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.