Finance chap 1.qxp_Layout 1 1/16/20 2:32 PM Page 1 Finance chap 1.qxp_Layout 1 1/16/20 2:32 PM Page 2 Industry Insight 4 MACROECONOMIC Set to soar: Momentum EGYPT’S FINANCE SECTOR

acked by strong legislative reforms and an improving macroeconomy, Egypt’s financial sector holds a treasure chest of opportunities. The latest edition of BAmCham Egypt’s Financial Services Industry Insight looks 13 INSURANCE Still Untapped at all aspects of the sector from banks to insurance to the capital markets, and more. The issue starts with a look at the macroeconomic progress of the past three years, with the latest data from Egypt’s economic turnaround, an assessment of potential challenges and the reform plan going forward. This is followed by a chapter on the insurance sector’s growing potential and a BANKS BREWING 19 third chapter covering the key drivers behind the banking Business sector’s expanding investment. Chapters four and five offer updates on the closely related topics of financial inclusion and fintech, detailing the role of retail lending, e-banking and non-banking channels in drawing more consumers and SMEs into the financial system. Finally, chapter six has the latest on trends in the stock market, with a special look at 26 CRACKING private equity and Egypt’s new sovereign wealth fund. Consumer Credit

Khaled Sewelam Director, Research and Publications FINTECH IS 34 Flourishing Amira Sheha Research Manager Fadila Noureldin Author and Senior Economic Researcher Kate Durham Editor and Head of Corporate Publications Nessim N. Hanna CAPITAL Senior Art Director 39 Crunch Emy Emile Senior Graphic Designer Verina Maher Graphic Designer Amany Kassem Advertising & Business Development Director Publications/Research EXPLOITING Lamia Seleit Sovereign Capital 45 Advertising Specialist Rowan Maamoun Advertising & Ad Traffic Coordinator Hani Elias Production Supervisor

©2019 AmCham Egypt’s Business Studies & Analysis Center. All rights reserved. Unauthorized reproduction, copying, re-mailing, storage or website posting is prohibited. All information in this publication is verified to the best of the author’s and the publisher’s ability. Finance chap 1.qxp_Layout 1 1/16/20 2:32 PM Page 3 Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 4

MACROECONOMIC Momentum

gypt’s three-year International Monetary Fund (IMF)-backed reform program wrapped up in November 2019 after executing rigorous fiscal consolidation and extensive financial and currency reforms. The program significantly improved the country’s macroeconomic fundamentals and Eboosted its fiscal and external accounts, landing Egypt a primary budget surplus in FY 2017/18 for the first time in 15 years. Harvard University’s global growth projections listed Egypt as the world’s third fastest economy (and Africa’s second) in 2018 with a growth rate of 5.3%, following India and Uganda. According to UK-based newspaper The Economist, Egypt maintained its spot in Q1 2019, posting an estimated GDP growth of 5.6%, just 0.2% shy of India’s and 0.8% away from China in first place. Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 5 Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 6

Macroeconomic Momentum

The economic uptick has resonated with the interna- 2019 with a cumulative appreciation rate of 11.3% in tional market. “Egypt has been on top of global 2019. In August, Bloomberg ranked the EGP as the investors’ lists for growth prospects,” says Akef El second-best performing currency in 2019 following Maghraby, vice chairman of state-owned bank Banque the Russian ruble, which gained 9.5% in the first Misr. “This has been reflected in portfolio investments, seven months of the year, and ahead of the Thai baht more specifically bills and bonds. The majority of (5.3%) and the Philippine peso (2.8%). reserves are long-term funding sources, which also The majority of analysts credit the appreciation bodes really well for the country’s growth story.” to tangible changes in Egypt’s financial accounts, “We remain positive on Egypt. The country has been including an improvement in rentier resources such reaping the benefits of [implementing] a significant as tourism, exports and remittances, along with slight reform agenda and a massive currency devaluation,” improvements in foreign direct investment (FDI). Bassel Khatoun, director of portfolio management The recovery of portfolio inflows also drew more FX for frontier and MENA at Franklin Templeton Invest- to the country. A July 2019 World Bank report noted, ments, told Zawya in May 2019. “Fiscal consolidation, “Net foreign assets [NFAs] in the overall banking sys- supported by subsidy cuts and more comprehensive tem [are] bouncing back after a steep decline,” which tax revenues, have restored confidence in its was triggered by a global emerging markets (EM) medium-term outlook.” selloff in mid-2018. The selloff prompted a USD 11.1 billion outflow in commercial banks’ NFAs, with the Currency affairs deficit bottoming out in November 2018 at USD 7.4 billion (down from a net inflow of USD 3.2 billion in Until 2018’s end, the Egyptian pound (EGP) remained November 2017). The carry trade also bounced back relatively stable, trading between EGP 17.80-18.35 in 2019, which helped push the currency up further. to the USD, compared to its pre-float level of EGP “Investors have netted themselves a 23% return on 8.88. The currency began an appreciation rally in EGP-denominated bonds [in 2019] — five times the 2019, rising by a monthly average of 1.3% and settling EM average... carry traders investing in Egyptian debt at a three-year high of EGP 15.97 to the dollar in with USD have made returns of around 15% in 2019,” December 2019, outperforming most currencies in Bloomberg reported in June.

Egypt Macroeconomic Progress Tracker n Macro Indicators

FY 2013/14 FY 2018/19 GDP growth 2.9% 5.6% Budget deficit (share of GDP) 12.0% 8.4% Foreign reserves USD 16.7 billion (June 2014) USD 45 billion (August 2019) Net portfolio inflows USD 1.2 billion USD 4.2 billion

n Long-Term Sovereign Credit Rating

Pre-2016 Post-2016 Rating (outlook) Date Rating (outlook) Date Moody’s B3 (stable) Apr 07, 2015 B2 (stable) Sept 1, 2019 S&P B- (stable) Nov 13, 2015 B (stable) May 11, 2018 Fitch B (stable) Dec 19, 2014 B+ (stable) Nov 26, 2019 Sources: MOF, CBE, Moody’s, S&P, Fitch

6. AmCham Industry Insight Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 7

Breaking Down Egypt’s Turnaround n Macroeconomic Fundamentals

Real GDP Growth (%) Contribution to GDP Growth (%)

1.1 7.0 1.0 1.0 2.3 6.5 0.6 1.9 6.0 0.8 5.6 0.5 5.3 0.1 0.3 1.7 1.2 1.2 4.4 4.3 0.8 4.2 0.4 1.4 3.8 3.4 2.2 0.2 2.5 2.5 1.1 FY 12/13 FY 15/16 FY 16/17 FY 17/18 FY 18/19 FY 19/20 -1.2 -1.6 -1.3 Preliminary Budget actual FY FY FY FY FY FY FY FY 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 Investment Public consumption Preliminary Budget Forecast Forecast Final consumption Private investments actual Private consumption Net exports Public investments

n Fiscal Performance

Overall Deficit and Primary Balance Overall Debt (local and foreign) 108.0% 16.5% 102.8% 93.0% 97.2% 90.3% 12.5% 12.7% 7.9% 83.0% 11.4% 18.0% 80.0% 77.5% 7.8% 9.8% 19.0% 8.2% 94.9% 18.0% 7.2% 90.0% 15.3% 85.2% 72.3% 14.3% 13.3% 78.2% 65.7% 67.7% 64.2% 2.0% 2.0%

FY 13/14 FY 14/15 FY 15/16 FY16/17 FY 17/18 FY 18/19 FY 19/20 Preliminary Budget -2.3% -3.7% actual FY FY FY FY FY FY FY FY -4.6% 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 Overall deficit (share of GDP) Preliminary Budget Target Target -8.4% Primary balance (share of GDP) actual Local debt External debt Total debt (share of GDP) (share of GDP) (share of GDP)

Revenue Breakdown Average Debt Maturity (years) Total Revenue EGP 989.2mn 1,000 5 Total Revenue EGP 821.1mn 4.4 800 Total Revenue 4 Total Revenue EGP 659.2mn EGP 465.2mn 3.3 600 Total Revenue Total Revenue EGP 456.7mn EGP 491.5mn 2.5 400 1.9 1.9 1.9

200

FY 13/14 FY 14/15 FY 15/16 FY 16/17 FY 17/18 FY 18/19 FY FY FY FY FY FY FY FY Preliminary 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 actual Preliminary Budget Forecast Forecast Tax revenues Non-tax revenues Other actual Sources: MOF, CBE

AmCham Industry Insight . 7 Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 8

Macroeconomic Momentum

n External Accounts

Current Account Deficit (excluding official transfers) Service Receipts (EGP billion) 80 6.0% 6.2% EGP EGP 72.0 bn 70 67.8bn 4.9% 19.9 EGP 60 EGP EGP 4.5% 53.6 bn EGP 53.0 bn 52.8 bn 50 50.3 bn EGP 14.7 14.8 14.5 44.7bn 40 2.5% 2.5% 2.5% 30 7.2 8.2 1.8% 20 6.2 6.2 10

FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 12/13 13/14 14/15 15/16 16/17 17/18 18/19 Preliminary Forecast Preliminary actual actual Workers' remittances Oil exports Non-oil exports Current account deficit (EGP billion) Share of GDP Suez Canal receipts Tourism receipts

Net International Reserves FDI Inflows 44.3 44.9 8.4 45.0 Net International Reserves (USD billion) 8.0 8.0 Total inflows (USD billion) Import coverage (# of months) Net inflows (USD billion) 31.3 13.7 6.4 13.4 13.2 12.4 12.5 10.9

20.1 17.5 7.9 7.8 16.7 3.9 6.9 3.7 6.4 5.9 3.3 4.2

FY FY FY FY FY FY Aug-19 FY FY FY FY FY FY 13/14 14/15 15/16 16/17 17/18 18/19 13/14 14/15 15/16 16/17 17/18 18/19

n Foreign Holdings of T-bills n Top Carry Trade Returns (as of June 2019) 14.3% 13.3% 12.0% 12.4% 12.4% 12.5% 11.6% 11.8% Russia 17.2 10.5% 11.2% 10.4% 18.718.9 10.7% 16.2 10.0% 16.7 17.4 19.3 Egypt 15 15.9 Israel 13.4 9.0% 12.1% 12.5 12.9 Mexico 2.6% 12.3 6.0% Thailand 1.5% Peru 1.5% South Africa 1.5%

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul -18 -18 -18 -18 -18 -18 -19 -19 -19 -19 -19 -19 -19 n EM Average = -0.6% Net foreign holdings of T-bills (USD billion) Share of total holdings

Sources: MOF, CBE, Bloomberg

8. AmCham Industry Insight Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 9

Others believe the EGP’s appreciation was a result of repatriation triggers a currency depreciation. The CBE low demand for FX during H1 2019 rather than in- cut key interest rates by 350 basis points over three creased portfolio inflows. “It’s a matter of seasonality. rounds in the last five months of 2019, but the currency But seasonality won’t be as supportive to the EGP in has yet to succumb. Still, some experts believe the EGP Q4 [2019] when demand for FX typically picks up rally may not be long-lived: “The CBE could decide to ahead of the new year and foreign investors look to allow the currency to weaken slightly to turn around repatriate profits,” EFG Hermes’ head of macroeco- tight financial conditions,” Bilal Khan, Standard nomic analysis Mohamed Abu Basha told local media Chartered’s senior economist for MENAP, told in June. The pound’s good run was also predicted to Bloomberg in October. In December, investment bank end gradually when the Central Bank of Egypt (CBE) Beltone Financial forecast the EGP would see limited resumed monetary easing, and more foreign profit volatility in 2020, within the EGP 15.90-60 range.

Fiscal payoffs Addressing long-lived fiscal imbalances has been a FY 2019/20, the state budgeted for 40% and 75% further cornerstone of Egypt’s reform program. On average, cuts in fuel and electricity subsidies, respectively. the overall fiscal and primary deficits have been as “The IMF rarely gives credit to a country but has given high as 10% and 3% of GDP, respectively, over the credit to Egypt’s progress in its fiscal accounts on past 15 years. The budget gaps peaked in FY many occasions,” says Banque Misr’s El Maghraby. 2012/13 with overall and primary deficits of 12.9% “This has definitely resonated with foreign investors and 5% of GDP, respectively, raising red flags over the on many fronts.” sustainability of Egypt’s fiscal policy and its general Egypt’s financing gap rang in at EGP 715 billion financial well-being. In 2016, the government began (USD 42.1 billion) in FY 2018/19, while its primary surplus sweeping fiscal reforms on both sides of the balance rose to EGP 104 billion (USD 5.8 billion) and took up sheet. To boost revenues, the 10% general sales tax 2% of GDP. Despite the improvement, the Ministry of was replaced in September 2016 with a 13% Value Finance (MOF) expects the gap to widen to EGP 820 Added Tax (VAT), which increased to 14% the follow- billion (USD 50 billion) by the end of FY 2019/20 on ing year. The VAT’s rate hike accounted for 60% of the the back of increased spending on education, health increase in total tax revenues in FY 2017/18. Cuts in and social protection programs. expenditures targeted subsidy spending, which in FY To plug the gap, the government has relied on local 2016/17 exceeded EGP 240 billion (USD 13.5 billion) and international debt issuances – a strategy that will and accounted for about 20% of the budget. The remain in place over the medium term. Egypt has raised government began removing subsidies on utilities, USD 22 billion from eurobond issuances since the energy and transportation and also restructured its beginning of 2017, beating all of its African peers and commodity subsidy system to minimize fund leakage, most emerging markets (after Turkey and Argentina). In cutting overall subsidy spending by 30% year-on-year May 2019, the government raised the cap on eurobond in FY 2018/19 to EGP 85 billion (USD 4.9 billion). In issuances to USD 42 billion until the end of FY 2021/22.

Medium-term Economic Targets

FY 2019/20 FY 2020/21 FY 2021/22

GDP growth (%) 6.0 6.4 7.0 Inflation (%) 10.5 9.1 8.0 Budget deficit-to-GDP (%) 7.2 6.2 4.7 Public debt-to-GDP (%) 90.5 80.0 77.5 Source: MOF

AmCham Industry Insight . 9 Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 10

Macroeconomic Momentum

Egypt’s Eurobond Timeline 2015

June USD 1.5 billion • 10-year bonds with a coupon rate of 5.875% • 3x oversubscribed 2017

January USD 4 billion • USD 1.75 bn: 5-year bonds yielding 6.125% • USD 1 bn: 10-year bonds yielding 7.50% • USD 1.25 bn: 30-year bonds yielding 8.50% • 3x oversubscribed

May 2018 USD 3 billion • USD 750 mn: 5-year bonds yielding 5.45% February • USD 1 bn: 10-year bonds yielding 6.65% USD 4 billion • USD 1.25 bn: 30-year bonds yielding 7.95% • USD 1.25 bn: 5-year bonds yielding 5.58% • 3.7x oversubscribed • USD 1.25 bn: 10-year bonds yielding 6.59% • USD 1.5 bn: 30-year bonds yielding 7.9% • 3x oversubscribed

April 2019 EUR 2 billion • EUR 1 bn: 8-year bonds yielding 4.75% February • EUR 1 bn: 12-year bonds yielding 5.625% USD 4 billion • 3.8x oversubscribed • USD 750 mn: 5-year bonds yielding 6.2% • USD 1.75 bn: 10-year bonds yielding 7.6% • USD 1.5 bn: 30-year bonds yielding 8.7% • 5.4x oversubscribed April EUR 2 billion • EUR 750 mn: 6-year bonds yielding 4.75% • EUR 1.25 bn: 12-year bonds yielding 6.375% • 4.5x oversubscribed November USD 2 billion • USD 500 mn: 4-year bonds yielding 4.55% • USD 1 bn: 12-year bonds yielding 7.05% • USD 500 mn: 40-year bonds yielding 8.05% • More than 7x oversubscribed

Note: no eurobonds were issued in 2016. Source: MOF The state is looking to diversify its financing sources Government officials met with local banks in May 2019 beyond eurobonds. In March 2019, the government to plan for a sovereign sukuk issuance worth up to USD announced it was studying the possibility of a local is- 1.5 billion, tentatively slated for early 2020. Also in May, suance of green bonds—lower-yield bonds that finance the government began talks with China-led Asian In- climate and environmentally friendly projects. Other frastructure Investment Bank to issue its first interna- new debt instruments on the table include yen- and tional infrastructure bond, a debt instrument used to yuan-denominated bonds (also known as Samurai and finance infrastructure projects in H2 2019/20. The Panda bonds) and sukuks (Islamic bonds). While a spe- state’s plan is to raise USD 3-7 billion overall from inter- cific timeline has not been set, the plan is to raise USD national markets in FY 2019/20, with 70% earmarked 250-500 million from Asian markets in FY 2019/20. for USD-denominated eurobonds.

10. AmCham Industry Insight Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 11

Ongoing concerns Credit agencies cite large financing needs, rapid growth, which will boost social protection spending. accumulation of foreign debt and weak debt affordability The government is working to address these risks on as their main concerns about Egypt’s long-term outlook. multiple fronts. For example, to hedge against sudden As of FY 2018/19’s end, Egypt’s external debt stood upticks in global commodity prices and/or average at USD 108.7 billion, up 17.3% year-on-year. At nearly interest rates, the MOF set up a EGP 68.2 billion (USD 40% of GDP, this puts Egypt among the top three 4 billion) contingency fund in its FY 2019/20 budget. countries globally with the biggest foreign debt stock. Also, the MOF and Ministry of Planning and Admin- In September 2019, Moody’s rated Egypt’s fiscal istrative Reform agreed to a USD 110 billion cap on position as “very weak” due to the government’s fi- foreign debt by 2021. nancing needs. The global credit agency forecasted Gradually declining FDI over the past two years has interest payments will con- some worried about Egypt’s tinue to eat up about 45% of growth prospects and busi- fiscal revenues over the MOF Contingency ness environment’s attractive- medium to long terms. Fund Breakdown ness. After peaking at USD 8.1 In an August research note, billion in 2016, net FDI fell to Capital Economics acknowl- USD 7.4 billion in 2017 de- edged that the sharp rise in Public wages spite the government’s rollout external debt is a cause for EGP 21.2 bn of the Investment Act in May. (USD 1.2 bn) alarm but sees Egypt’s debt Energy FDI inflows dropped 8.2% to subsidies risks are contained. According EGP 32.2 bn USD 6.8 billion in 2018, with to the research house, the (USD 1.9 bn) the majority of investments in CBE’s efforts to shore up FX the oil and gas sector. During reserves mean Egypt can H1 2019, FDI continued falling cover its external financing 22.5% year-on-year to USD 3.1 needs for the next year, espe- Miscellaneous goods, billion. services & investment needs cially with a narrowing current EGP 14.8 bn Experts point out that a account deficit and the EGP’s (USD 870 mn) global investment drop is appreciation. Source: MOF largely hampering foreign Meanwhile, the government capital inflows. The United Na- is working to reduce its substantial debt service bur- tions Conference on Trade and Development (UNC- den. Following a 2015 strategy that was dropped, the TAD)’s World Investment Report 2019 indicates global MOF rolled out a Medium Term Debt Management FDI hit its lowest level since the 2008 global financial Strategy (MTDS) in April 2019. The new four-year strat- crisis, falling 13% year-on-year to USD 1.3 trillion. FDI egy aims to trim public debt levels to less than 80% of levels in developed economies were hit the hardest, GDP by the end of FY 2021/22 by extending maturi- plunging by 27% to USD 559 billion—their lowest ties on government debt and lengthening the aver- since 2004. age life of debt stock to reduce refinancing risks. To Looking regionally, Egypt has remained Africa’s mitigate currency fluctuation effects, the MTDS is number one investment destination for the third pushing for more EGP-denominated borrowing from consecutive year, according to Rand Merchant international institutions. The strategy also seeks to Bank’s 2020 investment report. And in terms of the stimulate GDP growth by cracking down on informal business environment, the country continues to im- businesses to widen the formal economy. prove. Egypt ranked 114 out of 190 countries in the The IMF’s April 2019 fourth and penultimate review World Bank’s Doing Business 2020 report, jumping of Egypt’s extended fund facility pointed to factors six spots from the previous report and gaining spe- that could derail the government’s reform targets: oil cial mention as being among 42 countries to have price fluctuations, the population’s overall “economic implemented regulatory reforms that facilitated adjustment fatigue” and continued population doing business.

AmCham Industry Insight . 11 Finance chap 1.qxp_Layout 1 1/16/20 2:33 PM Page 12

Macroeconomic Momentum

The government is pushing for a 20-25% increase in FDI to USD 8-8.5 billion by the end of FY 2019/20. To draw investor interest, the government wants to contain internal pressures such as inflation and high interest rates, and streamline policies in value-added and technology-oriented sectors that contribute to eco- nomic growth and job creation. The government’s medium-term goals target USD 20 billion in FDI by FY 2021/22.

Egypt’s Areas of Improvement in Doing Business 2020 (rank out of 190)

• Improved “one-stop shop” system. • Abolished requirement for businesses to obtain a certificate of non-confusion [related to company name]. • Excess supply available for exportation. • Installed automated systems to monitor and report power outages.

• New regulations require shareholder approval when issuing new shares on the stock market.

• Introduced an online system for filing and paying corporate income tax and VAT.

Source: World Bank

Planning post-IMF strengthening welfare provisions and increasing the transparency of state organizations. “For us, it's very The IMF’s financial support has officially ended, but important that the next wave of reforms will address the government’s reform package is ongoing. And some of the impediments to growth by reforming the while Egypt’s policymakers have shown commitment business environment, allowing the private sector ac- to achieving the IMF’s macro-financial targets, inter- cess to greater market share and by improving the en- national and local investors have voiced concerns vironment for doing business in Egypt," he told local about Egypt’s status following the program’s comple- media. According to the MOF, the government could tion. Since the mid-1970s, Egypt has repeatedly re- reach an agreement with the IMF by March 2020. turned to the IMF to seek fixes for problems that “Egypt has worked to substantially reduce its country persist to this day—which may signal this won’t be its risk over the past three years since starting the pro- last call for international support. gram,” says El Maghraby. “Improving its macroeco- In June 2019, the government began talks with the nomic framework has been imperative to tackling the IMF for a non-loan program to set a roadmap for crucial microeconomic issues currently on the govern- Egypt that would likely last for two years. In October, ment’s agenda like bureaucracy, red tape and ease of the IMF’s Middle East and Central Asia Director Jihad doing business. When these issues are tackled, we’ll Azour announced future engagements would focus see an even bigger impact on Egypt’s economic on facilitating higher private sector participation, performance and growth prospects.”

12. AmCham Industry Insight Finance chap 2.qxp_Layout 1 1/16/20 2:09 PM Page 13

INSURANCE Still Untapped

hile insurance has been a major component of the global economy since the 1950s, it has been adopted by regional economies in waves. World War II activated mass automobile production in North America and Western Europe, triggering a boom in the motor insurance business that Wsparked a domino effect on other insurance subsectors. Developed Asian markets followed in the 1960s and 70s due to soaring household savings levels and the development of Japan’s pension social security system. Emerging Asia began to see its biggest contribution to insurance following the 2008-09 global financial crisis, becoming the biggest driver of global insurance growth since 2010 and representing nearly 90% of total emerging-market insurance premiums. The Middle East (including Turkey) has been at the other end of the spectrum, accounting for less than 3% of emerging economies’ gross written premiums (GWP), with the United Arab Emirates (UAE) and Saudi Arabia leading the region. Finance chap 2.qxp_Layout 1 1/16/20 2:09 PM Page 14

Insurance Still Untapped

Regional Insurance Metrics preliminary data from the Financial Regulatory Authority (FRA), GWP have continued growing, up 19% to EGP 35.2 billion (USD 2.1 billion) in FY 2018/19. UAE* KSA* Egypt Egypt activated its insurance market in the early 1900s, AED 4,753 SAR 244 EGP 500 but it remains miniscule with an insurance density (the (USD 1,293) (USD 65) (USD 30) Density Density Density ratio of premiums to population) of less than EGP 500 (USD 30) per person and a penetration rate (the sector’s 2.2% of GDP 2.3% of GDP 0.8% of GDP contribution to non-oil GDP) of 0.8%. These indicators Penetration Penetration Penetration pale in comparison to global and regional peers. Accord- *As of 2017 ing to an October 2019 Economist Intelligence Unit re- Source: Central Bank for each country port, Egypt’s insurance premiums represent less than 0.5% of total world premiums. According to the global advisory firm Ernst & Young, in- Egypt’s insurance market comprises 28 local and 10 surance growth in mature markets has been tapering off foreign companies operating in the life and non-life seg- over the past decade due to high insurance density and ments, along with 22 bancassurance providers. The non- penetration rates. In response, global insurers are turning life segment continues to take up about 65% of the to emerging economies due to their growing urbaniza- market in terms of premiums value, while the life seg- tion, rapid technological transformation, regulatory ment accounts for the remaining. Of the 38 insurance changes and introduction of micro insurance. And Egypt companies operating in the market, three are state- has become an increasingly attractive market. owned and the rest are privately owned with local, re- According to a February 2019 Moody’s report, Egypt’s gional, European and U.S. shareholders. The public insurance sector is full of “untapped potential” as one of sector players include Misr Insurance Company (MIC) the largest Arab markets with a high consumption base and Misr Life Insurance Company (MLIC), both founded and prevalent risk factor. The credit agency also pointed in the early 1900s as Egypt’s first insurers and among the to improving economic fundamentals and promising first in the Arab world. In 2006, MIC and MLIC became regulatory developments in the sector as factors driving subsidiaries of the newly created Misr Insurance Holding strong, profitable growth in insurance revenues over the Company (MIHC). short to medium terms. “The insurance sector’s perform- The insurance sector has shown consistent growth over ance is reflected quite well in the figures: GWP grew 20% the past five years yet has gained minimal momentum in to EGP 29 billion [USD 1.7 billion] in FY 2017/18 over comparison to its potential. “According to a 2019 Swiss EGP 24 billion [USD 1.3 billion] the year before,” says Alaa Re report, Egypt is ranked 10th in terms of insurance pre- El-Zoheiry, managing director of gig - Egypt and chair- mium gaps, with a USD 2.8 billion gap in premiums,” man of both the Insurance Federation of Egypt and Am- notes El-Zoheiry, which means that the sector currently Cham Egypt’s Insurance Committee. According to addresses less than 40% of the insurable market.

Egypt GWP Forecast

Total GWP (EGP billion) 29.0 30.6 32.6 34.5 36.3 38.3 Total GWP (y-o-y change) 6.2% 5.5% 6.5% 5.8% 5.2% 5.5% Gross Life Premiums (EGP billion) 12.1 12.6 13.5 14.2 14.9 15.6 Gross Life Premiums (y-o-y change) 5.2% 4.1% 7.1% 5.2% 4.9% 4.7% Gross Non-Life Premiums (EGP billion) 16.9 18.0 19.2 20.3 21.5 22.6 Gross Non-Life Premiums (y-o-y change) 7.0% 6.5% 6.7% 5.7% 5.9% 5.1% Source: Fitch Solutions

14. AmCham Industry Insight Finance chap 2.qxp_Layout 1 1/16/20 2:09 PM Page 15

According to Basel El Hini, MIHC’s chairman and manag- ing director, the industry’s biggest challenge is stagna- tion caused by limited con- sumer awareness. “People have no concept of how im- portant insurance is as mode of saving,” El Hini told busi- ness news portal Enterprise in February 2019. As a result, “the market for insurance isn’t [exponentially] growing. All of the players, public and private alike, are fighting for market share in a market that is con- strained in size.” “Lack of consumer aware- ness is a showstopper for the business because consumers still don’t see the true value of insurance policies in raising their standards of living and helping them mitigate per- sonal, political or business risks,” elaborates El-Zoheiry. insurance more accessible to income-constrained “Insurance can protect a family when its breadwinner households. In 2018, the two organizations passes away and a claim is distributed as part of launched a three-month media campaign with pro- the deceased’s policy benefits, helping the family motional videos designed to attract C- and D-class pay for education and its other financial commit - consumers to the market. An integral part of the ments. Equally, when a factory owner buys insur - campaign involved raising awareness about micro ance coverage against fire, flooding and/or other insurance, which operates jointly with microfinance physical damages to assets, the insurance claim and can provide policyholders with coverage of up can help restart factory operations at minimal business to EGP 50,000. “The campaign worked very well,” losses.” El-Zoheiry explains. “To date, EGP 1.3 billion [USD Low income levels may also be depressing de- 76.5 million] was injected into micro insurance cer- mand for insurance. According to state statistics tificates from a presidential initiative that grants agency CAPMAS, Egypt’s average annual house- holders EGP 50 in insurance for every EGP 500 they hold income is just shy of EGP 60,000 (USD 3,615), deposit into [designated savings] certificates.” with 32.5% of the population living below the Another presidential initiative, called “Aman,” was monthly poverty line of EGP 735.5 (USD 44.28). rolled out in Q1 2018 as a partnership between MLIC And while insurance is predominantly beneficial for and local banks to offer micro insurance to casual la- lower-income earners, small salaries coupled with borers, farmers and working single mothers. One insurance illiteracy drives families to allocate their certificate is worth EGP 500 and individuals can buy spending elsewhere. up to five certificates. Depending on the number of Egypt’s insurance industry may see a notable certificates held, beneficiaries receive up to EGP change of pace as market dynamics evolve and 50,000 in the event of the policyholder’s death or up pending legislation moves forward. The FRA and to EGP 250,000 in the event of an accident. The the Insurance Federation of Egypt have worked in payout can be taken as a lump sum or as a monthly tandem to improve consumer awareness and make pension of EGP 1,000-3,000 for up to 10 years.

AmCham Industry Insight . 15 Finance chap 2.qxp_Layout 1 1/16/20 2:09 PM Page 16

Insurance Still Untapped

Since the beginning of 2018, micro insurance The final draft of the law, which is currently being policies have grown to about 1 million, half of reviewed by Cabinet, also raises minimum capital which cover microloans. There are about 3 million requirements for insurance companies in the life microfinance loans in Egypt, meaning micro insur- and property sectors by 150% to EGP 150 million ance covers about 15% of the microfinance market. (USD 8.8 million) and doubles the ceiling for life in - “We are working to make this a 1:1 ratio,” El-Zo- surance payouts to EGP 80,000. While a number of heiry says. industry stakeholders claim the requirement is Also in the pipeline is the FRA’s Insurance Act, harmful for the industry, El-Zoheiry says it still falls which has been in the works since October 2017. short of regional and developed markets. “Post- To reduce risk and raise consumer confidence in in- float, the current minimum capital of EGP 60 million surance policies, the impending legislation creates shrank to less than USD 5 million, which is very de- an industry bailout fund to pay off policyholders in terrent to consumer confidence as well as compa- the event the underwriter defaults. SMEs will also nies’ investment position,” he explains. “Overseas, be granted incentives such as lower fees to lure insurance companies have a paid-in capital of up them into the market. to USD 100 million.” “The most important feature of the law was the According to Moody’s, the proposed increases in mandate of making more than 20 insurance prod- capital requirements will give insurance companies ucts compulsory, including professional liability in- a better credit profile and support “the absorption surance for liability-prone professions such as of both underwriting and investment risk.” Higher doctors, architects, lawyers and external auditors, paid-in capital puts companies in a better financial as well as public liability venue coverage,” El-Zo - position, especially in the insurance business, which heiry says. “These mandates are part of regional largely relies on reinsurance. Higher capital require- and developed insurance markets in Europe and ments will enable insurers to pay more claims out the U.S. and are integral to raising consumer of their own pockets, retain more risk and become awareness and growing the sector.” insurance companies rather than only brokers.

16. AmCham Industry Insight Finance chap 2.qxp_Layout 1 1/16/20 2:10 PM Page 17

Egypt Insurance Premiums: Composition and Growth 30 35.0% Life General y-o-y growth

30.0% 25

25.0% 20 56% 20.0% 15 56%

EGP million 53% 52% 15.0%

10 57% 55% 10.0% 58% 44% 59% 59% 5 56% 61% 44% 58% 47% 48% 5.0% 42% 43% 45% 61% 41% 44% 39% 41% 39% 42% 0 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

FY 2017/18 FY 2018/19 Non-Life GWP (EGP million) Health 4,459 5,735 Motor Comprehensive 3,225 3,783 Fire 2,898 3,330 Accident 2,234 2,508 Oil 1,990 2,024 Engineering 1,446 1,617 Motor Compulsory 1,076 1,056 Funds 482 746 Aviation 504 682 Marine Cargo 623 651 Marine Hull 309 356 Inland Transport 182 205 Non-Life Total 19,428 22,693 Life GWP (EGP million) Life Total 10,100 12,458 Total (EGP million) 29,528 35,151

Health 2% 1% Motor Comprehensive 3% 3% 3% Fire 5% Accident 25% 7% Oil Life Non-life Engineering 35% 65% 9% 17% Motor Compulsory 11% Funds 15% Aviation Marine Cargo Marine Hull Inland Transport Sources: FRA, Insurance Federation of Egypt

AmCham Industry Insight . 17 Finance chap 2.qxp_Layout 1 1/16/20 2:10 PM Page 18

Insurance Still Untapped

Insurance Industry Medium-term Goals Indicator 2017 2022

Contribution to non-oil GDP 0.8% 2%+ EGP 25 billion EGP 50 billion Gross written premiums (USD 1.4 billion) (USD 3 billion) EGP 86 billion EGP 150 billion Sector investments (USD 4.8 billion) (USD 9.1 billion) EGP 60 billion EGP 100 billion Aggregate size of insurance funds (USD 3.3 billion) (USD 6.1 billion) Source: FRA

The government’s EGP 600 billion (USD 36.4 billion) the population who cannot afford the premiums. Universal Healthcare Act (UHA) may also play a role “Article 10 of the law states that the government can in shaping the insurance business going forward. use private insurers in the system,” clarifies El-Zoheiry. The majority of Egypt’s insurance companies operate How this article will play out is still unclear, but there in the healthcare segment, which generates about are a number of models that can be followed. For ex- EGP 6 billion (USD 375 million) in revenues. The ample, “private insurers can pay out any price differ- UHA, which launched in 2018 and began rolling out ential between the government and insurance in July 2019 in Port Said, will give all Egyptians full companies’ price systems. So suppose a patient has a access to state-run health insurance coverage by heart surgery for EGP 100,000 and the government’s 2032, with premium contributions coming from em- price system allocates EGP 40,000 for that surgery. ployers and employees. As per the law, the govern- The insurance company can [cover] the remaining ment will fully fund health expenses for the 30% of EGP 60,000.”

Also brewing is the government’s IPO program, Insurance Companies’ Market Share which includes two insurance companies by GWP Value (Jan-Aug 2019) among the 23 companies slated for partial pri- Total market = EGP 10.7 billion (USD 664 million) vatization: MIHC and its subsidiary MLIC. The in- surance sector’s presence on the Egyptian stock market is negligible, with only two companies— MIC Delta Insurance and Mohandes Co. Insurance— MLIC listed in the non-banking financial sector. In 2018, the financial services (excluding banks) Allianz Life Insurance 21% sector was the second highest contributor 28% MetLife Life Insurance (11%) to total market capitalization, after banks. AXA Life Insurance Given the existing premium gaps and growing consumer awareness, there is extensive room Egyptian Life 13% Takaful Company for new players in the market, which bodes well 3% Suez Canal Insurance for the bourse. “There are five new overseas en- 3% 3% Misr Emirates Takaful trants in the pipeline that the regulator is cur- 10% 4% Life Insurance Company rently working with and doing its due diligence 7% 8% Allianz Egypt on,” El-Zoheiry discloses. “Quite a few more have expressed interest in entering Egypt’s in- Others surance market, which implies the sector pres- Source: FRA ents a big potential for overseas investment.”

18. AmCham Industry Insight

06:00 AM 09:00 AM 06:00 PM 09:00 PM 00:00 AM

A REAL PRO NEVER STOPS BEING A PRO.

WWW.FIAT.COM.EG

WITH FIAT PROFESSIONAL, CHOOSE FROM THE DUCATO & DOBLO WHAT FITS YOUR PROFESSIONAL NEED .... BECAUSE WE ARE PRO LIKE YOU.

Authorized Dealer: Dynamics Distribution S.A.E (Call Center :19984) - Cairo: 42 Abu Bakr El Seddiq Street, Safir Square, Heliopolis (Tel: 0227799174 – 0227799175) - El Obour City: Showroom and Service Center: Street 100 (Tel: 44814934/36/37) - Alexandria Service Center: 27 KM Alex-Cairo desert Road (Tel: 03-39613137 – 01003881124) - Damietta City Service Center: Shata Village beside El Omda fuel station, Damietta-Port said Road. (Tel: 01060979111) A PRO LIKE YOU Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 19

BANKS BREWING Business

gypt’s banking system has been the economy’s bread and butter since the early 2000s, accounting for nearly 90% of total assets in the country’s financial system as of Q1 2019. Buoyed by strong liquidity, high profitability and financially sound fundamentals, the sector is one of the most lucrative acrossE the MENA region. According to a July 2019 research note by Beltone Financial, Egyptian banks showed the fastest growth in the region since 2015, posting a compound annual growth rate (CAGR) of 26.3% in terms of deposits. The local investment bank credits the strong growth to rising money supply as retail deposits—its biggest constituent—continue to be banks’ primary funding source. As of August 2019, bank deposits stood at just over EGP 4 trillion (USD 240 billion), 80% of which were injected by households. Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 20

Banks Brewing Business

“In terms of profitability and asset quality, we are one and continuous improvements in asset quality. The of the strongest—if not the strongest—banking systems index was created in March 2011 as a composite in the region,” says Akef El Maghraby, vice chairman quantitative measure using 21 variables in four sub- of state-owned Banque Misr, the country’s second indices: banking sector performance, macroeconomic largest bank in terms of assets after the National Bank conditions, financial market development and the of Egypt. “The CBE’s [Financial Sector Reform] Pro- global economic climate. It uses quarterly data to gram, which began in the early 2000s, is still one of measure financial stability on a scale of 0 to 1, with 1 the main reasons behind the impeccable perform- indicating optimal financial stability. ance. However, one of Egypt’s biggest advantages is In April 2019, global credit agency Moody’s up- a real diversified economy as opposed to other re- graded Egypt’s overall sovereign credit rating to B2 with gional peers, who are largely reliant on oil for growth.” a stable outlook (from B3 with a positive outlook). The The Central Bank of Egypt (CBE)’s regulatory over- upgrade was followed the next month by improved sight has safeguarded the banking system against ex- credit ratings for Egypt’s five biggest banks (in terms of ternal or internal shocks. As of June 2019, aggregate assets). According to Moody’s, the improved ratings capital adequacy for the sector stood at a healthy stemmed from buoyant economic growth and the 16.9%. Local lenders also have one of the region’s banking system’s improving operating conditions, in- lowest and most improved asset quality: Egypt’s ratio cluding high exposure to government debt, solid bal- of non-performing loans (NPLs) to total loans stood at ance sheet growth, sufficient liquidity and sound capital 4.2% in June 2019, which has been steadily dropping levels. “We expect banks to maintain ample local cur- from 7.1% in 2015 and 10.5% in 2011. rency funding, high liquidity, and strong and stable prof- Despite an overall global economic slowdown, the itability,” noted the global credit agency’s statement. As CBE’s financial stability index rose to 0.54 in March of FY 2018/19, the banking system recorded EGP 62.5 2019 from 0.51 since 2017’s end, due to solid im- billion (USD 3.7 billion) in profits, more than EGP 5.5 tril- provements in the country’s macroeconomic funda- lion (USD 329 billion) in assets and EGP 1.9 trillion (USD mentals as well as the banking system’s high solvency 111.8 billion) in government debt holdings.

Banking Sector SWOT Analysis

Strengths Weaknesses • Abundant household savings • Low banked population • Large consumer market • Private sector crowded out by government debt • Sound financial footing, high liquidity and • Low household lending solid earnings • Restrictive regulations limiting credit expansion • High exposure to government debt • High interest rates • Developed digital infrastructure • Miniscule mortgage market

Opportunities Threats • Consumer finance & MSME lending • Corporate credit • Tightened global financial conditions • E-banking and mobile wallets • Security and political risks • Islamic finance • Fiscal slippage

20. AmCham Industry Insight Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 21

Egypt Banking Performance Indicators n n Return on Assets 5.4% Ratio of NPLs to Total Loans 10.3%

8.0%

5.0% 4.1% 3.7% 3.7% 1.6% 1.7% 1.8% 3.1% 1.3% 1.4% 1.4% 1.2% 1.9% 0.8% 1.5%

Pakistan Lebanon Chile Malaysia Egypt Romania South Turkey Argentina Malaysia Chile Argentina Turkey South Egypt Romania Pakistan Lebanon Africa Africa n LTD Ratio South Africa 179.5% Turkey 130.8% Tunisia 117.9%

Kuwait 109.3% Indonesia 103.6% Russia 101.2% Morocco 95.2% Saudi Arabia 88.1% Argentina 85.6% Egypt 47.8%

n Credit Growth (year-on-year) Profitability Return on Average Equity (%) 51.4% Net Interest Margin 30.9 Lending Rate (less than 1 year) Return on Average Assets (%) 24.4 21.5 31.3% 19.2 19.2

22.2% 19.20% 15.75% 17.50% 11.71% 12.12% 14.2% 13.6%

4.0% 4.6% 3.9% 3.0% 3.0% 1.5 2.0 1.5 1.4 1.4

Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

n Liquidity n Asset Quality 84.0 79.6 72.6 74.9 72.6 99.0 99.1 98.3 98.0 97.8

79.8 71.5 47.0 46.0 46.2 46.5 63.6 61.6 61.5 40.9 32.5 32.9 32.1 31.9 33.4 24.2 20.8 15.9 14.2 16.6

7.1 6.0 4.9 4.1 4.2

Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

Deposits (% of assets) Securities (% of assets) Loan Provisions (% of total loans) NPLs (% of total loans) Loans (% of assets) LTD Ratio Loans to Private Sector (% of customer loans)

Source: CBE

AmCham Industry Insight . 21 Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 22

Banks Brewing Business

Moody’s Outlook on Egyptian Banks (April 2019) Overall Outlook

• Accelerating GDP growth of 5.5% and 5.8% in 2019f and 2020f, respectively Positive • Banks' high exposure to sovereign debt (Current) • Ample local currency funding, high liquidity, and strong and stable profitability

What could • Weaker economic growth change the • A halt in the reform agenda, increased funding outlook to pressures or higher political risk Stable: • Foreign currency liquidity crunch

What could • Severe funding pressures, renewed liquidity crunch or change the geopolitical instability • Reduction in banks' capital buffers and significant increase outlook to in NPLs Negative:

Detailed Outlook Outlook Drivers ↑ Increased public and private-sector investment, higher exports and a re- covery in tourism are driving economic growth acceleration. Operating ↑ Banking penetration will deepen, supporting bank deposit and loan Improving environment growth. ↓ High inflation and interest rates, security and political risks, and tightening global financial conditions. = Banks’ high exposure to government debt. = NPL levels to remain broadly stable. Asset risk Stable ↓ Large volumes of untested new SME loans, ongoing security risks and loose NPL classification criteria leave banks vulnerable to a future turn in the eco- nomic cycle. ↑ Banks’ capital buffers to increase slightly, supported by robust internal cap- ital generation and higher capital requirements. Capital Improving ↓ Egyptian banks’ capital levels remain modest and lower than similarly rated global peers. Profitability and = Stable profitability as increased revenues from high balance sheet growth Stable efficiency will be offset by higher costs. = Sound funding profiles underpinned by high inflows of stable, low-cost cus- Funding and liq- tomer deposits. Their high liquidity buffers are a credit strength. Stable uidity ↓ Potential pressures on foreign-currency liquidity following foreign investment outflows and tightening global financial conditions. Government ↑ Improved fiscal record (reflected in the positive outlook on Egypt’s sovereign Improving support rating) will enhance the government’s capacity to support banks. Source: Moody’s

22. AmCham Industry Insight Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 23

Hang-ups While the upgrade set the seal of approval on assets, and outstanding T-bill balances, now ac- banks’ performance, Moody’s rated the banking counting for just over 50% of the government’s net sector’s macro profile—which evaluates system-wide domestic debt portfolio, grew 17% year-on-year to factors that predict banks’ propensity to fail—as EGP 1.4 trillion (USD 83.8 billion). ‘weak,’ up from ‘very weak’ prior to April’s upgrade. Egypt’s high-interest rate environment—another Its statement noted, “[Egyptian banks’] macro pro- boon for banks’ sovereign lending—has weighed file is underpinned by the country's high unemploy- heavily on private sector borrowers, which accord- ment and low income levels, as well as the ing to the CBE are the biggest contributors to credit challenging credit conditions. The latter relate[s] to growth. Soaring interest rates, driven by the CBE’s gaps in the legal framework for secured lending, aggressive monetary tightening policy after the high borrower concentrations and the significant in- EGP’s float, pushed away even more private sector crease in higher-risk loans to small and medium en - borrowers whose capital expenditure (capex) levels terprises (SMEs).” The agency also points to were already depressed by a foreign liquidity concerns about foreign currency liquidity following crunch and the depreciated EGP. foreign investment outflows amid weak global fi- According to the Emirates NBD Purchasing Man- nancial conditions. agers Index (PMI), which measures the health of While the banking system’s biggest credit overall operating conditions in the non-oil private strength is its stable and low-cost local deposit sector economy, credit remains a main pressure point on businesses looking to finance capex. Ac - base, which makes up about 70% of the sector’s cording to its June 2019 reading, “easing price total assets, the sector has one of the lowest lend- growth in recent months has offered some respite, ing utilizations in the region. In August 2019, total [but] subsidy reforms and a renewed pause in the loans grew 11% year-on-year to EGP 1.8 trillion CBE’s [monetary] cutting cycle mean that conditions (USD 107.8 billion), posting a five-year CAGR of remain difficult for private firms.” 22%. However, loans represent less than 40% of total banking assets and the loan-to-deposit (LTD) ratio has been declining since the early 2000s from more than 65% in 2003 to 46.5% as of June 2019. In February 2019, S&P Global Ratings forecasted nominal loan growth to reach 17% by year’s end, but said that figure was still inadequate when ad - justed for inflation given Egypt’s “economic devel- opment needs.” This unchanneled excess liquidity is a result of not only the CBE’s long-running reform program to re- duce default risks and improve the sector’s capital adequacy, but also due to the more recent high in- terest rates, reliance on government treasury debt, and low retail lending (see chapter 3). Amid shaky economic and political conditions between 2011 and 2015, banks became the primary player in the sovereign securities market to maintain profitability and minimize operational and credit risks. The trend grew stronger after the EGP float, with high yields on Treasury bills also substantially growing the sec- tor’s net interest margin. In August 2019, total gov- ernment securities stood at EGP 1.9 trillion (USD 107.8 billion), representing over a third of banking

AmCham Industry Insight . 23 Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 24

Banks Brewing Business

Tracking Key Interest Rates

19.75 18.75 17.75 17.75 18.75 16.75 16.75 15.75 17.75 16.75 16.75 14.25 15.75 15.75 13.25 12.75 14.75 13.25 9.75 11.75 12.25

8.75 Jul-17 Apr-18 Feb-18 Feb-19 Nov-16 Nov-19 May-17 Aug-19 Jun-17 Jun-16 Jun-15 Jun-19 Jun-18 Mar-17 Mar-16 Mar-19 Mar-18 Sep-16 Sep-15 Sep-19 Sep-18 Sep-17 Dec-16 Dec-15 Dec-18 Dec-17

Overnight Lending Rate (%) Overnight Deposit Rate (%)

Source: CBE

That said, the CBE’s monetary easing has accelerated being said, we will see results by 2019’s end [and] in Q1 in 2019. “So far 350 bps have been cut [in H2 2019] and Q2 of 2020 in much higher magnitudes as prospec- which is very good news for both the business and tive expansionary directions continue taking place.” Fol- consumer lending markets: Lower rates mean corpo- lowing November’s rate cut, Cairo-based financial rates’ cost of borrowing will decrease, improving their services firm Pharos predicted the CBE would cut inter- competitiveness as they’re able to expand business est rates by an additional 300 bps throughout 2020. activities and finance their investments as projects’ re- Looking ahead, a number of dynamics may work in quired [internal rate of return] decreases. This is espe- banks’ favor. Banks’ loan utilization may change as the cially true for export-oriented businesses, which also government’s fiscal gap narrows and lenders look to become more competitive when capex is cheaper,” drive growth elsewhere. According to Beltone Finan- explains El Maghraby. “On the household level, lower cial’s July research note, “Our in-house macroeco- interest rates induce households to increase spending nomic outlook shows an increase in fiscal deficit rather than hoard savings in the banks. [Also,] lower marginally lower than our expected total assets interest rates will incentivize households to take out growth, mainly on the back of the government’s fiscal more loans to finance their purchases.” reform, which will result in lower government securi- November’s PMI reading showed no signs of improve- ties constitution of total assets.” ment in non-oil private sector business activity, which re- Deflating price pressures also signal further rate mained in contractionary territory (below the 50.0 cuts await. “Historically, interest rates in Egypt aver- threshold) at 47.9, down from 49.2 the month before. aged 7-8% for deposits, 11-13% for credit and 12-16% “We definitely expect higher loan activity on the part of for consumer loans,” says Ahmed Issa, CEO of con- the private sector but [it] will take time for the cuts’ effects sumer banking at Commercial International Bank. to materialize. It takes time for fiscal/monetary policy Cairo-based HC Securities & Investment sees capex- changes to be embedded in the economy and their borrowing picking up when interest rates fall below multiplier effects to manifest,” El Maghraby says. “That their pre-float levels.

24. AmCham Industry Insight Finance chap 3.qxp_Layout 1 1/16/20 2:11 PM Page 25

Taxing turnovers In the works since 2017 is a new Banking Act, which and resulting in an effectively higher tax rate. Cabinet approved in October 2019. Among the law’s According to local asset management and invest- final draft proposals is a 1% annual tithe on bank prof- ment banking firm Shuaa Securities, the new tax treat- its to finance a bailout fund that would insure banks ment could slash banks’ annual earnings by up to 17% against bankruptcy, as well as a three-year grace pe- depending on their exposure to sovereign debt. To tilt riod for local banks to increase their minimum paid-in the scale in their favor, banks can reduce their expo- capital to EGP 5 billion (USD 300 million) and USD 150 sure to T-bills or demand higher yields in auctions. million for foreign banks. The new capital require- “Rising yields would help banks somewhat restore ment, a tenfold increase from the current EGP 500 mil- their earnings. According to our estimates, it would lion (USD 30 million), will likely take a toll on take an average of 335 bps rise in yields for banks to dividends, specifically for smaller banks. Beltone’s re- offset the resulting tax hike,” said the firm’s research port did not see the proposed amendment dramati- note. Should yields remain the same or decline, Shuaa cally shaking up the sector: “Despite their low capital sees banks reallocating excess liquidity to higher- bases, [banks] with above-average market profitability yielding interbank assets and loans. and strong parent support that values the Egyptian El Maghraby believes the impact will be much market’s profitability compared to other regions… smaller: “The effective tax rate is now higher, but the [will be able] to meet the new requirements.” overall impact is far from major and has been comfort- In February 2019, Law 10 of 2019 amended parts of ably absorbed into the system. Bank profits are still in- the Income Tax Law 91 of 2005 to specify a new tax treat- creasing and at a healthy rate following the rate’s ment for banks’ treasury-derived income. Banks must imposition.” The Banque Misr executive points out now account for treasury profits in their taxable income, that bank earnings, especially for the two biggest requiring them to reallocate costs to match revenues in state-owned banks, were hit by the scrapping of 20%- their finances. Banks have complained that the realloca- yield certificates of deposits, and “still we witnessed tion process causes other operating costs to shrink, fur- an annual rise in overall profits.” According to the CBE, ther amplifying income from non-treasury operations banks’ profits grew 30% year-on-year as of June 2019.

CBE unveils CONIA In August 2019, the CBE launched a risk-free benchmark interest rate to support the development of a broader set of products for the local money market. The Cairo Overnight Interbank Average (CONIA) is a fluctuating rate calculated daily as the weighted average rate of unsecured overnight EGP interbank trans- actions. Due to these transactions’ extremely short tenors, the benchmark rate is risk-free. The move falls in line with the global shift from interbank offered rates (IBORs) to risk-free rates (RFRs). IBORs were vital in global financial markets by acting as reference rates for hundreds of trillions of dollars in derivative markets and trillions of dollars in bonds, loans, deposits and securities. However, as concerns grew about IBORs’ sustainability amid the significant decline in unsecured banking finance market activity over the past few years, the international finance community began calling for a transition to RFRs. With CONIA in place, the CBE launched a mechanism allowing banks to set up overnight indexed swap (OIS) agreements. One of the fastest-growing instruments since they globally emerged in the 1990s, OIS contracts allow financial institutions to manage their interest rate risks by matching the maturity of their assets and liabilities, which helps protect both banks from fluctuations in the overnight rate (that varies significantly within periods as short as three months). With an OIS, if Bank A is paying interest on a CONIA-based loan from Bank B, and Bank B has a separate loan with a fixed, short-term interest rate from Bank A, the two parties can exchange interest rate formulas. Both banks would make interest payments as usual, and at the end of the agreed-upon period, the bank that paid less interest makes up the difference to the other.

AmCham Industry Insight . 25 Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 26

CRACKING Consumer Credit

gypt has come a long way since 2014 when the Central Bank of Egypt (CBE) embarked on numerous initiatives to bring the unbanked population online. And while the outlook on the banking system has never been more bullish, experts believe financial inclusion is one of the keys to unlock its full potential. EAccording to the latest data in the World Bank’s Global Findex, the number of adults with a bank account grew to 33% of Egypt’s population in 2017, up from 14% in 2014 and 10% in 2011; market research firm Euromonitor estimated it grew to 38% in 2018. However, that figure is still significantly lower than the global average of 69% and the low-middle income countries’ average of 57%. Egyptian households still steer clear of banks, despite having substantial investible cash on hand. “The extent of the Egyptian financial system’s [liquidity] was illustrated in September 2014, when the government raised EGP 64 billion [USD 4 billion] in Suez Canal development certificates in just over a week, with most of the funds coming from individuals paying in cash,” says a Q2 2019 Economist Intelligence Unit report. Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 27

According to surveys conducted in 2017 by the World considerably from 0.06% in 2004, it remains negligi- Bank and U.S.-based research company Gallup, just ble. Mortgages remain constrained by not only regu- over 6% of Egyptian households had a loan from a for- latory hurdles but also industry-related ones, mal financial institution, while 38% borrowed from including high interest rates stemming from the CBE’s family and friends. Of those surveyed, only 25% had contractionary monetary policy implemented after the a debit card, 3% had a credit card and just 4% had a float of the Egyptian pound. As of 2018’s end, the av- housing loan. erage interest rate on 13-year home loans stood at On the supply side, consumer banking is far from its 13.14%, compared to 12.18% in 2014, and 12.05% in full potential. As of July 2019, banks’ outstanding bal- 2011. “High interest rates have definitely impacted ance of consumer loans stood at EGP 347.8 billion loan growth, especially mortgages since they have yet (USD 20.8 billion), posting a compound average to take off,” explains Issa. “However, we are definitely growth rate (CAGR) of 15% since 2010. However, the predicting this issue will dissolve as monetary policy retail segment’s share of total loans has been gradu- continues easing in the near future.” ally declining from 25% in 2014 to 20% as of August Affordability is also an issue. According to the FRA, 2019, below its 22% share in 2010. Regionally, the the average monthly mortgage installment for bor- consumer segment’s share of total loans in Egypt is rowers was EGP 9,942 (USD 585) as of 2018’s end. Ac- lower than in the UAE (22%), Lebanon (31%) and cording to July 2019 data from state statistics agency Saudi Arabia (45%). These markets admittedly out- CAPMAS, the average annual household income is pace Egypt’s retail banking metrics on the back of EGP 58,900 (USD 3,465)—which means average mort- substantially lower populations, but they also have gage payments are double average monthly incomes. more diversified retail loan portfolios. In hopes of kicking off market activity, the CBE in 2014 “The majority of consumer credit in Egypt is concen- launched a EGP 10 billion (USD 560 million) mortgage trated in the personal loan classes,” says Ahmed Issa, fund that offered subsidized interest rates of 5-7% and Commercial International Bank (CIB)’s CEO of con- 8% to low-and middle-income borrowers, respectively; sumer banking, while other more promising loan cat- the fund was extended by another EGP 20 billion (USD egories remain unexploited. According to consumer 1.1 billion) in June 2019. The initiative successfully loan data from Egypt’s 10 biggest banks in terms of boosted the market: As of July 2019, low and middle-in- assets, personal loans accounted on average for 67% come mortgages had grown 60% in volume to 213,000 of their retail loan portfolios in 2018, while overdrafts, contracts and 138% in value to EGP 20.6 billion (USD 1.2 credit cards and mortgages represented 15%, 9% and billion) since 2014. With ample room remaining, the CBE 8% of their collective consumer loans, respectively, announced it would introduce a new EGP 50 billion (USD with the exception of the Housing & Development 2.8 billion) fund in June 2019 to provide interest rates of Bank (where mortgages make up about 75% of its re- 10% to middle-income earners. The government aims to tail loan portfolio). grow mortgage companies’ assets 150% to EGP 20 bil- lion (USD 1.3 billion) by 2022.

Scaling up mortgages “Mortgages account for 70-80% of U.S. bank loan portfolios, while the remaining share is channeled to personal and student loans as well as credit cards,” says Issa. The Mortgage Law 148 of 2001 grants li- censes for issuing long-term home loans to banks and specialized mortgage finance companies, the latter being regulated by the Financial Regulatory Authority (FRA). According to the FRA, as of August 2019, out- standing mortgages granted by mortgage companies totaled just over 60,400 contracts worth EGP 12.4 bil- lion (USD 706 million), generating a mortgage debt- to-GDP ratio of 0.3%. While the ratio has improved

AmCham Industry Insight . 27 Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 28

Cracking Consumer Credit

Mortgage Finance Companies KPIs (2018) n Mortgage Indicators

Outstanding Mortgages Loan-to-Value Average Financing Balance (EGP billion) (LTV) Ratio Period (years) 2017 3.6 55.0% 15.2 2018 4.6 53.6% 13.2 Change 27.8% ↑ 2.5% ↓ 1.3% ↓

n Year-end Metrics n Mortgage Market Value Growth (EGP billion)

Mortgage finance 19.8 20.6 14 companies

EGP 8 (USD 450 million) 14.5 billion Total assets 10.4 Year-on-year 46% growth in assets 7.2

Assets’ share of total 1.4% non-banking financial services assets July December July December July 0.2% Assets’ share of GDP 2017 2018 2019

Source: CBE

Going digital Digital banking is another area for banks to grow con- as the state-backed debit card Meeza hits the market. sumer credit, expand the formal economy and eliminate Meeza started rolling out in December 2018 to eliminate cash transactions (which still account for more than 90% all cash transactions exceeding EGP 500 (including pay- of transactions in Egypt). The country has one of the high- roll) by government entities. As of July 2019, more than est mobile penetration rates, a youthful population as 270,000 Meeza cards had been issued out of 20 million well as low banking density (defined as the number of cards planned by 2021’s end. bank branches per 100,000 inhabitants)—all catalysts to The prospects are bright for e-banking as the CBE spur digital banking growth. As of Q1 2019, Egypt’s pushes ahead with its financial inclusion efforts and banking density was 23.5, with the majority of bank banks follow its lead. In June 2019, Mastercard fore- branches concentrated in urban areas, indicating great casted Egypt’s e-banking industry would double in potential should banks increase customers’ access to size in terms of transactions by 2022, with electronic their services digitally. Banks’ digital infrastructure is also transactions accounting for 10% of all transactions, up sparse: there were 12,656 ATMs and 79,952 point of sale from 2-3% currently. In 2019, more banks began tak- (POS) terminals serving more than 25 million debit cards ing their banking activities online, including Banque and 4 million credit cards as of June 2019, showing pen- du Caire, Attijariwafa Bank and Banque Misr. As of No- etration rates of 13% (for ATMs) and 81.5% (for POS). De- vember 2019, 31 out of 38 banks offered digital serv- mand for digital banking infrastructure promises to grow ices, and 15 of these also provided mobile banking.

28. AmCham Industry Insight Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 29

Egypt’s Credit Indicators

n Aggregate Indicators

2013 2014 2015 2016 2017 2018 CAGR Total Loans (EGP bn) 546.2 625.0 786.7 1,293.4 1,453.1 1,802.0 20.9% Private sector 287.5 352.5 408.3 629.2 664.3 753.3 27.0% Government 41.6 47.4 100.7 296.6 373.8 570.5 21.2% Consumers/households 132.4 156.6 192.4 228.3 253.7 305.0 68.9% Public sector 75.2 58.2 76.7 126.6 154.4 165.9 18.2% Other 9.5 10.3 8.6 12.7 6.8 7.3 -5.1% Total number of bank branches 3,651 3,712 3,824 3,950 4,093 4,220 2.9% Total number of ATMs 6,283 7,855 8,443 10,701 11,002 12,200 14.2%

n Consumer Credit Indicators (as of August 2019)

Outstanding Retail Total Number 356.1 20% Share of Total Loans 4,298 Loans (EGP bn) of Branches

Share of Total Number 6% Share of Total Assets 9% 12,656 Domestic Credit of ATMs

n Banking Assets Breakdown

Securities & investments in T-bills 46% 44% 44% 40% 35% Private sector credit 35% 34% Consumer credit Government credit

14% 16% 14% 17% 18% 16% 14% 6% 6% 5% 6% 8% 8% 8% 7% 8% 11% 9% 2% 2% 4% 2013 2014 2015 2016 2017 2018 2019* *as of August 2019

AmCham Industry Insight . 29 Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 30

Cracking Consumer Credit

n Retail Metrics for Select Banks (as of Dec. 31, 2018) Total Retail loan MSME Number Number of assets portfolio portfolio of ATMs branches (EGP bn) (EGP bn) (EGP bn) National Bank of Egypt 1,920.0 58.4 44.0 4,068 461 Banque Misr 884.0 27.0 10.9 2,292 620 Commercial International Bank (CIB) Egypt 342.2 23.2 2.5 917 203 Qatar National Bank (QNB) Al Ahli 253.4 21.7 29.6 460 220 Arab African International Bank (AAIB) Egypt* 11.5 267.1 undisclosed 417 93 Banque Du Caire 165.7 26.1 7.3 698 219 Faisal Islamic Bank of Egypt 93.8 1.2 undisclosed 350 36 AlexBank 93.1 18.1 3.9 undisclosed 211 Credit Agricole Egypt 53.5 21.5 1.7 131 79 Abu Dhabi Islamic Bank (ADIB) of Egypt 49.2 11.1 undisclosed 780 70 Aggregates of Top 10 Banks 5,432.7 218.8 -- 10,113 2,212 Share of Total Banking System 75% 72% -- 83% 52% *Assets in USD billion, retail loans in USD million

n Consumer Loan Concentration in Select Banks (2018)

3.6% 0.8% 1.6% 3.5% 3.6% 0.6% 7.0% 7.7% 21.3% 0.1% 6.5% 15.2% 20.1% 12.5% 11.0% 10.4% 34.8% 7.1% 40.7% 6.3% 3.8% 4.3% 11.3% 2.0% Other 48.4% Credit cards 95.7% 41.2% 89.3% Overdrafts 80.3% 78.7% 73.9% 70.6% 77.6% Mortgage loans 59.3% 0.1% Personal loans 4.6% 27.1% 17.4%

AAIB ADIB+ AlexBank Banque Banque CIB Credit Faisal Islamic NBE QNB Al Ahli +Islamic banking loans Du Caire Misr Agricole Bank+ n Egypt ATM Supply (2018)

17% QNB Al Ahli 1% NBE 3% 33% Banque Misr AAIB 3% CIB Faisal Islamic Bank 4% ADIB Credit Agricole 6% Banque Du Caire Others 6% 19% 8% Sources: CBE, bank financial reports

30. AmCham Industry Insight Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 31

Securing smaller players Micro, small and medium enterprises account for 90% of disbursed to 566,000 MSMEs under the initiative. all enterprises and 75% of the workforce in Egypt. “It is Also in the works is an MSME law, aimed to lure therefore vital for this part of corporate Egypt to receive more of these ventures into the formal economy. Still enough access to finance,” CIB’s Issa says. One of the in draft form, the bill proposes preferential tax treat- biggest impediments to MSME ment for micro and small en- growth worldwide is financial Bank MSME Loan Breakdown terprises that will see them support. Egypt is no exception: by Value (2018) pay a fixed amount over a According to a May 2019 study Total = EGP 1.8 billion three-year term regardless of by Acumen Consulting, only revenue growth, subject to 12.4% of Egypt’s small busi- reassessment at the end of 6.1% nesses use banks. They instead the term. Other tax-related rely on personal funds, and incentives include five-year contributions from family and exemptions from the stamp friends to finance their busi- tax, capital gains and con- nesses. 46.6% tract and company establish- The CBE launched an MSME 47.3% ment fees, starting from the initiative in 2014 to boost lend- date of their ventures’ estab- ing to small ventures and lishment. broaden their exposure to for- While the CBE is pushing mal finance. In 2015, it opened banks to increase MSME lend- a EGP 200 billion (USD 11 bil- Micro enterprises Small enterprises ing, banks remain bound by a lion) fund to disburse loans to Medium enterprises host of other Central Bank reg- up to 350,000 firms; in 2016, it Source: CBE ulations governing asset quality mandated that banks allocate and capital adequacy levels. 20% of their loan portfolios to MSMEs and announced Regardless of size, corporates requesting loans must below-market interest rates to lure more of these small present certified financial statements, tax returns, ventures into the banking system. In May 2019, the reg- stamped sales invoices, property contracts and other ulator agreed to count investments in MSME-focused eq- documentation, which MSMEs (mostly operating in the uity funds as part of the MSME loan portfolio mandate, gray economy) often cannot provide. Unable to relax giving commercial lenders more incentive to back angel these stringent procedures due to capital adequacy re- investors, venture capitalists and private equity growth quirements, the government has mulled non-banking fi- funding for MSMEs. Between December 2015 and June nancial services for MSMEs, including microfinance 2019, a total of EGP 144.2 billion (USD 8.5 billion) was institutions, factoring and leasing companies.

MSME Act Proposed Tax Rates Company Size CBE Classification Current Tax Proposed Tax Tax Break (in annual turnover) ≤ EGP 250,000 EGP 2,000 EGP 1,000 50% EGP 250,001-500,000 Micro enterprise EGP 5,000 EGP 2,500 50% EGP 501,000- ≤ 1 million EGP 10,000 EGP 6,000 40% EGP 1- ≤ 5 million EGP 50,000 - Small enterprise EGP 5-10 million EGP 100,000 -

Source: Enterprise Press

AmCham Industry Insight . 31 Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 32

Cracking Consumer Credit

Non-banking Finance KPIs (2018) n Sector Overview

Number of com- Assets Share of non- Share of GDP panies (EGP billion) banking assets Microfinance (including NGOs) 924 13.3 2.3% 0.3% Financial leasing 228 41.3 7.3% 0.9% Factoring 9 6.8 1.2% 0.2% Total 1,161 61.4 10.8% 1.4% As of 2018’s end n Assets Breakdown n Asset Growth (EGP billion)

Securities brokerage Mortgage finance Factoring 1.7% 1.2% 58.3% Microfinance 1.4% 41.3 Other 2.3% 1.4% Financial 30.7 leasing 7.3% 34.5% Investment funds 8.3% Post-Office 42.9% 13.3 Private 8.4 6.4 6.8 insurance 13.7% 6.2% funds Insurance 19.8% Microfinance Financial leasing Factoring 2017 2018 Growth n Portfolio Sizes

EGP 41.7 EGP 11.5 EGP 10.6 billion billion billion Aggregate value Aggregate Aggregate value of contracts lending of contracts portfolio Financial Micro- Factoring Leasing finance

45.8% 62.2% 18.3% Annual growth Annual growth Annual growth

n FRA Sector Targets

Indicator 2018 Target (2022) Microfinance portfolio size (EGP billion) 11.5 25.0 Microfinance beneficiaries (million) 2.2 4.0 Factoring portfolio size (EGP billion) 9.0 20.0 Financial leasing portfolio size (EGP billion) 24.0 60.0 Source: CBE

32. AmCham Industry Insight Finance chap 4.qxp_Layout 1 1/16/20 2:13 PM Page 33

Microlending programs have existed in Egypt since the exceptions are state-owned NBE, Banque du Caire and 1960s but only gained substantial momentum in recent Banque Misr, which operate their own microfinance arms. years when the Microfinance Law 141 of 2014 was rati- Since the Microfinance Law was enacted, a number of fied to regulate non-banking finance activities including non-banking microfinance companies have entered the microfinance, factoring and leasing, and open the doors market, accounting for a growing market share. As of Au- for non-bank companies to offer these services. As of Au- gust 2019, the FRA’s nine registered microfinance com- gust 2019, a total of 3 million microloans worth a total panies accounted for 35% of the number of loans but EGP 14.4 billion (USD 850 million) were disbursed to 50% of their aggregate value. small and micro firms, growing 14% and 42% year-on- These include Tamweely Microfinance, a EGP 50 mil- year, respectively. lion (USD 2.8 million) venture by state-owned investment Of the 947 microfinance institutions (MFIs) in Egypt, the bank NI Capital (a privately managed and incorporated majority are non-governmental organizations (NGOs) subsidiary of National Investment Bank). Raya Holding’s with an aggregate portfolio of EGP 7 billion (USD 421.8 Aman for Microfinance, which launched in 2018, has million) doled out to 1.9 million beneficiaries as of August more than 15,000 active clients and doubled its paid-in 2019. The FRA categorizes microfinance NGOs into Tier capital to EGP 100 million (USD 11.2 million) in early A (with lending portfolios exceeding EGP 50 million), B 2019. Tasaheel is another giant in the industry, launched (portfolios between EGP 10-50 million), and C (portfolios in 2015 by Ghabbour Automotive’s finance arm—GB below EGP 10 million). The role of banks in microfinance Capital—with 500,000 active accounts. In September has been largely limited to providing tranches of funding 2019, El Sewedy Capital announced it was looking to tap to MFIs, due to regulations banning MFIs from accept- into the microfinance and leasing markets through its ing funds because of national security concerns; the non-banking financial services license.

Microfinance Breakdown, Jan-Aug 2019 (volume = 2.9 million loans)

34% 66% 46% 54% 65% 14% 14% 7% Male Female Company Individual Retail Services Agriculture Industry Gender Type of beneficiary Purpose of loan

Source: FRA Microfinance Profitability Indicators 69.0%

45.0% 37.0% 39.0%

20.0% 13.0% 14.0% 9.0%

2017 2018 2017 2018 Return on assets Return on equity Microfinance Companies NGOs Source: CBE

AmCham Industry Insight . 33 Finance chap 5.qxp_Layout 1 1/16/20 2:15 PM Page 34

FINTECH IS Flourishing

n its road to bringing the unbanked population on board, Egypt has developed one of the biggest and fastest-growing financial technology markets in the Middle East and North Africa (MENA), hosting nearly 20% of the region’s fintech companies as of 2018’s end. This makes the Ocountry the second largest hub after the United Arab Emirates (UAE) and puts it ahead of Jordan, Lebanon and Morocco. Egypt’s burgeoning fintech scene is a product of the country’s large economy, mature banking infrastructure and wealth of human capital. With its strategic location—centered amid the five time zones covering Europe and the Middle East—and favorable labor costs, Egypt has earned a solid reputation in information and communication technology (ICT)-related services such as software development, data storage, outsourcing, offshoring and technological entrepreneurship. Finance chap 5.qxp_Layout 1 1/16/20 2:15 PM Page 35

In 2018, Egypt’s ICT sector generated about 1.8 million country’s first payment solution provider. Today the jobs, accounting for 6.5% of the workforce, and con- platform processes 2.1 million transactions every day, tributed 2.5% to GDP. The country is also one of with a customer base of 20 million Egyptians. Fawry is Africa’s top five internet markets and the MENA re- an intermediary payment channel connecting un- gion’s largest with a 95% mobile penetration rate, banked consumers who need to pay bills for online making Egypt one of the most promising markets for purchases, utilities and other services with participat- fintech to flourish. ing government entities and other businesses. Egypt is home to more than 45 fintech players—in- The fintech industry has since absorbed a wide array cluding 16 startups, nine financial institutions and nu- of financial services into its realm. For example, local merous incubators, investors and microfinance investment bank EFG Hermes teamed up with other institutions—operating in fields such as consumer fi- banks in 2017 to launch valU, a fintech app that now nance, savings, payment solutions, mobile cash, mo- provides instant financing for big-ticket purchases to bile wallets, crowdfunding, capital raising, more than 100,000 customers. ValU allows customers e-commerce, telecom and cryptocurrency. There are to pay in installments over three to 24 months based about 9 million digital wallet holders, with 200,000- on a credit score calculated using an in-app algorithm. 300,000 additional users opening accounts every Other investment banks have followed in EFG Her- month. mes’ footsteps: In 2019, CI Capital and Prime Holding Among Egypt’s earliest and biggest adopters of fin- each obtained regulatory approvals to operate their tech was Fawry, which set up shop in 2007 as the own consumer finance arms.

Mapping Egypt’s Fintech Ecosystem

Note: This segmentation is an overview of the key players and is not a comprehensive list of all market participants. Source: INVYO

Fintech for—and by—SMEs Fintech has indeed disrupted how banks deliver serv- specifically for small and medium enterprises (SMEs) ices to their customers and created many bank-beat- in need of quick funds to jumpstart their businesses. ing solutions for banked and unbanked consumers. In Egypt, the relationship flows both ways: many of More importantly, fintech has taken the world by the country’s emerging SMEs have set up shop in the storm by strengthening access to business finance, fintech space.

AmCham Industry Insight . 35 Finance chap 5.qxp_Layout 1 1/16/20 2:15 PM Page 36

Fintech is Flourishing

According to UAE-based entrepreneurship platform leading a shift in mindsets. According to the 2018- Wamda, Egypt is MENA’s fastest-growing entrepre- 2019 Global Entrepreneurship Monitor (GEM) report, neurship hub. The number of venture capital (VC) more than 75% of surveyed Egyptians looked to en- firms, accelerators and incubators has spiraled over trepreneurship as a career choice (compared to the the past few years, as has the number of SMEs seeking global average of 43%), while 43.5% (double the their funding and support. In 2018, MENA VC hit global average) were already pursuing their business record levels with 366 investments worth USD 893 ideas. In terms of necessity, high overall unemploy- million in funding, up nearly a third over 2017. While ment rates between 2011 and 2018, which included UAE topped the charts with 30% of the region’s total substantial numbers of jobless university graduates, deals, Egypt was the fastest growing, securing 22% of made fintech one of the go-to sectors for entrepre- the deals compared to only 7% in 2017. neurs. In September 2019, three Egyptian fintech Driving the boom has been both opportunity and ne- startups landed a spot in the Forbes Middle East cessity, with increasing awareness of entrepreneurship Fintech 20 list.

Egyptian Fintech Startups on the Forbes Middle East Fintech 20 list (2019) Company Year of Rank Field Funding Name Establishment 15 Vapulus E-payment gateways USD 1.1 million 2016 Crowdfunding; rotating savings and 17 MoneyFellows USD 980,000 2016 credit association (ROSCA) 20 Paymob E-payment gateways undisclosed 2015 Source: Forbes

Far from flawless Financial technology has come a long way in Egypt, but October 2019 Speedtest Global Index, the average mo- it has yet to fully take off. According to GEM, 17% of busi- bile and broadband download speeds in Egypt were nesses surveyed in Egypt closed down in 2018, com- only 16.54 and 14.34 megabits per second (Mbps), re- pared to 10.2% in 2017 and only 2.7% in 2010 – the spectively, compared to the global average of 30.02 second highest and most accelerating rate among 49 Mbps (mobile) and 70.68 Mbps (broadband). Egypt was countries surveyed. It is true that country-specific eco- ranked 107 out of 141 countries in terms of mobile inter- nomic and political variables during the period played a net speed and 131 out of 176 countries in terms of part, but there are also a number of structural challenges broadband speed. curbing the industry’s growth. Wamda cites high transac- tion fees on e-payments imposed by banks and payment gateways, limits on digital and mobile transactions, an embryonic regulatory environment and network prob- lems. Unlike in global markets, the cost of cash transac- tions is much cheaper than digital ones in Egypt, giving merchants and customers little incentive to turn to fin- tech. Egypt also suffers from one of the slowest internet speeds in the region and worldwide. According to the

36. AmCham Industry Insight Finance chap 5.qxp_Layout 1 1/16/20 2:15 PM Page 37

GEM Entrepreneurial Framework Conditions: Egypt’s Ratings (2018-19) Score (1-9) Rank (/54)* Entrepreneurial finance 4.39 30 Government policies: support and relevance 4.26 28 Government policies: taxes and bureaucracy 3.5 35 Government entrepreneurship programs 3.98 36 Entrepreneurial education at school stage 2.33 47 Entrepreneurial education at post–school stage 3.72 51 R&D transfer 3.46 34 Commercial and legal infrastructure 4.48 37 Internal market dynamics 5.13 25 Internal market burdens or entry regulation 4.38 24 Physical infrastructure 6.52 26 Cultural and social norms 4.56 37 Notes: 9 is best. Only 49 countries were surveyed but 54 were scored. Source: GEM 2018-2019

Another issue is a dearth of funding, despite Egypt Bahrain and Lebanon with 9% each. Egypt’s share of being MENA’s second most active fintech startup hub. the region’s disclosed fintech startup funding agree- According to the MENA Fintech Venture Report 2019 ments concluded during the first nine months of 2019 by regional startup platform MAGNiTT, Egyptian start- grew to 27%, at 13 agreements, from only 13% in the ups accounted for 7% of total funding (in value terms) entire 2018. MAGNiTT’s annual report tracks fintech allocated to MENA fintech ventures, trailing behind ventures’ funding deals across 12 markets.

Fintech Funding in MENA n Breakdown of Fintech Deals by Volume Syria Lebanon 2% 9% <1% 3% Tunisia Palestine 1% 1% Kuwait Morocco 7% Iraq <1% 5% Jordan 3% Bahrain <1% Algeria 17% Qatar Libya 1% Egypt 6% UAE 46% Saudi Arabia 1% 59% 56% Oman 47% 46% <1% 36% Yemen 37% 27% 27% 26% 22% 21% 21% 20% n 13% Share of Total Fintech 11% 10% 6% 6% Startups by Country (2018) 5% 4%

UAE Egypt Lebanon Others Total # of deals: Total # of deals: Total # of deals: Total # of deals: 88 30 16 48

2015 2016 2017 2018 2019 (Jan-Sept) Source: MAGNiTT

AmCham Industry Insight . 37 Finance chap 5.qxp_Layout 1 1/16/20 2:15 PM Page 38

Fintech is Flourishing

Financing fintech In its plan to kickstart the industry’s growth and make the mass market, in turn helping the CBE develop reg- Egypt a regional fintech hub, the Central Bank of ulations and consumer safeguards in line with global Egypt (CBE) rolled out a three-year, multilayered strat- best practices. The initiative’s main purpose is to pave egy in March 2019, which includes a USD 60 million the road for the nascent industry’s growth and open the fund to back fintech startups. The fund will directly door for new business models that may be held up by and indirectly funnel investments into fintech ventures stringent existing regulations. through VC funds, startup incubators, accelerators International institutions are also allocating funds. In and other industry-specific investors. The “innovation April 2019, Egypt secured USD 200 million from the fund” should go live in early 2020 and will grow to World Bank to support SMEs and entrepreneurship. USD 500 million within five years. The same month, Startupbootcamp and the Interna- The CBE’s strategy also includes setting up FinTech tional Finance Corporation launched a program to sup- Egypt, an in-house fintech platform and digital research port fintech startups in Egypt in collaboration with local lab that will connect all ecosystem players including investment bank Pharos Holding’s Pride Capital, the startups, investors, financial institutions, policymakers, American University in Cairo’s AUC Venture Lab, mentors and service providers. Through the platform, AlexBank and the Export Development Bank of Egypt. startups will have access to a cohort-based “regulatory The four-year program will help two private sector fin- sandbox” to test innovative solutions live in a relaxed tech-focused accelerators improve their services to 40 regulatory environment. The structured, supervised na- startups in areas such as mentorship, business devel- ture of the sandbox will help identify and manage risks opment and technical training, to help the fledgling associated with new technologies before products hit ventures attract funding from investors.

CBE Fintech Innovation Fund Network

CBE FUNDS Investors OF FUNDS

$ $ $

Co-investments with VC funds, incubators/ VC (tech/ Incubators/ Regional tech/ accelerators fintech) funds accelerators fintech funds at startup level

Startups

Source: CBE

38. AmCham Industry Insight

Download AmCham Egypt Application

The App allows you to

◗ Receive notifications about upcoming events, register and pay online* ◗ Watch speeches given by ministers and business leaders at AmCham events ◗ Access the full Members database ◗ Request other members’ contact information * Your Gateway to ◗ Access exclusive offers * AmCham Egypt ◗ Check Members’ latest news Community

“For members, please login using your business email provided to AmCham”

* this feature is for members only Sponsors

Sponsors

Mobile app 2.indd 1 1:18 19/20/10 PM Finance chap 6.qxp_Layout 1 1/16/20 2:17 PM Page 39

CAPITAL Crunch

quity investors ended 2018 with heightened anxiety due to looming recession fears and a global emerging market (EM) sell-off. Signs of economic softness persisted in 2019, with the battle be- tween the world’s two largest economies driving bearish sentiments. Trade tensions between the UnitedE States and China began fraying in Q1 2018, when new U.S. tariffs on USD 200 billion of Chinese goods prompted retaliatory tariffs on USD 60 billion of U.S. goods. The two countries paused planned tariffs in the beginning of 2019 and rekindled trade talks in June, by which time global equity outflows had surpassed USD 116 billion. Little progress was made, however, and hopes for a settlement dimmed in August 2019, when U.S. President Donald Trump announced another tariff increase. In response, the yuan depreciated sharply below the key 7 per USD level for the first time in 11 years, sending U.S. and global equities into a state of sorrow. U.S. equities lost USD 700 billion during the first few weeks of August and European markets followed. Finance chap 6.qxp_Layout 1 1/16/20 2:17 PM Page 40

Capital Crunch

EMs also sent out distress signals, recording their biggest daily losses as more investors fled their fixed- income assets. Some USD 6.8 billion in funds were pulled out of EM equities and bonds during the first week of August, with Asian and Latin markets hit hard- est due to their close trade ties with Beijing. While less exposed, MENA stocks began dipping in late August— including Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Oman—amid fears the trade spat will depress the oil demand and growth in general.

Weathering the storm The Egyptian Exchange (EGX) has cushioned itself shocks. pretty well from the global storm, still buoyed by an at- EGX equities are the sixth cheapest among global tractive currency, positive macroeconomic fundamen- markets and third in the Arab world behind Oman and tals and stronger investor confidence. In May 2019, the Dubai, according to a June 2019 report by local in- British investment management fund Franklin Temple- vestment bank Shuaa Securities. The EGX also leads ton ranked Egypt’s bourse among its top three global MENA in terms of earnings growth: Egyptian stocks market picks for growth. Citing Egypt’s economic re- have the region’s highest return on equity at 31%, with form program and improved foreign profit repatria- a forecasted compound annual growth rate (CAGR) of tion, Salah Shamma, Franklin Templeton’s head of 24% between 2018 and 2021. “The EGX trades at a investment-MENA equity, told local media he believed forward [price-to-earnings] P/E ratio of 8x, which is Egyptian equities will become even more attractive as quite attractive versus the [EM] peer average of 12x,” prices continue deflating and monetary policy eases. says Allen Sandeep, director of research at Naeem Inflation stood at 3.6% in November 2019, after shrink- Holding. ing to a 14-year low of 3.1% in October, and key inter- “The EGX has been one of the best-performing est rates were cut by a total of 450 basis points (bps) stock markets over the past couple of years across all throughout the year. emerging markets. Obviously, the market goes up Egypt was second on Bloomberg’s June 2019 rank- and down hand in hand with investor sentiments, ings of EM equities highly resilient to the instability which have definitely been tested this year due to prompted by the trade war, behind India and ahead global conditions,” adds Sherif El Kholy, partner and of the Philippines. The study evaluated 21 EMs based head of MENA at the Cairo office of the EM private eq- on factors such as domestic demand and exposure to uity giant Actis. “It comes as no surprise when you find China or the U.S. Bloomberg found that EM sell-offs Egyptian stocks being affected by these conditions,” have left Egyptian equities relatively undervalued and he says, especially when foreigners represent over shielded them from the effect of the trade war’s 30% of market activity by volume.

EGX Metrics Jan-Oct (2018) Jan-Oct (2019) Growth Trading volume (billion securities) 51.8 43.5 -16% EGP 306 billion EGP 336.6 Trading value 10% (USD 17 billion) (USD 19.8 billion) EGX 30 index value (EGP terms) - 14,558.02 10% EGX 30 index value (USD terms) - 3,063.02 22% Source: EGX

40. AmCham Industry Insight Finance chap 6.qxp_Layout 1 1/16/20 2:17 PM Page 41

The EGX had its share of setbacks in 2019 on the Unexpected turn back of local hiccups. “The prolonged dispute with At the end of August, analysts had predicted the Global Telecom Holding (GTH) has impacted sen- benchmark EGX 30 index would break the 15,300 timent and trust among investors and caused trad- mark by September’s end due to anticipated rate ing volumes to fall,” Sherif Shebl, vice president of cuts. Instead, the bourse turned in its worst showing GCC sales at local investment bank Pharos Hold - since 2016 in the last week of September as in- ing, told local media in July. In 2018, the Egyptian vestors dumped shares following two nights of Tax Authority seized EGP 990 million (USD 55 mil- protests in Egyptian cities, with foreigners leading lion) from GTH’s local funds over a tax dispute dat- the sell-off. The benchmark finished the week down ing back to 2016. The parties reached a USD 136 6%, nearly wiping out its gains during 2019. The million settlement in June 2019. Other domestic bond market also felt the impact, with Citibank esti- contributors included a slowdown in the real estate mating USD 800 million in Egyptian government sector (whose shares fell 8.2% in Q2 2019), a grim debt outflows over that week. According to corporate earnings season and contractionary Bloomberg, the EGX has since been one of the monetary policy. world’s worst performers as its returns on equities Ongoing delays of the government’s initial public dwindled compared to other EMs. offering (IPO) program, on the table since 2016, has “The EGX’s performance over the last quarter has also contributed to softer sentiments. After the gov- been range-bound,” says Sandeep. “While inflation ernment kickstarted its partial privatization efforts in drops and consecutive interest rate cuts were posi- Q1 2019 with a 4.5% secondary offering of consumer tives for the economy, foreign [inflows] into the EGX goods company Eastern Tobacco, the program was as well as local debt have slowed down due to disap- paused to wait out the EM equity exodus. pointing corporate earnings results, heightened The market partially rebounded in Q3 with a big geopolitical risks (at the time), [and] news of protests, boost from the August IPO of Fawry for Banking & which in my opinion was blown out of proportion by Payment Technology Services, a non-banking finan- the foreign media.” cial technology and e-payments provider that en- “We didn’t reap the full benefits of interest rate tered the market in 2007. The IPO was the largest cuts on the EGX because you can’t isolate them,” El since 2015 when UAE-based real estate developer Kholy adds. “The cuts took place during a period Emaar Misr took its company public on the local when other influencing factors were taking place as bourse. Fawry’s IPO received healthy demand, laying well.” the grounds for reviving Egypt’s anemic IPO market, Between July and October 2019, foreign participa- which hadn’t seen action since Sarwa Capital went tion dropped by 5%. Since the start of 2019, foreign public in October 2018. “The subscriptions for both investors were net sellers of EGP 2 billion (USD 120 the public and private offerings for Fawry were large million) in Egyptian equities; during the same period and strong because the industry itself is new to the of 2018, foreign investors were net buyers with an eq- market and has greater-than-average growth,” Radwa uity of EGP 5.9 billion (USD 330 million) in EGX El Swaify, head of research at Pharos Holding, told stocks. Reuters in August. “The view of investors this time “The rebalancing of portfolios—i.e. indirect impacts around is towards the long-term payoff and not the of the Aramco IPO—have also somewhat impacted the short-term.” The IPO has also set the tone for Egypt’s bourse’s performance in Q3 [2019],” notes Sandeep, stock market ahead of other planned offerings, in- meaning investors were realigning their portfolios’ cluding those lined up for the state’s partial privatiza- asset weights. The Saudi state-owned oil giant an- tion program. nounced it would go public by year’s end in a trans- The market is expected to get a boost from the 350 action that analysts at U.S. investment bank Morgan bps drop in interest rates rolled out in the last five Stanley valuated between USD 1.06-2 trillion, crown- months of 2019. “Lower interest rates indicate the ing it as the world’s biggest IPO. Even still, Sandeep EGX will become more competitive as investors pull says, “For now, we see the impacts [of the Aramco their funds out from banking instruments and into IPO] as minimal on the EGX as Arabs account for higher yielding assets,” explains El Kholy. about 8% of market volumes.”

AmCham Industry Insight . 41 Finance chap 6.qxp_Layout 1 1/16/20 2:17 PM Page 42

Capital Crunch

Fawry IPO Facts Investors participating in Public placement subscription public & private placements

Times Public placement 30 35.4 million Shares New Existing Value Investors Investors 5% EGP 228.5 mn 11% 89%

10%

21%* Private placement 219.3 million Shares Bought Value EGP 1.4 bn

Private placement Total 21.16% 78.84% subscription IPO 16 Times Investors’ nationalities in public & private placements

Egyptians Arabs Foreigners Public placement

5%

2,326 Shares (million) 28.4 4.3 2.7 Investors Investors 2,218 89 19

Private placement

* 10% 21% Shares (million) 111.2 18.2 90 151 Investors Investors 87 29 35

Arabs

Investors participating in 8.8% Egyptians private & public offering by Foreigners 54.8% nationality 36.4%

*Fawry offered 21.2% of its shares to strategic investors: state-owned banks Banque Misr and National Bank of Egypt (7% each) and Actis (7.2%). Source: EGX

42. AmCham Industry Insight Finance chap 6.qxp_Layout 1 1/16/20 2:17 PM Page 43

New Stock Tickers n EGX Total Returns Index To deepen the market and address investor needs, the EGX launched the EGX30 Total Returns Index (EGX30 TR) on August 22, 2019. The EGX30 TR, which includes the same companies listed on the EGX 30 (based on liquidity and activity), is also weighted by the adjusted free-float market capitalization. To help investors see their total return on investment, the new index accounts for dividends and prices together (rather than only the price change) and uses stocks’ last prices rather than closing prices. Published with a base date of February 1, 2009 and a base value of 1,000 points, the EGX30 TR gives more weight to companies with higher reinvested income returns.

n Commodities Exchange In September 2019, the EGX announced that Egypt’s first agriculture commodities exchange would be launched by September 2020. Set up in partnership with the Ministry of Supply and Internal Trade, the exchange will buy and sell futures contracts for industrial and agricultural commodities under a 20%-80% public-private ownership agreement. While the list of commodities traded is not confirmed, it could include flour, corn, iron, cement and oil.

Going forward, the EGX should continue deepening and brokerages in June, with 51 licenses granted as of No- expanding, particularly as the state’s IPO program mate- vember. On December 1, short selling went live on the rializes. Baker & McKenzie sees the EGX being home to local bourse. “Part of any stock market’s development and IPOs worth USD 93.9 million in 2020, USD 170.9 million maturity includes new, more sophisticated tools to in 2021 and USD 213.5 million in 2022. According to Min- deepen the market—like short selling,” says Actis’ El Kholy. ister of Public Enterprises Sector Hesham Tawfik, the state Addressing potential risks to activating short selling, he should resume selling stakes in public sector companies adds, “We need to make sure short selling regulations are in Q1 2020, with a number of options to be first in line, in- prudent to ensure that it doesn’t result in any market cluding Banque du Caire, e-Finance, Abu Qir Fertilizers or shocks or market manipulation.” Alexandria Container and Cargo Handling. The choice In July 2019, the EGX also began looking at incentives depends on market conditions, the opinion of each trans- to drive new listings, stimulate market activity and lure action’s advisors and the views of Cabinet. more foreign investors into Egyptian stocks. One proposal Following March 2018 amendments to the Capital Mar- is a seven-year, 50% tax break for companies listing 35% kets Law of 1992, the Financial Regulatory Authority (FRA) or more of their stock on the EGX, effective from the IPO issued regulations to activate short selling in February execution date. Incentives could also include tax breaks 2019. In May, the EGX revealed the list of 30 securities el- on cash dividends for already listed shares at fixed dis- igible for short selling, which will be reviewed every six count rates. In October, the FRA approved a proposal to months. Eligible stocks must qualify as frequently traded, cut regulatory fees on EGX transactions. Also in October, with at least 10% of registered brokerage firms trading the Ministry of Finance approved proposals to scrap the the shares in question and free-floating shares having a capital gains tax and slash the stamp tax by as much as a turnover rate of 20% or more. third to 0.1%, down from a current 0.175%. Both propos- The FRA began handing out short selling licenses to als are pending Cabinet approval.

FRA’s Proposed Regulatory Fee Cuts Current rate Proposed cut New rate Trading service fees 0.025% 20% 0.005% Clearing house fees 0.0125% 20% 0.01% Stock broker fees 0.010% 17% 0.0120% Charges on trading insurances 0.01% 50% 0.005%

Source: Local media

AmCham Industry Insight . 43 Finance chap 6.qxp_Layout 1 1/16/20 2:17 PM Page 44

Capital Crunch

EGX Indicators

Sectoral Performance (Jan-Oct 2019) Trading Activity by Sector (Jan-Oct 2019) Banks 26.7% Travel & leisure 18.9% Telecommunications 9.9% 18% 14% Financial services excluding banks 8.7% Telecommunications 5% % of 15% Real estate 9.9% Real estate 5% Value Personal & household products 1.6% Traded Financial services 6% excluding banks -0.6% Healthcare & pharmaceuticals 14% 11% Technology -17.3% Food & beverage 13% Healthcare -9.0% Chemicals & pharmaceuticals -26.1% Industrial goods, services & automobiles Industrial goods, services & automobiles -25.7% Construction & materials 11% 3% Personal & -24.2% Basic resources 3% 29% household products 4% % of Travel & leisure 5% Volume Bulk of Foreign Activity Others in Volume Terms (Jan-Sept 2019) Traded 12% Average share of sector trading 18% 15%

Banks Healthcare Technology Trading Aggregates 58.0% & pharmaceuticals 28.5% 45.0% Trading value (EGP bil lion) Trading volume (billion securities) 7.9 57.8 54.8 6.6 Personal Food & household products & beverage 46.3 44.2 40.7% 36.8% 34.0 5.5 16,000 3.8 3.9 3.9 5.0 25.6 23.1 2.7 14,000 20.2 17.1 2.1 13.5 2.2 12,000 Net (non-Arab) Foreign Purchases

10,000 (USD million) Jan Feb Mar Apr May Jun Jul Aug Sep Oct 3.9 3.8 8,000 1.9 1.8 -0.06 1.2 6,000 -4.2 0.5 -0.08 -1.03 0.2 0.5 0.1 0.2 0.08 0.2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct 4,000 -0.4 -0.2 -0.7 -0.5 -0.3 -0.2 2019 2018 2,000

0 January February March April May June July August September October November

Source: EGX

44. AmCham Industry Insight Finance chap 6 Box.qxp_Layout 1 1/16/20 2:18 PM Page 45

EXPLOITING Sovereign Capital

overeign wealth funds (SWFs) are state-owned investment funds used worldwide by governments to manage their national savings. They typically invest globally in real and financial assets such as stocks, bonds, real estate, precious metals or in alternative asset management investments such Sas private equity (PE) or hedge funds. In October 2019, Egypt’s government launched its first SWF—Tharaa (Arabic for wealth)—to maximize the value of public sector assets. News of Tharaa first emerged in June 2018 after the government ratified the Sovereign Wealth Fund Law 177 of 2018, which governs the struc- ture and function of SWFs in Egypt. The plan was to launch Private Investment the fund by 2018’s end but the global emerging market by Sector (FY 2018/19) (EM) sell-off and tightened global conditions delayed its Total=EGP 484.2 billion (USD 28.5 billion) execution. Tharaa was created to steer investment toward lucrative Agriculture Other sectors including agribusiness and food processing, phar- Wholesale 15% Natural gas maceuticals, infrastructure and logistics, power and & retail 4% 21% tourism. It will operate through three partnership models. 5% In the first, the SWF partners with private-sector investors; in the second, Tharaa partners with other SWFs; and the 7% Real estate 17% third model involves public-private partnerships, joint ven- ICT tures (JVs) and other sub-funds with the private sector. The 9% 12% 10% EGP 200 billion (USD 11.7 billion) fund plans to grow its Transportation authorized capital to EGP 1 trillion (nearly USD 60 billion) over the medium term through a diversified portfolio of Electricity Manufacturing investments and partnerships. Source: Central Bank of Egypt

AmCham Industry Insight . 45 Finance chap 6 Box.qxp_Layout 1 1/16/20 2:18 PM Page 46

Capital Crunch

“Egypt is among the most attractive emerging mar- macro climate. “We have an 18-month window before ket economies today,” Tharaa CEO Ayman Soliman traditionally strong emerging markets, which have told local media in October. “It has strong fundamen- seen a downturn this year, start picking back up tals as well as the demographics, consumer market again… Egypt managed to bring in hot-money port- and [other dynamics] needed to drive growth.” He folio investors in the worst of times thanks to high noted that Egypt’s above-average yields puts Tharaa yields. Tharaa can leverage this to draw them into at an advantage amid the currently challenging global more long-term instruments.”

Largest SWFs by Total Assets (2019) Total Assets Rank Fund Region (USD billion) 1 Norway Government Pension Fund Global 1,098.8 Europe 2 China Investment Corporation 940.6 Asia 3 Abu Dhabi Investment Authority 696.7 Middle East 4 Kuwait Investment Authority 592.0 Middle East 5 Hong Kong Monetary Authority Investment Portfolio 509.4 Asia 6 GIC Private Limited 440.0 Asia 7 National Council for Social Security Fund 437.9 Asia 8 SAFE Investment Company 417.8 Asia 9 Temasek Holdings 375.4 Asia 10 Qatar Investment Authority 328.0 Middle East Source: Sovereign Wealth Fund Institute

According to the Sovereign Wealth Fund Institute, falls under Tharaa’s energy sub-fund. The SWF has three Egypt’s Tharaa currently holds USD 12 billion in total other sub-funds in the works: the tourism and antiquities assets and is ranked 42 worldwide, 11 in the Middle fund will see the light by 2019’s end, while the manufac- East and second in Africa. turing-focused and agriculture/agro-industrial funds Tharaa will use the PE model to offer stakes in compa- have undisclosed timelines. nies and projects across industries. Since its launch, the Bidding for a 70% stake in Tharaa’s power plant fund has received seven offers from investors for poten- transaction are emerging market PE giant Actis, tial partnerships in healthcare, pharma and agricultural France’s global electric utility company Engie, China’s manufacturing ventures. Tharaa also sealed a USD 20 Datang Overseas Investment Company (operating in billion JV agreement in November 2019 with the Abu power and engineering contracting), energy-focused Dhabi Development Holding Company, the UAE gov- PE business Blackstone Energy Partners’ Zarou, and ernment’s investment arm, to establish an investment Southeast Asia’s power producer Edra Power Hold- platform to inject capital in a number of sectors. The fund ings. Local investors are also taking part: Egypt’s is also in control of the Siemens/Orascom Construc- Elsewedy Electric expressed interest but had not an- tion/Elsewedy Electric combined-cycle power plants (lo- nounced an official bid. The electric and wind energy cated in Burullus, Beni Suef and the New Administrative producer is also eying other potential SWF investment Capital), in which a number of players are looking to ac- opportunities in the natural gas sector. Orascom In- quire stakes. According to Tharaa’s Soliman, the plan is vestment Holding’s Executive Chairman Naguib to sell shares of one plant by the end of 2020, with stake Sawiris also expressed interest in investing with sales for the other two plants to follow. The transaction Tharaa in Egypt’s mining sector.

46. AmCham Industry Insight Finance chap 6 Box.qxp_Layout 1 1/16/20 2:18 PM Page 47

Egypt’s PE Scene PE involves a pool of investors or high-net worth in- food and beverages, education and healthcare. There dividuals (usually operating through a firm or a series are 18 PE firms in Egypt, the majority of which are of funds) acquiring controlling management and eq- large local players such as BPE Partners, Qalaa Hold- uity stakes in private businesses, making it a key mile- ings and Arab Moltaqa Investment (AMIC). “The mar- stone in the target company’s capital-raising and ket also consists of some regional players and a few growth cycle. “Investors have already moved into global players like Actis,” adds El Kholy. emerging market equities and bonds but remain un- “Private capital can be a real and enduring source derexposed to private investments in emerging and of investment for Egypt—if Egypt creates the right frontier markets,” said Richard Banks, consulting edi- projects and the right legal environment for it to have tor for Euromoney Conferences, at the Egypt road- a home in the country,” said Euromoney’s Banks. Up show in September 2019. “This is an opportunity until 2017, PE inflows were stifled by an unfavorable which Egypt must take if it is to attract the capital business environment. Among the deterring factors, flows it needs to develop its economy in a post-FDI PwC listed the lack of minority investor rights protec- age.” tion, bankruptcy law, and clear and transparent in- Despite its market potential, PE penetration in vestment regulations, as well as profit repatriation Egypt remains low compared to peer economies. difficulties. There are a few onshore PE funds, but local firms tend On the external front, a major scandal that unfolded to base their funds offshore or establish atypical fund in 2018 shook PE inflows to the whole MENA region. structures onshore such as investment holding com- Dubai’s PE giant Abraaj, which was the region’s panies. largest buyout fund, filed for provisional liquidation According to Sherif El Kholy, Actis’ partner and in June 2018 after it collapsed amid investors’ allega- head of MENA, Egypt’s PE industry has been around tions it had mismanaged a USD 1 billion healthcare for a good 20 years, with EFG Hermes and the Com- fund. The scandal significantly eroded institutional in- mercial International Investment Company (CIIC) vestor confidence in EM-based private equity firms, Fund the first large-scale PE firms in the country. “At including those in MENA. the time, most funds were directed towards family The PE market has dramatically changed over the businesses and SMEs [small and medium enter- past two years. In July 2019, Actis acquired the rights prises],” El Kholy says. “The industry has since to manage two PE funds previously run by Abraaj, evolved, currently involving heavy activity in buyouts, which included investments in 14 portfolio compa- expansion capital deals, replacement capital deals, nies. El Kholy says his company wants to bolster the and buy and build platforms. It is true that a lot of PE industry. “Abraaj definitely did affect the confidence activity in Egypt is still driven by family businesses, and appetite for PE in the entire MENA region, which but these types of businesses have been institution- is one of the reasons why Actis decided to step in to alized and scaled up pretty well, making them lucra- salvage the situation,” he notes. Two other Abraaj tive for PE activity.” funds were acquired by international investors. As more fund managers move in to the market, the Closer to home, the government has overhauled sizes of PE deals have progressively increased. Ac- and introduced a bundle of laws to improve Egypt’s cording to the global advisory services firm PwC, the investment climate and increase foreign capital in- majority of local and large regional PE firms occupy flows. “We are quite confident in Egypt’s PE business. the mid-cap segment, targeting companies with mar- 2019 has been a year of stabilization and momentum ket capitalizations between EGP 50-200 million (USD buildup,” says El Kholy. “Egypt’s biggest opportunity 3-12 million). There are a few key players occupying is to capitalize on building sizeable, scalable pan- the large-cap segment (targeting companies with African businesses. With Egypt heading up the market capitalizations exceeding EGP 200 million) African Union, there’s an opportunity to create more with average investment ticket sizes of USD 10-50+ business ties between Egyptian and African busi- million, mostly directed to ‘defensive sectors’ (those nesses and capitalize on investment opportunities relatively resistant to market contractions) such as that arise as a result of that.”

AmCham Industry Insight . 47 Finance chap 6 Box.qxp_Layout 1 1/16/20 2:18 PM Page 48

Capital Crunch

Opportunities, Areas of Development and Legislative Enablers for Egypt’s PE Industry

Transaction Lifecycle

Concerns: • Lack of awareness of Egypt’s PE market among potential Fundraising investors, limiting the potential for fundraising. • Fluctuating oil prices are limiting the ability of GCC investors to provide funding.

Concerns: • Egypt’s limited liability partnership (LLP) model does not allow for tax transparency. It prohibits investment of funds on behalf of others, Fund creation and is therefore an unsuitable model for PE funds. • Regulatory framework does not encourage investors to establish onshore funds in Egypt.

Regulatory Fix: Amendments to the Companies Law (Law 4 of 2018) Investment origination

Concern: • Corporate governance is often lax in SMEs, which impedes the due Investment diligence process. This discourages some fund managers from negotiation investing in SMEs.

Regulatory Fix: MSME Law (draft)

Investment closure

Concerns: • Lax minority investor protection and solvency • Obtaining the necessary approvals for operations is a lengthy process that is not investor-friendly. Investment management Regulatory Fixes: Companies Law 4 of 2018 Bankruptcy Law 11 of 2018 Investment Incentives Law 72 of 2017

Investment Concern: exit • The NILEX is not considered an attractive option for listing due to the low trading volumes.

Source: PwC

48. AmCham Industry Insight