped Egypt’s current account shrug off the effects of the covid-19 pandemic during 3Q FY2019-2020, narrowing the deficit markedly to USD 2.8 bn from USD 4.5 bn a year earlier, according to official data (pdf) released by the Central Bank of Egypt yesterday. Remittances, a key source of hard currency for the country, increased by USD 1.7 bn to USD 7.9 bn during 3Q2019-2020 despite the global headwinds in March. This helped the current account deficit for the first nine months of the fiscal year shrink to USD 7.3 bn, compared to USD 9.8 bn a year earlier.

Non-oil trade deficit falls: The non-oil trade deficit fell by USD 2.2 bn to USD 27.3 bn during the first three quarters of FY2019-2020, from USD 29.5 bn in the same period a year earlier. A key contributor was merchandise exports such as gold, radio and TV transmitters and pharma products, which rose by USD 1.2 bn to USD 13.6 bn. Imports of iron, coal, spare parts for cars, and pharma products dropped, contributing to the reduced deficit. In 3Q, non-oil merchandise exports rose almost USD 300 mn to USD 4.4 bn while imports fell 3.2% to USD 13.7 bn.

But oil exports continued to decline: The oil trade deficit widened to USD 773.3 mn in 9M2019-2020 (from a USD 294.3 mn deficit last year), driven by a decline in oil exports, which fell by USD 1.2 bn to USD 7.3 bn. The deficit would have been wider had it not been for the slump in oil prices in 3Q, which caused a 21.3% decline in oil imports to USD 2.3 bn during the three-month period.

Foreign direct investment inflows more than halved during 3Q to USD 970.5 mn from USD 2.3 bn in 3Q2018-2019, amid heightened uncertainty because of the pandemic.

Tourism revenues decline in 3Q: Tourism revenues, another key source of currency, came under pressure during the third quarter, falling 11.4% to USD 2.3 bn (against USD 2.6 bn the year before) as the government suspended international flights towards the end of March. The overall travel balance fell to USD 1.5 bn from USD 1.9 bn, exacerbated by an 11.4% rise in travel payments.

Other key metrics:

• Suez Canal receipts rose by USD 84.4 mn to USD 1.4 bn in the third quarter.
• Portfolio investments recorded net outflows of USD 8.2 bn in 3Q, compared to net inflows of USD 6.9 bn.

The tides are turning for foreign portfolio investment in Egypt as investors return to “favorite” carry trade: Foreign holdings of Egyptian sovereign debt rose to USD 10.6 bn by the end of June, and the first two weeks of July saw another USD 3 bn of inflows to local debt, Bloomberg reports, citing an unnamed Egyptian officials. The reversal of the massive capital outflows Egypt witnessed during the earlier months of the pandemic comes as the hunt for an attractive carry trade has brought investors back to Egypt, a longtime “favorite,” Bloomberg says.

At 6.8%, Egypt’s bonds have the fourth-highest returns in USD terms across 25 emerging markets, the business information service tracks, and EGP-denominated bonds have “one of the world’s highest” inflation-adjusted returns at 8.4%. Compared to other similar EMs like El Salvador and Sri Lanka, Egyptian bonds have seen better performance since March, Reuters says.

Egypt now has higher short-term yield and is looking at a potential rally in the EGP, making “the carry trade the most lucrative in Egypt at the moment,” Goldman Sachs Middle East and North Africa Senior Economic Farouk Soussa tells the newswire. This has been driving “significant flows” back into the country, he says.

On the downside, analysts suggest that the rally is at risk of “flatlining” due to geopolitical concerns over a potential conflict in Libya and stalled negotiations on the Grand Ethiopian Renaissance Dam threatening Egypt’s water security, as well as a labored recovery of the tourism industry, Reuters says. The “yield bonanza” is not necessarily translating into improved economic performance and “masks” weak fundamentals, says Arqaam Capital executive fixed income director Zeina Rizk.

Fitch Ratings affirmed yesterday Egypt’s long-term foreign-currency issuer default rating at ‘B+’ with a ‘stable’ outlook. The ratings agency said that Egypt’s “recent track record of fiscal and economic reforms, policy commitment to furthering the reform program and ready availability of fiscal and external financing in the face of the covid-19 pandemic” supported the rating affirmation. On the flipside, Egypt’s rating is weighed down by the country’s fiscal deficit, which is “still large,” as well as high general government debt / GDP and weak governance scores as measured by the World Bank governance indicators.” These are broadly the same reasons the ratings agency gave back in November, when it last affirmed the same rating and outlook.

Also weighing on our rating: Public finances, including our debt-to-GDP and debt-to-revenue levels, which Fitch says are “significantly higher” than the “B” median of 65%. The upside of Egypt’s debt is that half of it is from multilateral institutions the country has warm relations with, and we have “considerable domestic financing flexibility” thanks to a robust banking sector. Fitch also cites “weak governance” and political / security risks as other factors weighing against Egypt.

Egypt’s GDP is expected to grow 2.5% in FY2020-2021, which is “well below” the average 5.5% growth Egypt recorded in FY2017-2018 and FY2018-2019. However, the ratings agency expects growth to bounce back to 5.5% in the next fiscal year and average at a little above 5% over the medium term. The accelerated growth will come on the back of a recovery in the tourism industry, as well as an expansion in the energy and manufacturing industries, underpinned by further reforms to improve the business climate. Inflation is expected to hover at an average of 6% this calendar year and 7.5% in 2021.

Fitch sees Egypt’s budget deficit widening to 9.5% of GDP in FY2020-2021, from 8.8% in the fiscal year that ended on 30 June, and sees a “small budget sector primary deficit of 0.4% of GDP.” This is a “more cautious” forecast than that contained in the state budget, which targets a 0.5% primary surplus — revised downward from an initial 2.0% primary surplus target. The ratings agency also sees this indicator recovering in FY2021-2022, when it expects the primary surplus to “reemerge” and the budget deficit to narrow again to 8.8%.

PE giant Actis to make new renewables acquisition this year, likes fintech, healthcare: Leading emerging-market private equity firm Actis expects to close a new investment in Egypt’s renewables sector by the end of the year, Sherif El Kholy, head of the firm’s Middle East & North Africa business, told Hapi Journal without revealing the project or the size of the investment. The firm, which last year invested in a 250 MW wind farm in the Gulf of Suez through its renewable energy company Lekela, is interested in getting involved in “all new projects” in the sector and is currently considering several prospects, he said.

Potential acquisitions in the fintech and healthcare sectors are also on Actis’ radar, El Kholy said, noting that both have proven themselves to be solid defensive sectors in the face of the pandemic. The firm has investments in both sectors, through its 7.2% stake in Egyptian e-payments firm Fawry and its ownership of Cleopatra Hospitals and Al Borg Laboratories, and is focused on helping these companies expand in their respective spaces, he said.

Actis’ bid for Siemens’ plant moving forward: El Kholy gave little updates on its bid to acquire a stake in one of the three, 4.8-GW Siemens-built combined-cycle power plants that the Sovereign Fund of Egypt is marketing to private investors. He noted only that officials have been working with the anointed financial advisor on the tender process and that Actis has been actively responding to improve its chances. The firm submitted the bid late last year, and is competing with France’s Engie, China Datang Overseas, Blackstone Group’s Zarou, and Edra Holdings. Electricity Ministry sources said previously that Zarou had submitted the best financial offer, making it the top contender.

Plans to invest alongside SFE underway: Alongside its bid to acquire the plants, Actis is also planning to invest with the Sovereign Fund of Egypt (SFE) in several key sectors including infrastructure, energy, and healthcare under an MoU signed with the fund earlier this year, El Kholy said. The plans were said then to involve channelling some GBP 3 bn worth of investments into Egypt over the next three years.

M&A WATCH- Cleopatra eyes majority stake in fertility-specialist Bedaya Hospital: Cleopatra Hospital Group is in late-stage negotiations to buy a 60% stake in Bedaya Hospital, which specializes in fertility and IVF treatments, the local press reports, citing unnamed sources. The sources did not provide details on the value of the transaction, but said the two sides have reached an agreement on the financials. Bedaya Hospital owner Ismail Aboul Fotouh will retain his holding of the remaining 40% stake and will continue to manage the hospital once the transaction is completed.

M&A WATCH- Beltone Financial is waiting on US regulatory approval to complete the sale of its 60% stake in New York-based brokerage Auerbach Grayson, according to a bourse filing (pdf). Beltone signed the stake over to an unnamed group of investors in April and expected the regulatory approvals to be completed within three months. The filing mentioned that the postponement is due to “current circumstances,” which we’re taking as a reference to covid-19.

In other company news, Beltone expects to launch its consumer finance arm within a “few weeks,” Shehab Marzban, the newly appointed CEO of Beltone’s VC arm, told Al Mal. The new company, named Bel Cash, is expected to be up and running as soon as Beltone completes a few remaining steps and the Financial Regulatory Authority gives the all-clear. Beltone submitted a request to the authority to obtain the license earlier this week, it said in a regulatory filing (pdf).

DEMERGER WATCH- OIH board signs off on demerger to delineate between its investments in financial services + other industries: Orascom Investment Holding (OIH) is planning to implement a “horizontal demerger” as part of its plans to restructure the company, according to a bourse disclosure (pdf). The plan, already approved by the board of directors, will split OIH into two companies — OIH and Orascom Financial Holding (OFH). Following the demerger, OIH will remain listed on the EGX and will retain all of its investments in its nine subsidiaries and sister companies apart from those in financial services, which will be transferred to OFH. These investments include stakes in Beltone Financial, Sarwa Capital, and “the current account due to Orascom Investment Holding from Victoire Investment.” The demerger is meant to more clearly delineate between the company’s operations in the financial services industry and other sectors to allow shareholders with a specific interest in one industry to target their investments.

LEGISLATION WATCH- Real estate developers oppose VAT on non-residential properties: Real estate developers have pushed back on proposed legislative amendments that would impose a 14% value-added tax (VAT) on the sale and rental of non-residential properties, the local press reports. The Federation of Egyptian Industries’ real estate division is currently petitioning the Finance Ministry to cancel the planned levy, which they say will raise costs for businesses already struggling to cope with muted consumer demand caused by the coronavirus pandemic.

Government sources say the change will iron out inconsistencies in the VAT law, which impose the tax on some non-residential properties but not others. The law currently subjects stores and office spaces rented within malls to VAT, but grants exemptions to non-residential properties outside of malls.

Background: The cabinet’s economic group last month signed off on proposed changes to the 2016 VAT Tax Act that would amend the list of goods and services on which VAT is remitted. The amendments would subject most commercial advertising to the tax but scrap the 20% stamp tax on ads, and allow tourists to claim VAT rebates. Special economic zones would enjoy the same VAT treatment as freezones, and the Health Ministry would be given the authority to issue decrees exempting pharma components from the tax.

Egypt’s Sumed oil pipeline is feeling the effects of the global demand slump: Egypt’s Sumed pipeline has recently been operating at only a quarter of its capacity due to a historic slump in global demand for oil and the subsequent production cuts that were introduced in May, data compiled by Bloomberg shows. Flows through the pipeline, which is designed to transport up to 2.5 mn barrels of crude per day to the Mediterranean from the Red Sea, have slowed as European countries saw consumption drop by as much as 90%, prompting oil producers to cut output by 10%. As a result, crude flows into Sumed fell almost 50% to 700k bbl/d in June and July from nearly 1.3 mn in April.

Signs of recovery in July: Lifting from the pipeline reached a nadir in June, but since then there has been a slight recovery as a pick up in demand from European refineries draws more crude. Despite this, flows entering the pipeline have failed to rebound, hurt most of all by Saudi Arabia’s continued production cuts. Opec+ is due to start easing the cuts in August, but as most of the new supply is expected to be used domestically, Sumed and other pipelines around the world may have to wait longer before flows pick up.

Why Sumed? Giant crude tankers carrying shipments that mostly come from Saudi Arabia are too big to navigate through the Suez Canal fully loaded to reach their destinations in Europe and North America. Offloading some of their cargo into one end of the pipeline in Ain Sokhna allows the carriers to cross the Suez Canal (without sitting too deep in the water) and then refill in Sidi Kerir. They can also fully offload their cargo to westbound tankers stationed on the other side and move to their next consignment.

LEGISLATION WATCH- The Financial Regulatory Authority (FRA) has finished the first draft of a law that will govern the fintech space, and expects to draw up a final version within one month, Abdelhamid Ibrahim, FRA board member and head of the committee drafting the law, tells Al Mal. The bill would regulate the broad use of financial technology to deliver non-bank financial services, covering areas including crowdfunding, robo-advisory, nano-finance, and insurtech.

The authority is looking to refine the technical aspects of the legislation with the help of an international agency, Ibrahim said, without naming the institution. The European Bank for Reconstruction & Development is a likely candidate, given FRA boss Mohamed Omran said in January that the multilateral lender would work with the regulator on the legislation.

Meanwhile, seven microfinance companies have applied to the FRA for nano lending licenses. The market watchdog gave the greenlight for micro lenders to offer nano loans in November of last year. So far, only one micro lender has been granted a license: Pharos-backed application Kashat, which was launched back in February.

MOVES- Mona Nasser has been appointed as assistant to the finance minister, according to a ministry statement. Nasser will continue her role leading the digital one-stop shop project for trade and customs procedures. She was previously a financial observer for the Social Health Insurance Authority and ِAin Shams University, as well as serving as the executive director of the governmental insurance fund for custodians of charges.