Category Archives: Banking

Breakfast Wrap: US Victory Shines Light on Egypt’s Inexperience, Energy Problems

More than $6 billion was spent on campaigns that sought to prove how both candidates would attempt to turn around the deepest economic downturn since the Great Depression.  It was Barack Hussein Obama’s night, and as the WSJ put it:

Mr. Obama’s victory in the bruising campaign marks a landmark in modern election history. No sitting president since Franklin D. Roosevelt in 1940 has won re-election with a higher unemployment rate, which stands at 7.9%. 

The candidates emphasised the economy in aggressive campaigns that sought to reassure Americans how the country would be pulled out of its crisis.

It was in stark contrast to Egypt’s presidential campaigns, which failed to acknowledge the most pressing problems and papered over the economic challenges with vague rhetoric about social justice.

Hardly a word was muttered about the North African nation’s biggest economic challenges including the budget deficit, or how the presidential candidates would seek to reduce the almost 13% unemployment rate.  The US victory shines a light on Egypt’s political inexperience and misdirected focus on religion.

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On that note: Egypt’s pound weakened on Tuesday to its lowest against the U.S. dollar since 2004, and traders and analysts speculated the central bank may have resumed a policy of allowing a gradual depreciation, Reuters reported. (That is despite common knowledge among traders that the Central Bank intervenes in the currency through state banks).

Egypt’s foreign reserves have hovered at about $15 billion, just above the critical level enough to cover three months of imports. But any increase in reserves has so far been superficial and down to international donors funnelling cash straight to the central bank to support the pound.

As London-based Capital Economics analysts said in a note to investors earlier this week:

Talks between Egypt and the IMF this month have focused attention back onto the external financing requirements of the region’s resource-poor economies. But so long as their oil-rich neighbours continue to drip-feed aid, we think they should be able to avoid full-blown balance of payments crises.

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In the clearest sign of Egypt’s energy problems, yesterday Orascom Construction Industries was forced to stop production at three fertiliser lines after the state gas company cut off supplies from a gas field for emergency maintenance.

Egypt, which is a net gas exporter, has been suffering more and more fuel shortages and electricity cuts due to growing domestic consumption.  The country has had to re-direct gas for domestic use, that would have otherwise been exported.

Local media has reported talks between the Egyptian government and Qatar in the last few weeks to import liquefied natural gas to cover its needs.  Algeria was also a possible contendor for the job.

It is a clear signal of how an addiction to energy subsidies has managed to infiltrate almost all parts of Egypt’s economy.  Bankers tell me that the reason foreign reserves have declined, is not just to support the currency but to ensure Egypt has enough to keep importing oil and gas to keep its subsidy system running.

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In other news:

–  Dana Gas, the first UAE company to fail to meet a bond redemption, said it had reached a restructuring deal “in principle” to repay a $1 billion sukuk, potentially averting seizure of its assets, Reuters reports.

Natural gas producer Dana, headquartered in the emirate of Sharjah, said it will cancel $80 million of the Islamic bond and sukuk holders will receive a part payment in cash from Dana as part of deal reached with an ad-hoc group of bond holders.

–  Abu Dhabi Islamic Bank is set to become the first Gulf Arab company to issue a hybrid Islamic bond this week, but investors are likely to demand a big premium for the rare structure.

ADIB’s Tier 1 sukuk structure, which is expected to raise $500 million, is a different animal: it does not have a maturity date – hence it is “perpetual” – and the principal is repaid at the discretion of the issuer.

If ADIB’s issue is successful, it could pave the way for other banks in the region to follow suit, although the jurisdiction in which the bank is located will be important.

Breakfast Wrap: Libya’s Drop in the Ocean Aid to Syria, Egypt Tender Delays, UAE Central Bank

The Syrian National Council (SNC) says it has received over $20 million in aid from Libya since it was founded in October 2011.  That’s half of the $40.4 million the opposition group has amassed since August 2011.

As Borzou Daragahi of the FT put it: “The top financier of the Syrian opposition is no Arabian Peninsula oil kingdom or cloak-and-dagger western spy outfit, but struggling, war-ravaged Libya, which is itself recovering from a devastating civil conflict.”

Qatar gave $15 million, while the United Arab Emirates gave $5 million.

But why is Libya supporting Syria? Some indications here from Daragahi:

Oil-rich Libya has emerged as one of the Syrian uprising’s firmest and earliest backers. Perhaps dozens if not hundreds of veterans of the Nato-backed rebel insurgency against Colonel Muammer Gaddafi have travelled to Syria to fight against the regime of President Bashar al-Assad. Its interim foreign minister said earlier this year that his governmentcould not prevent or condemn Libyans heading to Syria to fight.

Despite this quite detailed release from the SNC, the balance sheet, if true and accurate, also exposes how little money the opposition group has.  Other details that emerged from the financial document, which apparently is an attempt by the SNC to look more transparent, show the group has just $10.7 million in its bank account.

While Egypt is getting multi billion-dollar easy loans funnelled straight to it almost two years after a popular uprising forced the former president to step down, the SNC has to manage with just a fraction of that.   Egypt may be a strategically important country in the Middle East that is too big to fail, but in the bloodiest uprising that the Middle East has seen since the beginning of the last year, Syria will need much more than just $20 million if it is to beat the Assad regime. 

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In the latest sign of Egypt’s energy troubles, Egypt’s state-owned Egyptian Natural Gas Holding Company (EGAS) has postponed the closing date for international companies to present their bids for 15 oil and gas concessions by three months due to weak interest in the tender.

After all, would you do business with someone if you couldn’t guarantee you would get paid?

EGAS has pushed back the deadline for bidding to February 13 from November 14, a posting on the company’s website showed without elaborating, Reuters reported.

Oil minister Osama Kamel had revealed on a Monday late night talk show that “the interest wasn’t at the level that we wanted.”  

Oh dear.  It’s the second controversial delay of a tender after the other main state-run energy firm Egyptian General Petroleum Corporation (EGPC) pushed the closing bid for its tender to March 29, from January 30, to allow more companies to take part.

EGPC is due to announce the results of its latest bid round some time this week, around seven months after the closing date.

The main problem is that Egypt’s energy supplies are overstretched because of rising domestic demand (from inefficient subsidies) and rising debt levels (also partly because Egypt sells what would be quite expensive energy at subsidised prices).

Earlier this week there were some moves made to test ration cards in four Egyptian provinces that limit the amount of subsidised energy distributed, but the country needs to move fast on implementing reforms before companies that explore for oil and gas decide they can no longer do business with an indebted country. 

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The impact of Egypt’s oil troubles are not just limited to the North African nation.  Many energy companies are owed billions of dollars in overdue payments from Egypt’s state-run energy firms and those oil companies that aren’t able to restructure the debt are having problems of their own.

UAE-based Dana Gas, for instance, last week missed a $920 million Islamic bond redemption, but said today it was still negotiating a standstill agreement with a creditors’ committee.

Dana, which became the first UAE company to miss a bond redemption, started encountering problems after the company was hit by payment delays on the gas it supplies to Egypt and Iraq’s Kurdistan region.

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All change at the helm as top Abu Dhabi banker Khalifa Mohammed al-Kindi becomes the new chairman of the UAE’s central bank, Reuters reports.

Al-Kindi is what you would call a banking celebrity.  He started his career at the Abu Dhabi Investment Authority (ADIA), one of the world’s largest sovereign wealth funds and is a former chairman of National Bank of Abu Dhabi, the UAE’s top lender by market capitalization.

He’s a fitting man for a role that will see him head board meetings, have the final say on policy decisions, and other very important things that big bankers do.

The new chairman, whose position has not been formally announced yet, will probably also have to deal with several moaning state companies, after Abu Dhabi last month decided to issue a new directive that will rein in boom-year borrowing that has triggered bailouts of state-linked companies and losses.

Breakfast Wrap: Gulf Arms Sales, James Bond’s Villain, Fire EFG CEOs?

The ugly military power of the Gulf, including the United Arab Emirates, Saudi Arabia, Qatar and Bahrain was exposed during the “Arab Spring”.

It wasn’t a huge surprise that this oil-rich area was well-equipped with arms, but it did show that “it is presidents and colonels, not kings and princes, who have proven most vulnerable to social upheaval,” a note from Foreign Policy Research Institute sums up.

This subject, worth a post of its own, is one worth keeping an eye on if only for the United States’ (and the United Kingdom in some cases) involvement in supporting these autocracies for their own benefit.

Just two days ago Boeing Co secured a contract valued at $4 billion to modernize the Royal Saudi Arabian Air Force’s fighter jet fleet

The work, which will be done at the Robins Air Force Base in Georgia, offers a glimpse into the long-standing ties between the US and Saudi Arabia.

And with most deals, it’s win-win.  For the US, Saudi Arabia’s military power helps protect it against Iran, while for Saudi it is about maintaining rule.

Saudi Arabia used F-15s and Apache helicopters in late 2009 to fight Muslim Shiite rebels who crossed the border from Yemen and seized territory inside the kingdom.

Despite sporadic demonstrations, little opposition has mobilised against ruling families in the Gulf, aside from Bahrain, where the threat to monarchical rule was countered with local security forces helped by the Gulf Cooperation Council troops.

Order is maintained, for now.


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Finally some real work on energy subsidy reform from Egypt.  The North African nation Egypt has taken a first step to getting expensive energy subsidies under control, a key component of an economic reform programme the cash-strapped government is presenting to the IMF to obtain a loan, Reuters reported.

The cabinet received on Thursday the preliminary results of a pilot programme to use ration cards to distribute cooking gas to the needy instead of selling it on demand, Petroleum Minister Osama Kamal is quoted as saying.

The government spent 96 billion Egyptian pounds, or 20% of all expenditure, on subsidising petroleum products, including cooking gas, in the financial year that ended on June 30.

The ration system, where gas cylinders are only given out to those with the correct cards, has only been tested in four governorates (there are just under 30), but a start is better than nothing.

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Egyptian investment bank EFG Hermes aims to expand into Turkey, Iraq and Libya and plans to grow its asset management arm by 50% after the completion of its joint venture with Qatar’s QInvest, it said on Friday.

Ok, the ambitions sound reasonable enough, especially considering EFG Hermes is one of just a handful of investment banks that is plying to become more of a regional power.

However there is a big glitch to this plan.  EFG’s top two chief executives, Yasser El Mallawany and Hassan Heikal are currently under investigation for alleged insider trading.  The controversial case, which also implicates the once untouchable Mubarak sons, has been dragging on since the beginning of this year.

In a post-revolutionary climate, where transparency and accountability are King, will EFG’s reputation hold up, even with Qatar’s influence?

Perhaps it’s time to let go of the weakest link? Yes, EFG has so far protected Heikal and El Mallawany, but the damage has been done and the bank is effectively being taken over by the Qatari firm.  There’s nothing to it now but to fire the CEOs. 

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The latest James Bond blockbuster has the villain, not as a giant with metal teeth, or a Japanese man adept at throwing a steel-rimmed bowler hat, but as a super cyber hacker.

This is today’s national security risk and the US and some countries in the Middle East have become the main targets.

The National’s Tony Glover sets out the US defence secretary’s main fears and new strategy against cyber crime.  Leon Panetta, has warned that America is facing the prospect of a highly targeted and orchestrated attack by adversaries of the United States, which officials identified as China, Russia, Iran and militant groups.

Mr Panetta outlined a nightmare scenario in which the US suffers a string of disasters such as derailed passenger trains loaded with lethal chemicals, simultaneous contamination of the water supply in major cities and a shutdown of the power grid across large parts of the country.

Breakfast Wrap: Lights Out for Egypt? A Show for the IMF, Qatar Defence Plans

If the latest comments from the government can be believed, the decision to enforce a 10pm curfew today for shops and restaurants will be postponed “indefinitely”, local development minister Ahmed Zaki Abdeen told Al Masry Al Youm.

Read this as: “We have realised that this move, meant more as a symbolic gesture to save energy and appear proactive, will actually be more detrimental than helpful for the domestic economy, and we have decided to abandon these plans for now.”

Aside from creating another situation where a lack of clarity is unnerving for the business community, whatever the government does now is likely to be criticised.  They either back-track from an original decision, making the president and his ministers look weak, or they stick to the plan which will cost the economy billions of dollars.

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On the bright side negotiations over a loan with the International Monetary Fund has pushed the Egyptian pound to a near 8-year low, Reuters reports.

Now is the time to swap all your pounds for US dollars! Personally I hold my cash in Sterling, the strongest currency in the world (Disclaimer: this is not investment advice, and I am not an investment advisor, but I am British and I have a strong alliance to the Great British Pound.)

Traders said that by letting the pound slip, the government seemed to be signalling to the IMF it is prepared to be flexible over the value of the currency, which many analysts say is substantially overvalued against the dollar, the Reuters report said.

This may be a comfort to the IMF delegation in Cairo, but it’s only the tip of the iceberg.  Some evidence must be offered to the IMF to show the government is full-steam ahead with energy subsidy reform, the biggest drain on the country’s finances and one of the reasons why foreign reserves have been down (i.e. to fund petroleum imports).

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Citadel Capital, an Egyptian private equity outfit, are slowly moving in to fill the gap that is forecast once the country’s subsidies package diminishes. 

The company’s $3.7 billion investment in the Egyptian Refinery Company was one way of doing this (refine at home rather than import more expensive already refined fuel).

Another is through investing $200 million on barges, ports and storage facilities that are already handling shipments of wheat, cement and phosphate, Bloomberg reports.

Why? Because as the subsidy reform hits Egypt’s transport system and cheap fuel is a thing of the past, trucks and railroads will cost more to run, tipping the scale towards cheaper modes of transport like barges.   

Within five years, the share of cargo moved by river may jump to at least 15%, [from just 0.5%] said Stephen Murphy, a managing director at the company.

Savvy, those Citadel Capital guys.

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Another group of shrewd, albeit indulgent, investors are the Qataris.

This FT piece on the reasons behind Qatar’s decision to create a 50 million Euro fund to invest in some of Paris’s poorest suburbs shines some light on the investment strategy behind the Gulf state.

The French political right and left united in disapproval.

Yet the reaction shows a fundamental misunderstanding of the way Qatar operates globally and what it is trying to achieve. The pattern of its international relations shows its investments are geared primarily to three things: profit, security and building a brand that appeals to its western allies despite not being a democracy.

It’s not until you get to the end of the piece that you realise why it’s singing the praises of Doha.

The author is deputy director for the Royal United Services Institute (Qatar), and would probably get fired if he wrote anything else. But still, interesting read in Qatar’s defence plans.

Breakfast Wrap: Egypt’s Oil Curse – Part Two

This morning’s Breakfast Wrap will be dedicated to Egypt’s energy crisis and part two to yesterday’s “Oil Curse”.

That’s because two significant calendar events are in store for us this week:

1) From Thursday, shops will close by 10pm and restaurants without tourist licences will close by midnight, hours earlier than usual
2) A delegation from the International Monetary Fund will arrive this week to re-start negotiations over Egypt’s request for a $4.8 billion loan.

Both of these events are inherently related to energy subsidies.  Simply Egypt’s energy shortages because of its wastage and misdirected spending has meant the government is cutting consumption where it can and as quickly as possible.  In addition, the delayed reforms of energy subsidies may cost Egypt almost $5 billion unless the government can show it has a long-term plan in place.

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Breakfast Wrap: Egypt Must Stop Crying Wolf, Hussein Salem’s Seedy World

I was on a conference call with several Arab (some of them Egyptian) economists and analysts based in New York yesterday, and they told what their biggest concern is regarding Egypt’s transition to democracy.

It wasn’t the confusion over writing a constitution, nor the risk of violence from protests. It wasn’t even nationwide subsidies that have bled the country dry for the past few years.

The analysts’ biggest worry was the credibility of news announcements that come out of Egypt almost on a daily basis.  For example, do we believe the government’s statement that they will secure an IMF loan by November when they’ve been repeating this statement for months?

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Lebanon’s Economic Fragility

The scars of civil war still run deep in Lebanon after prolonged battles from 1975 to 1990.  

Beirut become synonymous with carnage and street fighting ruined large parts of the city.

Since then, huge reconstruction programmes have brought the country back to life and Lebanon has enjoyed periods of economic prosperity as a trading, financial and tourist hub.

But that is all threatened once again with recent events.

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Breakfast Wrap: Made in Asia – China & Japan in North Africa, Saudi-Style Revolution

[caption id="attachment_868" align="aligncenter" width="580"] Japan’s stamp on Cairo’s Subway. By Ed Giles.[/caption]

Egypt is to China and Japan, what Pick ‘n’ Mix is to an eager child.

The North African nation has a diverse selection of attractions for Asia, such as its proximity to Europe and the rest of Africa, its huge labour force and access to the Suez Canal.  All of that comes at a relatively good price and with a favourable tax climate.

That is why, during the revolution, Asian countries (especially China) continued to pour money into the country while others were wary.

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Breakfast Wrap: Iraq Central Bank Head Suspended, Mubarak’s Laundromat

Nothing is more controversial in business and finance than banking, as we saw yesterday with the media storm that erupted after the departure of Vikram Pandit as chief executive of Citigroup.

But the most contentious of all are the central banks.  These are organisations sitting at the juncture of both economic and government policy.

Yesterday we saw how controversial this industry can be when the governor of Iraq’s Central Bank was booted over allegations he had intentionally weakened the value of the Iraqi dinar against the US dollar.

“The cabinet decided to authorise Abdelbassit Turki, the head of the Board of Supreme Audit, to run the central bank indefinitely,” Prime Minister Nuri al-Maliki’s spokesman Ali Mussawi said, adding that Sinan al-Shabibi had been suspended from his post by the anti-corruption watchdog.

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Gulf Insider Fraud

Fraud is down globally and the proportion of companies that suffered an incident slid to 61%, from 75%, according to a report published today from Kroll Advisory Solutions that was prepared with the Economist Intelligence Unit.

“But the biggest threat is from within,” the report says, with two-thirds of the firms hit by fraud in the company’s survey citing an “insider” as a key perpetrator.

Things start getting interesting in the Middle East section of the report, which is mainly focused on the Gulf states, including Saudi Arabia.   Though Gulf state respondents reported a lower prevalance of fraud than the global average, the “main perpetrators of fraud in the Gulf differ in some ways from the norm.”

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