Month: November 2018

The Central Bank of Egypt (CBE) has decided to terminate the repatriation mechanism at the end of the 4 December business day for any fresh foreign currency portfolio investments wishing to enter the local treasuries or stock markets, the CBE announced in a release. Going forward, fresh foreign portfolio investments will be channeled through the interbank market and the decision will not apply to balances held inside the mechanism before the cut-off date, it added. (CBE)

HC’s comment: Foreign holding of Egyptian T-bills declined to USD11.8bn in October 2018 from USD21.5bn in March, a total outflow of USD9.7bn. Around USD8bn of the outflows were covered by commercial banks shifting them to a net foreign liability position of USD3.9bn as of September and the remaining USD1.7bn were covered from the repatriation fund which declined to USD7.8bn as of the end of October from USD9.7bn in March. HC expects the direction of foreign currency portfolio investments through the interbank systems to result in an FX rate reflecting supply and demand forces, supporting a floating currency mechanism. HC however, expects commercial banks to show limited ability to support the EGP at current rates due to holding a net foreign liability position, as HC earlier illustrated in thier Egypt macro note dated November 7, 2018. Therefore HC expects to see EGP devaluation of 5%-10% throughout 2019. That said, as the currency settles at market equilibrium rates HC would expect to see foreign inflows into the Egyptian T-bill market giving banks room to replenish the position of their foreign assets. Accounting for the potential devaluation, HC expects inflation to average 16%-17% over 2019, hence they do not expect interest rate hikes throughout 2019, as was also illustrated in their November macro report. Currently, international price of Brent declined to USD58.87/barrel, which should offset the potential EGP devaluation’s effect on the Egyptian government’s budget. On HC’s numbers, average FY18/19e Brent price of USD76.6/barrel translates to a budget deficit of 8.4% of GDP.

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Egypt’s Cabinet approved a new draft law modifying income tax on treasuries, which separates income earned on treasuries from corporates’ and banks’ other income sources, according to the Ministry of Finance sources. According to the draft law, income earned on government treasuries will be recorded net of a 20% tax and then will be added to the entity’s taxable income after deducting other treasuries related costs. The total net income will then be subjected to the 22.5% income tax rate. The amendment is expected to result in some EGP10bn in tax revenue to the government. (Al Borsa).

HC’s comment: Currently, banks are taxed at the highest of 22.5% of pre-tax income or 20% of treasury income. Egypt’s Ministry of Finance did not provide further clarification on the actual application of the new tax law. According to HC’s understanding, however, it appears the new law stipulates that banks will be entitled to 80% of treasury returns (net of 20% tax), which will enter the bank’s revenue stream and will later be subjected to 22.5% corporate income tax after deducting operating expenses, implying double taxation. If HC’s understanding is correct, this would imply a lower net profit for banks and possibly lower valuations. For banks under coverage, Abu Dhabi Islamic Bank – Egypt (ADIB EY) and Commercial International Bank (COMI EY) have the highest exposure to government treasuries, constituting c46% and c45% as of 3Q18, respectively, of total deposits, while Crédit Agricole Egypt (CIEB EY) has the lowest exposure to treasuries, constituting c36% of its total deposit base. HC awaits confirmation from domestic banks on their understanding of the new law before adjusting their numbers.

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HC Securities & Investment announced today that it acted as the sole financial advisor to Middle East Glass Manufacturing Co. (MEG) (MEGM.CA) and the Samaha family on the sale of 74% of the share capital of Medco Plast for Packing and Packaging Systems S.A.E (Medco Plast) to Indorama Ventures Public Company Limited (IVL), one of the world’s leading producers in the intermediate petrochemicals industry, for a value of EGP 843 Million. Additionally, HC Brokerage acted as the sole transaction broker for the buyer and the sellers.

“This is our fifth M&A transaction with MEG, where we have worked hand-in-hand over the years to ensure they meet their long-term objectives,” Mahmoud Selim, Head of Investment Banking at HC Securities & Investment, commented on the transaction.

HC Securities & Investment has previously advised MEG on several transactions, including the acquisition of 60% of Medco Plast in 2010, the acquisition of Wadi Glass in 2014, the private placement of 36% of MEG share capital to Gulf Capital, one of the leading private equity firms in the MENA region in 2014, and the acquisition of Misr Glass Manufacturing Company in 2016.

Medco Plast is the largest manufacturer of recyclable PET preforms, injection molded products, and closures to all the multinational soft drink and water manufacturers operating in Egypt, with a 25% market share. Medco Plast currently has 11 state-of-the-art production lines with a combined annual production capacity of 70,000 metric tons of PET preforms.
“Indorama is a global player that adds to the development of the packaging sector in Egypt, and transactions such as this provide confidence in the Egyptian economy and hopefully contribute to attracting more foreign investments to Egypt,” Selim added.

HC expects the MPC to keep interest rates unchanged at its upcoming meeting.
October monthly inflation came in significantly higher than HC’s expectation of it normalizing to c0.8%, mainly on supply shocks witnessed in the fruit and vegetable market leading to price hikes. Currently, inflation has exceeded the upper limit of the CBE’s targeted rate of 13% (+/-3%). HC accordingly raises its inflation forecast for October-December to 17.1% from 15.9%, previously, however, HC still believes the CBE will not undertake a rate increase due to a slow business activity, as indicated by the Egypt PMI index of 48.6, which has resulted in excess interbank liquidity currently (25% of deposits as of August 2018 compared to 21% in June 2017). Hence, HC believes attracting additional liquidity to the banking sector is not on the table at the moment. Higher corridor rates could also have a negative effect on consumer demand, already at low levels growing by an estimate of 1.5% in FY17/18e, below the normal population growth rate of 2.5%. Moreover, the CBE deputy governor said earlier this month that the CBE will begin to flexibly target inflation.

At its last meeting on 27 September 2018, the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept its policy rates unchanged for the fourth time after 2 consecutive 100 bps cuts in both February and March, signaling the start of an easing cycle. Egypt’s annual urban consumer inflation accelerated to 17.7% in October from 16% in the previous month with monthly inflation accelerating to 2.6% from 2.5% in September, according to data published by the CBE. Egypt’s annual core inflation accelerated to 8.85% y-o-y in October from 8.55% y-o-y in September, with the monthly core CPI increasing 0.98% m-o-m, central bank data showed.

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