El Garhy: No backing away from subsidy reform, IMF visiting in April, stamp tax is coming. Fresh off the successful float of the EGP and the closing of a USD 4 bn eurobond, the finance minister and his team are now in the trenches on the 2017-18 budget — and looking at how to push the reform program forward. El Garhy spoke on Sunday at an American Chamber of Commerce in Egypt luncheon headlined “Egypt’s Financial Reform Agenda: The Way Forward.” The minister said Egypt has “passed through a very difficult phase that can be described as a tsunami of adverse circumstances.” Today, the float of the national currency has “resolved something like more than 60% of the issues that we face … leaving the market to determine the right level for the currency.” What remains, he says, is “what the government can do in terms of really paving the way for the private sector to operate more, because we need the entire economy to move at full speed.” El Garhy also noted the government is targeting reducing the budget deficit to a mid-single-digit percentage of GDP by 2021, telling attendees that this was a function of “long-term sustainable growth.” He expects GDP growth rates to be hitting 6% by 2021 and inflation to fall to 7-8% by that time.

Our key takeaways from the luncheon include:

• There’s no backing away on subsidy reform: Subsidies have to be designed differently to reach the neediest, El Garhy says. “We don’t want to live with energy subsidies that killed this country from 2002-2003 through 2014,” but the timing for lifting fuel subsidies has not been set yet.
• Egypt is fortunate oil prices have fallen from their peak north of USD 100 per barrel, the minister noted. That said: The effective devaluation of the EGP and a rally in oil prices to the USD 50s sees the ministry working now to figure out what to price oil at in next year’s budget.
• The stamp duty on stock market transactions has to be finalized before May and suggested the EGX’s doldrums in recent days has a lot more to do with the strengthening of the EGP against the greenback than it does with traders bucking the prospect of a stamp tax on buyers and sellers.
• We also spoke with Deputy Finance Minister Amr El Monayer, who said a 0.2% rate for the stamp tax is only one scenario the Ministry is considering, not necessarily the final rate that will be in the draft legislation. El Monayer says it’s not likely the stamp tax will be shelved.
• The IMF delegation visit originally set for March has indeed been postponed, as the Finance Ministry needs to finish the budget for FY2017-18 by 31 March. “So we will do it sometime in April. That will happen in line with the agenda before and after the Spring Meetings” of the IMF and World Bank, which are due to happen 21-23 April in Washington, El Garhy said.
• There is no fixed date for the disbursement of the USD 1.25 bn second tranche of the IMF loan to Egypt, Deputy Finance Minister Ahmed Kouchouk explained to Al Mal. The agreement with the IMF only sets a “proposed schedule of purchases.” Kouchouk adds that people are confusing the regular semiannual visit by the Fund’s delegation to conduct its mandated reviews and the actual disbursement of the funds.
• El Garhy says the IMF loan document, and an Arabic translation of it, were sent to the House and will be discussed in a plenary session on 7 March.

El Garhy also discussed about the successful eurobond issuance, saying “when we started the eurobond roadshow, we were thinking of [raising] USD 2.5 bn. Then we started receiving the order book. We were at a level USD 7-8 bn before the US market opened, and before 6 a.m. LA time we reached over USD 14 bn … We eventually decided to take USD 4 bn and we’ve tightened the price. Even more importantly, the secondary market performance is very strong. We’ve seen a rally.” He also added that foreign holdings of local T-bills jumped to EGP 53 bn within three weeks following the eurobond issuance as well.

The one clear thing on economic policy in Egypt now: “There is determination, resolve, and very strong attention from the political leadership on economic reform, and very clear desire to move the agenda forward,” El Garhy said.

Profit repatriation window opens a bit wider for foreign companies in Egypt: The Central Bank of Egypt has amended regulations on how banks can use their excess foreign currency balances, Al Mal reports. Banks can now use 50% of their excess currency to finance non-essential demand, 25% can be reinjected into the interbank market, and the remaining 25% can now be used to support the repatriation of profits by foreign companies. Prior to the directive, the central bank was allowing banks to use 50% of their excess currency to finance non-essential imports and inject the other half into the interbank market. A banker told Al Mal that banks never blocked profit repatriation, but the new directive allows for a larger percentage of a bank’s funds to be used for that purpose.

Tax Authority suggests 0.175% is an ideal stamp tax on the EGX: Tax Authority head Emad Samy says his agency’s studies suggest that a 0.175% stamp tax on the buy- and sell-side of stock market transactions would not hurt the EGX and should reel in an additional EGP 1-1.5 bn in annual revenues, according to Al Borsa. Samy said that he sent the proposal to top ministry officials to review before presenting it to the Ismail cabinet for approval.

Brokers still aren’t warming to the tax, despite it being likely to come in lower than the initial suggestion of a 0.2-0.4% levy. The Egyptian Capital Market Association, an industry lobby group, says it will is advising the Finance Ministry that anything higher than the 0.1% rate that was temporarily imposed in 2013 would reflect negatively on the EGX, the newspaper adds. Some are on the fence, with HC Securities’ Shawkat El Maraghy noting that a 0.175% stamp tax duty on transactions might be marginal for foreign investors and institutions, but would be an issue for the retail investors who account for the majority of the EGX’s turnover. Egyptian Financial Supervisory Authority head Sherif Samy had previously argued against the tax for the same reason.

The House of Representatives’ Economic Committee gave a preliminary nod to theInvestment Act on Monday during its first session debating the bill, Al Mal reports. Committee members expect to finalize their discussions in two weeks’ time before the bill comes up for a vote by the House as a whole by the end of March. The committee plans to bring business and investor associations into the discussions starting next week and also wants to consult the Finance Ministry, the Central Bank of Egypt, and the Egyptian Financial Supervisory Authority, Al Borsa says. Investment and International Cooperation Minister Sahar Nasr is also expected to join the meetings and had promised representatives that the executive regulations for the act would be ready in time for the vote.

Shockingly, European car makers and local importers of their wares are not in love with the so-called “automotive directive,” which would give tax breaks to local manufacturers and protect them against unfair advantages now enjoyed by EU, Turkish and Moroccan imports. The automotive directive will not only harm European exports to Egypt but also violates the terms of free trade agreements with the EU, the companies complained in a letter to the European Commission picked up by Al Borsa.

Trying to keep the Masry gravy train rolling, EU-based manufacturers argue that the bill offers tax breaks and incentives to local manufacturers that could prove harmful to exporters in the long run. Then came the not-so-veiled threat: The directive — which grants incentives along the value chain to encourage local manufacturing — will affect future European investments in Egypt’s auto industry. Members of the Federation of Egyptian Industries said it was unlikely that the government would take the European concerns into account, maintaining that the directive does not violate trade agreements. The bill is presently before the House Industry Committee.

Colliers International’s latest report on Egypt sees good things ahead for Egypt’shospitality sector. Resort towns of Sharm El Sheikh and Hurghada are both expected to see an upswing in occupancy in 2017 as Colliers anticipates travel bans by the UK and Russia will be lifted this year. The report sees occupancy levels reaching 41% in Sharm in FY 2017, up 22% year-on-year, while Hurghada’s is set to grow 33% to 45% this year. Cairo occupancy will also rise in 2017 to 64%, an increase of 7%, as a new airport in Sixth of October and new developments come online in the west of the city.

Paper, filing, and binding company Mintra is establishing a new USD 40 mn furniture factory by the end of the year, CEO Hany Cassis told Al Borsa. The company already secured a number of supply agreements from the new factory with US-based companies, including Amazon. The new plant is part of Mintra’s bid to expand beyond its traditional market, he said, noting that Mintra wants to double its plastic production to 20,000 tonnes annually in two years’ time.

Our breeding skills have beat out the Chinese. Internal migration might have something to do with it too. Either way: Cairo is expected to be the fastest growing city in the world by population, according to Euromonitor International's Global Economies and Consumers in 2017 report (pdf). Cairo’s population is expected to grow by another 500K people this year alone. The capital city’s population reached 22.9 mn as of June 2016, according to CAPMAS. The population growth rate has beat out Shanghai, which is expected to see 400K new inhabitants this year. Alex should see another 100K people in 2017, according to the report.

** Earnings watch: ‘Tis the season, though we note that many companies plan to take advantage of the extension until mid-April to file 4Q/FY2016 results. Among those reporting earnings yesterday:

• Global Telecom Holding announced that its net profit attributable to shareholders increased to USD 7.3 mn in 4Q2016 from a net loss of USD 12 mn a year earlier. This came as revenues grew y-o-y to USD 768 mn from USD 710 mn. Net profit attributable to shareholders for 2016 came at USD 61 mn, up from a net a loss of USD 142.7 mn in 2015.
• National Bank of Kuwait-Egypt recorded a net profit of EGP 848.9 mn in 2016, up from EGP 575.6 mn in 2015. The bank says the EGP flotation has had a positive impact of EGP 37.7 mn on its financials. NBK’s board also approved a EGP 1.5 bn capital increase to EGP 2.5 bn, according to a regulatory filing.
• Al Baraka Bank Egypt registered a net profit of EGP 512.5 mn in 2016 compared to EGP 265.1 mn last year.

Development Partners International (DPI), the African private equity specialist, has signed onto the United Nations Principles for Responsible Investment (UNPRI), the firm said in an emailed statement yesterday. “The UNPRI association works to understand the investment implications of environmental, social and governance factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.” DPI says this “reflects the firm’s continued dedication to responsible investing and its drive to support its portfolio companies in making a positive, long-lasting impact on the organisation, societies and economies they operate in.” DPI is a USD 1.1 bn Africa-focused private equity firm; it acquired one third of Egyptian electronics retailer B-Tech’s in July 2016 for USD 35 mn.