A hiccup on the road to economic recovery? Business conditions in Egypt’s non-oil private sector deteriorated at a faster pace in March compared to February, according to the Emirates NBD PMI compiled by Markit. The reading fell to 45.9 in March from 46.7 a month earlier, still below 50 and deep in contraction territory. “Sharper falls in output and new orders were recorded, while firms continued to reduce workforce numbers and were reluctant to engage in purchasing activity. On the price front, substantial cost pressures, stemming from the weak exchange rate relative to the [USD], continued to translate into higher selling prices, though rates of inflation softened.”

Tim Fox, head of research and chief economist at Emirates NBD, says “although the economy's rebalancing process is proceeding as one would expect — evident through a narrowing in the trade deficit and higher FX reserves — it will take some time before this translates into stronger growth momentum. One silver lining from the report is that inflationary pressures are continuing to ease.” The report notes “anecdotal evidence” highlighting “weak underlying demand, and unstable economic conditions amid high inflationary pressures and currency weakness.”

Other signs of daylight: The pace of contraction in buying levels easing to their weakest in eight months despite staying sharp, backlogs of work decreased for the first time in one-and-a-half years, and the rate of job losses easing to its weakest in over a year.

…The PMI reading suggests the “economy hasn’t yet turned the corner despite painful austerity measures and currency reform,” Tarek El Tablawy writes in Bloomberg. He says the news contrasted President Abdel Fattah El Sisi’s “upbeat” visit to the US.

Fitch is worried about Egyptian banks’ capitalization: Some Egyptian banks will struggle to meet minimum regulatory capital requirements following the EGP float given their high exposure to foreign currency loans, Fitch Ratings says. It also believes that the EGP devaluation will result in a “modest deterioration” in asset quality, with debt restructuring of loans for smaller corporates already taking place. Fitch expects that, in the event of capital shortfalls at public-sector banks, the Egyptian authorities “would look to provide support,” possibly through subordinated debt. “However, the government's ability to support banks is severely constrained by its weak credit profile and financial flexibility… We expect private-sector banks would cut dividends to bolster capital if needed.” Overall, Fitch believes “the floating of the pound will increase the flow of foreign direct investments and help to ease the FC shortage in the Egyptian banking system. However, the sector's FC loans/deposits ratio is weak, in our opinion, given the operating environment, with a worsening trend in recent years.”

There is strong demand for emerging market credit with 1Q2017 primary issuance hitting new record high, according to BNP Paribas’ Africa Weekly DCM Market Update. The report shows that Egyptian credit spreads remained resilient on strong secondary trading activity. Newly issued notes tightened on a US Treasury rally, which drove Egyptian yields to trade at record lows, dropping by c.1% since issuance with the yields on notes maturing in 2022 at 5.1% those maturing in 2027 at 6.6%.

President Abdel Fattah El Sisi had yet another busy day of meetings on the fourth day of his official visit to DC, which included a sit-down with Jordan’s King Abdullah II. The two leaders reaffirmed their commitment to the Palestinian-Israeli peace process and the resolution of other political conflicts in the region, an emailed statement said.

Peace between the Israelis and Palestinians also topped the agenda when El Sisi met with US Secretary of State Rex Tillerson, setting off talk in the Araband Israeli press that the two were chewing over plans for a Middle East peace summit. El Sisi also met with White House National Security Advisor Lt. Gen. HR McMaster to talk cooperation on strategic and security issues, particularly counter-terrorism. The NSC still doesn’t seem to have a website and the State Department hasn’t issued a press release (and doesn’t appear to have done a press briefing since 23 March.)

At Congress yesterday, El Sisi also met with US House Speaker Paul Ryan as well as House Foreign Affairs Committee Chair Congressman Ed Royce and the Senate Foreign Relations Committee Chair Senator Bob Corker, according to an Ittihadiya statement picked up by Al Mal. The president reassured the officials that more legislative reforms meant to improve the investment climate were underway.

What Ryan said: “After visiting with President al-Sisi in Cairo last year, I enjoyed the opportunity to host him at the Capitol this afternoon. The strategic partnership between the United States and Egypt is essential to securing regional stability and defeating terrorism. The House is committed to building on this constructive cooperation with our Egyptian counterparts in the months and years to come.” The brief statement from the Speaker’s office included a note that other participants in the meeting included House Majority Leader Kevin McCarthy (R-CA), House Democratic Leader Nancy Pelosi (D-CA), House Democratic Whip Steny Hoyer (D-MD)

Speaking of investors: A number of American companies have reportedly expressed interest in expanding their investments in Egypt during their meeting with El Sisi on Monday, Al Ahram says. El Sisi had met with representatives from major US corporations as well as the CEO of the American Chambers of Commerce Thomas Donohue. Meanwhile, a White House readout notes that “Both countries’ economies stand to benefit from further engagement in the years ahead,” especially as Egypt pushes forward towards stability with its “ambitious homegrown economic reform plan, backed by a USD 12 bn agreement with the IMF.”

Investment is more important than foreign aid, Investment and International Cooperation Minister Sahar Nasr suggested in a brief chat with Fox News (watch, runtime: 4:49) about the future of US-Egypt relations after the trip. She had announced earlier in the day that a delegation of US investors will visit Egypt “soon,” to look at investment opportunities in East Port Said, New Alamein, the New Administrative Capital, and the Golden Triangle in Upper Egypt. Nasr was careful not to let any details slip on questions of military and economic aid. Pressed on human rights, Nasr maintained that even though “sometimes there are misperceptions about that issue,” Egypt remains committed to progress on that front.

Shipping lines that pulled out of Egypt added no value to the economy –PM: The withdrawal of five major shipping lines from the East Port Said Port is not a grave issue or loss for Egypt in terms of investment, Prime Minister Sherif Ismail said yesterday. According to Ismail, the shipping lines were initially attracted to Egypt due to the wide range of incentives offered to them, including free land, low fuel costs, and tax breaks, but did not provide the country with added value significant. The PM stressed that the government is more interested in investments that add value to Egypt’s economy, pointing to the hydrocarbon industry (and Zohr in particular) as well as manufacturing. Ismail also said that Egypt’s foreign debt is within a safe range and stressed the country is committed to its debt service schedule.

Is the House Economic Committee backtracking on its (nonsensical in the first instance) decision to split the proposed Investment Act in two? The House of Representatives’ Economic Committee decided against splitting the Investment Act into two separate bills, MP Mohamed Saad Badrawy tells Al Borsa. The committee concluded its review of the bill on Tuesday, Al Shorouk says, and approved 40 out of 99 total articles (down from 114 previously). Discussions over pending articles will continue until early next week, after which the bill will go to a plenary session for a vote, according to Economic Committee Chair Amr Ghallab. Parliamentary Affairs Minister Amr Marwan urged the Economic Committee on Tuesday to speed up the process. Among the issues currently stirring the pot are incentives for foreign investors. Because God forbid a nation entirely reliant on imports and tourism actually do something to also become more attractive to global capital.

Consumers in the lowest consumption-based price tier may be exempt from electricity price hikes: A committee from the Egyptian Electric Utility and Consumer Protection Agency (Egyptera) has prepared scenarios for new electricity prices, including the possibility of exempting those who consume less than 300 kWh from the July hikes, a source from the agency tells Al Shorouk. A source from the Electricity Ministry said all scenarios will be considered, but lower consumption tiers will likely see a 10-20% increase in prices. As we noted last month, a ministry source had told the newspaper that tariffs for the lowest three residential consumption tiers will be hiked by 20-30%. The proposal will be sent to Cabinet for approval by the end of the month. The final decision will be announced around mid-July, after Cabinet signs off on the hikes, Electricity Minister Mohamed Shaker told the press yesterday.

We love the smell of fees in the morning: McKinsey & Company has been tapped to advise the government on the restructuring of the EGPC and its subsidiaries, beating out Ernst & Young, Navigant, and a PwC and Logic Consultancy partnership, sources told Al Borsa on Tuesday. It will take a year to put together the restructuring plan, which will be funded by the World Bank and Petroleum Ministry, the sources added. The plan will include an updated strategy for fuel subsidies, transparency and accountability procedures, and debt repayment scheduling.

INVESTMENT WATCH- MM Group, whose IPO is due to wrap next week as the company’s shares begin trading on the EGX, plans to invest EGP 1 bn over the next 18 months to expand its e-commerce, microfinance and consumer operations, said Chairman Khaled Mahmoud. He expects FY2017 net profits to jump 80% to more than EGP 400 mn from EGP 222 mn last year. He promised that 50% of profits would be returned to investors each year, Reuters reports.

Manfoods, the Egyptian franchisee of fast-food king McDonald’s, is planning to invest EGP 650 mn until 2020 to expand its activities in the country, the company’s general marketing manager Hisham Abdel Wahab said yesterday, Al Shorouk reports. The company is targeting sales north of EGP 1 bn this year.

EARNINGS WATCH- Cheese manufacturer Domty’s net profit plunged 80% y-o-y to EGP 25.6 mn in 2016 as the company posted an EGP 29 mn loss in the fourth quarter, according to its earnings release. Revenues grew by 22% y-o-y to EGP 1.7 bn last year. Results in 4Q16 were affected by the EGP float and the interest rates hike, Vice Chairman Mohamed El Damaty. Domty also announced it used EGP 105 mn from the proceeds of its capital increase to expand distribution, a new factory, and to acquire bakery and Roumy cheese production lines, Al Borsa reports, and says it is thinking about moving into Ethiopia.