Finance ministry is closing a tax loophole that gives a break to some state institutions and insurers that invest in state debt: The state treasury expects to net as much as EGP 34 bn in additional income from a bill currently making its way through the House of Representatives that would, if passed, tax previously-exempt institutions on returns from their investments in government treasury bonds and bills, a Tax Authority official who contributed to the bill’s drafting told Enterprise. The bill would cover specific state institutions as well as government-owned bodies such as the National Investment Bank and the Nasser Social Bank. It would also include private insurance firms and some civil society groups, the source said.

Leveling the playing field: These entities had previously not been taxed on interest income and capital gains they made on investments (or trading of) government bonds and bills — onshore investors in those instruments face taxes under the 2005 Income Tax Act.

One institution that’s still getting some special treatment: The National Organization for Social Insurance, which will only see 35% of the gains it makes from its investments in government debt be subject to income tax; the share of taxable income could rise every three years under the bill as it currently stands, according to Al Mal.

Why did the loophole exist in the first place? The source explained that the institutions that had been benefitting from the loophole have “social missions”: The loophole was an incentive for them to make better returns by investing in higher-yield state paper rather than leaving surplus liquidity parked in bank accounts.

Don’t expect the volume of investment in government debt to go down when the loophole closes given how attractive yields are today, the source argues: Institutions losing access to the loophole will still be able to generate returns as much as 400 bps higher than they would get by parking their liquidity with banks.

No foreign investors will be impacted by this change as only a handful of domestic investors presently have access to the loophole, Finance Minister Mohamed Maait said.

Keep this all in context: This is the second time the state has looked to recoup of a piece of the pie that investors make from investing in state debt instruments. A law passed in 2019 (executive regulations here) effectively hiked the tax rate on interest income banks and corporations make from investments in government bonds and bills.

Beltone Financial Holding will set up three new non-banking financial companies in September in a bid to return to profitability, CEO Ibrahim Karam said in an interview with Reuters on Tuesday. Beltone will set up a financial leasing company targeting a first-year portfolio of EGP 600 mn, a consumer finance company with a first-year portfolio of EGP 400 mn, and a venture capital subsidiary, he said. The investment bank has already locked down the licenses for these subsidiaries. Beltone had said in January it expects non-banking financial services to contribute 30-40% of its revenue over the next three years. “The new companies, along with strengthening existing activities, will help us return to profit in 2021,” Karam said.

Beltone is still waiting on US regulators to approve the sale of its 60% stake in New York-based brokerage Auerbach Grayson. “We are waiting for the regulatory authorities there to approve it, but we have concluded an agreement with a buyer and signed contracts,” Karam told the newswire without disclosing the identity of the buyers, adding only that they were not a GCC-based institution. The investment bank announced in April that it had completed the sale to a group of investors, pending regulatory approval.

Beltone has been on a loss-making streak that is on its way to last three years, last reporting a profit in 1Q2018. The company announced improved figures in 2Q2020, reporting a EGP 12 mn loss from the EGP 34 mn loss made in 2019.

INVESTMENT WATCH- Egypt, Vestas ink EGP 4.3 bn Gulf of Suez wind power plant agreement: The New and Renewable Energy Authority (NREA) signed yesterday a EGP 4.3 bn agreement with a consortium led by Denmark’s Vestas to construct a 250 MW wind farm in the Gulf of Suez, according to a cabinet statement. The consortium also includes unnamed Italian, French, and Chilean companies. The plant, which is expected to take 35 months to complete, will have an annual energy output of 840 GW once fully operational. The project will be jointly financed by the French Development Agency, the EU, the European Investment Bank, and the German Development Bank.

The NREA had awarded Vestas the tender earlier this year after both Siemens Gamesa and Germany’s Senvion retracted their bids late in 2019.

INVESTMENT WATCH- CIRA to build international school on 2.8 feddans in New Sohag: Cairo for Investment and Real Estate Development (CIRA) is earmarking 2.8 feddans in New Sohag to establish an international school complex, it said in an EGX disclosure (pdf) yesterday. We picked up a story from the press yesterday citing a source who incorrectly said the leading private sector education outfit had purchased a five-feddan plot of land in the area.

M&A WATCH- MNHD receives EGP 30 mn offer for its 98.4% stake in Nasr Utilities and Installations: Madinet Nasr for Housing and Development (MNHD) has received an offer from a unnamed strategic investor to purchase its 98.4% stake in construction company Nasr Utilities and Installations (NUI) for EGP 30 mn, it said in an EGX disclosure (pdf) yesterday. MNHD will likely come to a decision on the sale at its next board meeting on 23 August.

MNHD may also be exiting El Nasr Civil Works: News of the offer comes a week after MNHD agreed to allow Odin Investments to begin due diligence on El Nasr Civil Works ahead of a possible acquisition of the real estate developer’s 52.5% stake in the company.

M&A WATCH- A group of investors in state-owned Nile Cotton Ginning want to buy out the company’s workers’ union, offering EGP 183 mn for the entire 7.06% stake the union holds in the company, union head Khairy Marzouk tells Al Mal. The Financial Regulatory Authority has signed off on the potential sale, decreeing that the union would be treated as an individual investor and has the same ownership rights. The offer is up for discussion at the company’s next general assembly meet on 24 August.

REGULATION WATCH- Shares in companies that voluntarily delist from the EGX can still be traded for up to three months after the company announces its plans to leave the exchange, according to new regulations the Financial Regulatory Authority (FRA) issued yesterday. The decision is meant to give shareholders some measure of maneuverability during the delisting process.

Companies undergoing a mandatory delisting will be required to buy back their freefloating shares at a fair market value determined by an independent financial advisor. Shareholders who hold more than 20% of a company’s stock will not be permitted to trade in shares that face mandatory or voluntary delisting without giving the market regulator a heads up.

REGULATION WATCH- Consumers can now take out debt to finance sporting club memberships, insurance policies: The Financial Regulatory Authority (FRA) has authorized consumer finance companies to add the payment of insurance premiums and club membership fees and annual dues to their lists of products, according to a statement. The first part of the decision aims to stimulate the insurance market through consumer finance services, FRA boss Mohamed Omran said.

STARTUP WATCH- Fawry is officially Egypt’s first unicorn: EGX-listed e-payments firm Fawry became the first Egyptian tech company to hit a market cap of USD 1 bn on Monday after its share price reached intraday highs of EGP 22.69, former managing director Mohamed Okasha announced in a LinkedIn post. Fawry’s share price has increased by more than 300% since it debuted on theEGX last year, a rise that has accelerated in recent months as the use of its payment services skyrocketed during the lockdown. The company’s shares rose to EGP 23.74 at the close of play yesterday, giving it a market cap of USD 1.05 bn. The company’s success “will help the whole industry and will open more doors for fintechs to receive funds and make partial exits,” Okasha told Waya.

Gamers can now pay online without a credit card thanks to Paymob: Online payment processor Paymob has partnered with German company Holyo to allow gamers to pay international gaming merchants — including PlayStation, Xbox, or PUBG Mobile — online without a credit card, according to a press release (pdf). The MENA region is home to the world's fastest growing online gaming community, with 25% y-o-y growth, the release notes.

LEGISLATION WATCH- House gives early nod to draft law to regulate, encourage investment in waste management: The House of Representatives approved in principle yesterday a draft law to set up an authority to oversee and monitor waste management in Egypt, Al Mal reports. The authority would be in charge of monitoring the industry and encouraging its growth and would outline a national strategy for waste management as well as the regulations and guidelines for all contracts. The bill also includes investment incentives as well as other measures to encourage garbage collectors, small companies, private contractors, and recycling centers to join the formal economy. The legislation applies to all types of waste, including agricultural and industrial waste, as well as dangerous waste, we noted last year.

Why is this important? Private players in the waste management industry have been calling for the government to step in with incentives that would make the industry viable. This has the potential to revive a decades-old bid by the government to manage waste properly. But hurdles remain due to inherent structural problems, including the lack of a nationwide collection infrastructure and a market that is no longer conducive to the byproducts of recycling.

We recently took a deep dive into what makes Egypt’s waste management efforts challenging, asking whether a waste regulatory authority is really what’s needed.

Meanwhile: Final nod to amendments to protect the identity of harassment victims. Amendments to the country’s criminal code that ban the disclosure of the identities of [redacted] harassment and assault received final approval from the House yesterday. The changes, which will take effect as soon as President Abdel Fattah El Sisi signs them into law, would subject anyone who identifies victims to up to six months in prison, allowing the personal data of victims to only be known to their lawyers. Reuters took note of the story.

The House also signed off on 11 presidential decrees ratifying recent loans and agreements during a plenary session yesterday. The agreements include a USD 510 mn loan from First Abu Dhabi Bank to the government, a USD 50 mn emergency loan from the World Bank’s International Development Association, and a KWD 1 mn facility from the Arab Fund for Economic and Social Development to help fight covid-19.

Other bills that received final approval:

• A law to criminalize bullying — subjecting those who disparage another’s race, gender, religion, body, social status, or health or mental condition to up to six months of prison and fines of EGP 10-30k;
• A law to authorize the finance minister to guarantee a EGP 1 bn long-term loan to the Egyptian Holding Company for Airport and Air Navigation;
• A bill that divides Egypt’s electoral districts into 143 single-member constituencies and four in which MPs are elected through electoral lists;
• Amendments to the Civil and Commercial Judicial Procedures Law to expand the role of district courts to include lawsuits with lower claim values; and
• Amendments to the law regulating the National Authority For Tunnels to improve the authority’s performance.

ALSO AT THE HOUSE- An MP wants to question the supply minister over smaller loaves of subsidized bread. Rep. Abdel Hamid Kamal has tabled a request to summon Supply Minister Aly El Moselhy to a hearing into why his ministry is cutting the size of a loaf of subsidized bread by nearly a quarter, Al Mal reports. The decision to shrink the size of a loaf of bread comes despite recent CAPMAS data showing the country’s poverty rate edging up nearly 5%, argues Kamal.

Permits for building of Dabaa reactors coming in 2H2021: The Nuclear and Radiological Regulatory Authority (ENRRA) expects to issue the construction permit for the reactors of the Dabaa nuclear power plant during the second half of 2021, Nuclear Power Plants (NPPA) Authority boss Amgad El Wekeel told Youm7. Rosatom’s Atomstroyexport (ASE), the project’s main contractor, was previously set to break ground on the reactors around the second half of this year, with the first 1.2 GW nuclear reactor slated to begin operations in 2026. The delay in issuing the permit, which the NPPA needs to acquire from ENRRA, won’t affect other works at the site such as landscaping and setting up support buildings, El Wekeel said.

EARNINGS WATCH- EFG Hermes saw 8% y-o-y net profit growth in 2Q2020: EFG Hermes saw net profits grow to EGP 328 mn in 2Q2020, according to a company’s earnings release (pdf) as revenues rose 26% y-o-y to EGP 1.3 bn in 2Q2020. “Top line performance was primarily driven by revenue growth at the Group’s investment bank arm,” the company said, noting revenues there had risen 40% over the same period last year to EGP 1.0 billion as regional capital markets recovered and a “subsequent revaluation of seed capital and investments.” Group CEO Karim Awad said EFG has “shown resilience in the second quarter of 2020 as we continued to navigate a challenging external environment as a result of the covid-19 pandemic. EFG Hermes is ideally positioned to capture new opportunities when global markets and economic activity picks up.”

MOVES- EFG Hermes-owned microfinance player Tanmeyah has hired Ahmed Abed (Linkedin) as head of the information sector as well as Hatem Abouelenein (Linkedin) as human resources director, according to Al Mal. Abed was formerly the public sector account manager at Cisco Qatar while Abouelenein was the CIB’s head of compensation and benefits.