Category Archives: Qatar

First comes love,

Then comes marriage,

Then comes bickering over money.

Qatar and Egypt are turning out to be a predictable couple.

Qatar, the sugar daddy in the relationship, has provided more money to Egypt than any other Arab ally. With $8 billion in loans, grants and deposits, it is by far the biggest financial backer of the Islamist-led government.

As a bonus, it’s also thrown in gas supplies to cover any shortages over the summer period.

This gives the Qataris power and easy access to the Arab world’s most populous country, even if Qatar’s Prime Minister Sheikh Hamad bin Jassim al-Thani insists that Qatar “did not ask for anything in return”.

Meanwhile, the aid strengthens Egypt, the damsel in distress, in her time of need.

But the relationship is doomed to fail.

Egypt is asking for more for less, while Qatar is not getting much in return as it sees that its cash is merely sustaining a costly budget that needs restructuring and allowing Egypt to delay its economic plans.

So the tables have turned. Qatar, previously quiet on its demands, is asking for 5% interest on $3 billion of bonds it wants to buy from Egypt.

This is not a generous deal and is in line with normal market rates (for instance, look in comparison at the $4.8 billion loan from the International Monetary Fund and the meagre 1.1% rate attached).

What’s more, if Egypt goes to the debt markets to raise more money for its deficit, it will likely pay more than 5%.   The yield on the Egyptian government’s $1 billion of benchmark 5.75 percent dollar-denominated bonds is around 7.1% in secondary markets, for example.

Egypt should consider Qatar a temporary donor, and one that is not looking out for its best interests.

It would be best served to expend its time negotiating energy contracts with Qatar because this is where Egypt is mostly struggling (energy subsidies are a huge weight on the budget and the inefficient system has led to fuel shortages that threaten livelihoods, cause nationwide electricity blackouts and miles-long queues for diesel).

Agreeing preferential rates on energy contracts with countries including Qatar, Libya and Iraq would be a huge boon for Egypt which spends almost two billion dollars every couple of months buying fuel, on top of the normal allocated amount in the budget.

Focusing on cash to buy Egypt’s debt and prop up its reserves is expensive and will only have to be re-paid later.

Egypt has the advantage with its Arab allies, who want a slice of Egypt more than it wants a slice of them. It’s time Egypt negotiated with this in mind.

When the deal between Egyptian investment bank EFG Hermes and Qatar’s QInvest fell apart yesterday, some in the banking industry were not surprised blaming Egypt’s stagnant business environment.

“Since when did the regulator approve anything after the revolution?” lamented one banker.

The Cairo and Doha-based banks said a planned joint venture had ended after they reached a 12-month deadline without approval from the Egyptian regulator, the Egyptian Financial Services Authority. The two sides had received approval from countries including Saudi Arabia, the United Arab Emirates, Qatar, and Jordan.

It was seen as the latest casualty of Egypt’s struggling economy after January 2011.  But there is more to the story than meets the eye.

EFG Hermes’ top two executives, Hassan Heikal and Yasser El Mallawany are under investigation for alleged insider trading. They are among nine, including the two sons of former president Hosni Mubarak, alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May.

EFG’s CEOs and the other defendants deny the charges. The case is ongoing.

EFG spokespeople insisted there was no link between the delays in approving the joint venture and the investigations into the CEOs. But this is very difficult to believe when history shows that if any company is hit with any allegations of financial misconduct the heads of the company are usually the first to go.

The fact that Mr Heikal and Mr El Mallawany did not resign, despite investigations into a previous transaction, is likely to have put a dampener on the deal.

The CEOs reputation was no longer intact, innocent or not. Both are rumoured to have had close relationships to the former regime, especially Gamal Mubarak, within and outside the bank.

For some countries, this would be enough to prompt a resignation.

In Spain, for example, a rule of “professional virtue” is used as a prerequisite for those working in the banking industry and can be lost by anyone faced with a criminal record.

If the deal had gone through it would have paved the way for QInvest to buyout 60% of EFG, plug another $250 million into the banking business and give the CEOs a free ride out of their mess and responsibilities for the bank.

Was the head of Egypt’s regulator, Ashraf El Sharkawy, prepared to take this responsibility, knowing it would give the men a free pass?

It’s unlikely.

The Financial Times alludes to this too:

According to a person familiar with the deal: “It fell through because no one in Egypt now wants to make a decision or affix their signatures to a piece of paper.”

Businessmen in Egypt have complained that, since the 2011 revolution which ousted Hosni Mubarak as president, officials have shied away from making big decisions because of fears over possible allegations of corruption.

What now?

EFG has turned to Plan B. It will sell “non-core” assets and return most of the cash to shareholders to cut costs by 35%.

In light of the deal falling apart, and another lost business opportunity, perhaps it’s time for Mr Heikal and Mr El Mallawany to do the right thing and step down, taking responsibility for their case until it is resolved.

There are few Egypt’s president can rely on more in these economic hard times than his band of Islamist brothers.

Key financial supporters from Islamist-led governments have come through with cash injections at times of extreme economic hardship, when Mohammed Morsi faced a spike in inflation and subsequent social unrest.

Egypt’s Islamist groupies, including Qatar, Turkey, Saudi Arabia and Libya have all together offered the country $10 billion, partly to boost the Central Bank’s coffers, partly to help with energy imports.

But this generosity, however unwavering, is unsustainable.

As the FT’s Middle East editor Roula Khalaf puts it:

This unconditional assistance has no chance of boosting confidence or putting the economy on a more sustainable track unless accompanied by political commitments.

In fact, propping up the budget this way only serves to artificially cushion the Muslim Brotherhood and allows them to delay an economic reform plan.  

Because after all, what’s the point of importing Libyan oil to feed an addiction to energy subsidies? Why support the Central Bank’s reserve pot when the country has struggled to put forward an economic plan that will safeguard future reserves?

This is why other countries have been wary of pouring money into Egypt, and in so doing, unfairly legitimising the Morsi administration at a time of political divisiveness. 

Without such budgetary support, the Brotherhood would be forced to be more conciliatory toward opposition groups and find compromises. Otherwise, they risk being voted out of office for failing to stop an economic backslide.

It’s important to differentiate between aid to Egypt and budgetary support for Mohammed Morsi and his government. These are not mutually exclusive.

 While Islamist governments such as Qatar and Libya may believe unconditional support will allow the Brotherhood to hold onto power, international donors should not withhold aid to Egypt’s people who are facing the very real possibility of chronic food and fuel shortages.  It is possible for donors to provide support toEgypt (for example by investing in key youth programmes and infrastructure projects) without propping up the Brotherhood. 

What is clear is that instability in Egypt will not bode well for the region, not for donor countries who need economic and political stability in Cairo.

The International Monetary Fund, after signalling that it does not believe Egypt’s proposed economic reform programme is strong enough, has offered Cairo a temporary loan to help the nation weather its currency and budget crisis while it negotiates a more complex $4.8 billion loan.

In Washington, the International Monetary Fund said Egypt needed bold and ambitious action to tackle its economic problems urgently and it could get temporary IMF funding while it negotiated a long-delayed full loan programme.

An IMF spokeswoman Wafa Amr said the Rapid Financing Instrument was designed to provide rapid, but limited, assistance to member countries facing urgent balance of payments needs.

Reuters, March 11

The stop-gap measure could amount to about $750 million, according to Reuters, a sum which pales in comparison to the budget deficit targeted at $28 billion this financial year, or 10.9% of annual economic output.

The Fund is quietly acknowledging that in the absence of the reforms president Mohammed Morsi has been reluctant to enforce, the country needs immediate help as it fast runs out of cash for fuel and wheat imports.

Providing immediate help at a smaller and more grass-roots scale, and ensuring this is not hinged on an IMF final accord is something other international investors should consider in Egypt, as Rebel Economy has argued before.

Especially as Gulf money, which has acted as a stop-gap in the past, is not forthcoming. (Qatari finance minister Youssef Kamal dashed any hopes that more funds were on their way soon this week. “We already announced $5 billion,” he told Reuters. Asked whether Doha expected to provide more, he replied: “Not yet.”)

But there is a problem in the IMF’s approach. 

While the IMF is working hard to represent a voice of compromise at a time when the government’s credibility is being tested and the mandate to follow through on important reforms narrows, it should not help Egypt plug an unsustainable budget through these temporary measures because it artificially props up the government.

Egypt should not accept the bridging finance.  Instead, what the government should do is begin a campaign to make the budget transparent and the economic situation clear. It needs to do that to get political buy-in for austerity measures.

The president and his supporters are buying time because they want to win parliamentary elections before imposing a more difficult economic reform plan. Accepting the bridging finance only furthers the government’s interests. 

It’s almost like Mr Morsi is holding the country hostage with the help of the IMF.

If anything the IMF should not offer bridging finance and force the president to be clear about a reform plan.

The chief executives of Egypt’s biggest investment bank, EFG Hermes, have been quietly replaced as the bank attempts to clean up its image ahead of a potential takeover from Qatari firm Qinvest, three sources close to the matter have said.

Hassan Heikal and Yasser El Mallawany, who were last year charged with alleged insider trading alongside the sons of the former Egyptian President Hosni Mubarak, are still “technically on board but have been removed from the executive function,” said one investment banker close to the bank. Mr Heikal and Mr El Mallawany are still getting a paycheck but remain in their positions only on paper, the banker said.

EFG Hermes denied any changes were made. The changes have not yet been officially announced and Mr Heikal and Mr El Mallawany are still employed as CEOs at EFG Hermes.

Karim Awad and Kashif Siddiqi, who were last year announced as the new co-CEOs as part of the Qinvest takeover, are now running the bank, a second banker said.  They were head of Investment Banking and head of Asset Management respectively.

Under Qinvest deal, Mr El Mallawany and Mr Heikal were to leave on completion of the transaction that would see Qinvest take control of the bank.  But the deal has stalled because of delays in getting government approval in some Arab countries, according to a statement from EFG in January.

Mr Heikal, who has been living in London for at least a year, is now “pursuing other opportunities” and is “definitely not involved in the running of EFG,” a third source said.

A registry form at the Dubai International Finance Centre in the United Arab Emirates, where EFG Hermes is also registered, lists Mr Awad and Mr Siddiqi as the new directors.  Mr Heikal and Mr El Mallawany are listed as former directors, ending their position in June 06 2013, just 7 days after the case of alleged insider trading was brought against them in Cairo.

In addition, EFG Hermes main website also suggests changes at the helm.  As of February 16, the website title Karim Awad as Co-chief executive of the investment bank, and lists him first in the ranking on the profiles page. But this change was made only a week ago, when the website had described him under the old title of  head of investment banking.

The change is subtle, but indicates a significant shift in the bank’s executive management.

EFG has seen a sharp drop in its market value since the turmoil of the 2011 uprising in Egypt, partly because of its association with Gamal Mubarak, son of the former Egyptian president who owned a stake in its private equity business.

A further shadow was cast over EFG when its two co-chief executives, Mr Heikal and Mr El Mallawany, were among the nine alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May. The case is ongoing.

At a press conference yesterday, Egypt’s bewildered minister of finance, El Morsi El Sayed Hegazy, struggled to compose himself in front of reporters.

The newcomer forgot his predecessor’s name and called the former finance minister Mumtaz Al Sagh instead of Mumtaz Al Saeed.

He also looked worriedly at his Freedom and Justice Party colleagues for reassurance and had to be handed documents detailing the few basic figures on Qatar’s loans to Egypt before he spoke.

The outcome of Hegazy’s confused and anaemic performance was a claim that the new law for Islamic bonds, or Sukuk, is expected to generate $10 billion for the Egyptian government.

A significant sum considering the law for regulating sukuk issuance in Egypt has been talked about for at least two years.

The move to implement one now has gathered momentum after the strong emergence of the Muslim Brotherhood following Egypt’s uprising in 2011, but progress has been slow.

Just last week,  Egypt’s cabinet finally approved a draft law to allow sovereign Islamic bonds as the government searches for new ways to finance an unsustainable budget deficit.

However, for the Muslim Brothers to push for debt, Islamic or not, is a concern for the country’s main religious authority, Al-Azhar.

As Maggie Hyde, at Egypt Independent wrote:

Adopting the Islamic banking law in Egypt has drawn significant scrutiny from civil society and religious figures — an indication of the struggle over Sharia-based laws in the future.  One of the main concerns is that putting the Islamic label on this sort of financing is merely cosmetic, a way to lure investors into a less than attractive market.

Members of Al-Azhar’s Islamic Research Academy rejected the Finance Ministry-backed bill, saying it “violates Islamic Sharia and endangers the state’s sovereignty”: 

The bill would allow foreigners to own sukuk, as well as shares in local factories and businesses, Al Azhar academy member and former Grand Mufti Nasr Farid Wasel told Al-Masry Al-Youm.

“It is like we are selling our properties to foreigners,” he said.

It is a further test of how Egypt’s Islamist government will reconcile religious beliefs with a modern economic framework. The Morsi administration has already faced this dilemma with the IMF loan, as they sought to convince conservatives that the contentious loan was Sharia-compliant.  The IMF distanced itself from this notion, saying instead that the interest rate on the loan is very favourable compared to other forms of financing.

But amid all the confusion during this messy political transition, a push toward tapping Islamic bonds for financing signals that the Brotherhood are promoting the very element of finance that Islamists usually reject – debt.

For the Islamists, this is the right kind of debt. However, they are mistaken on how much it will cost them.

In fact, in Egypt’s case, it will be cheaper to opt for conventional financing rather than sukuk.  To give one example, Egypt will borrow from the International Monetary Fund at about half the rate Qatar paid for sukuk in July.

Perhaps the nervous new finance minister should concentrate on practicing his public speaking before proposing Islamic finance as a credible way out of Egypt’s economic crisis.

The monthly announcement of Egypt’s net international reserves figure has become more of a spectacle of the country’s economic woes than a reflection of recovery.

Egypt’s foreign reserves have tumbled more than 60% from $36 billion before the uprising that toppled Hosni Mubarak in early 2011 and as the country’s key sources of hard currency – investors and tourists – have dried up.

Reserves rose slightly to $15.5 billion helped by a deposit by Qatar to support the economy, Egypt’s minister of finance said yesterday, but they remain at a dangerous level after being run down to defend Egypt’s currency.

Though sporadic official announcements convey seemingly unwavering optimism that reserves will be back to normal levels, behind these headline numbers is a more worrying figure.

In reality, liquid reserves, or convertible foreign currencies including securities, cash and deposits that can be used to defend the Egyptian pound, are at $11.8 billion, according to Egypt financial consultancy Dcode, which used data from the Egyptian Central Bank.

According to Dcode:

Liquid Net International Reserves (net of Gold reserves) declined from $21.3 billion in September 2011 to $11.8 billion in November 2012, covering only 2.2 months of commodity imports.  This figure includes past debt repayments, including a $1.6 billion debt repayment in July, but does not include any other repayments post-November 2012.

That suggests the Central Bank’s monthly announcement is extremely misleading and in fact Egypt is well below the three months of cover for imports that the IMF recommends its members retain.

But not only have economists suggested liquid reserves are falling at a faster rate than net international reserves, but that the $11.8 billon could be even lower in reality.

In a November 2012 note, Capital Economics economist William Jackson suggested liquid reserves are under $10 billion:

Jackson writes:

The CBE has intervened aggressively in the foreign exchange market to defend the pound against the backdrop of capital flight. As a result, FX reserves have fallen from a peak of $36.2bn to just $15.5bn at present (and liquid reserves have fallen even further). (See Chart 1.) The good news is that the CBE’s reserves have stabilised in recent months, mainly thanks to the drip feed of aid from the Gulf. And so long as the IMF deal is ratified by the Fund’s board next month, the Bank’s reserves should receive a more sizeable boost in the coming months.

As liquid reserves run dry, the Central Bank’s ability to defend an already overvalued pound has become untenable.

With no sign of a final agreement on the IMF loan, the Bank’s decision to launch dollar auctions (which many regarded as a late reaction) to effectively depreciate the pound makes a lot of sense.

Even more intriguing is the IMF’s own breakdown of Egypt’s reserve level.

The IMF figures suggest that the bulk of Egypt’s liquid reserves, excluding gold and other non-convertible assets, stand at about $7.1 billion.  That’s in stark contrast to the Central Bank, which says foreign currency reserves are $10 billion. That $7.1 billion figure may not represent the only liquid reserves but economists say they are unsure of what this level could be at the moment.

The Central Bank’s late decision to allow the pound to fall has cost the country and the Morsi administration.

Now Egypt has little choice but to rely on immediate, easy aid from the Gulf, and a long-term (and very contentious) loan from the IMF before it can recover to its original reserves level.

Could Egypt’s new central bank governor Hisham Ramez, who replaces Farouk Al Okdah, signal a shift in policy from tightly controlling the exchange rate of the pound – as it has done for nearly a decade – to introducing a more balanced currency market driven by supply and demand?

Yes, the business community tells Al Arabiya’s Carina Kamel.

“The priority now is to have an orderly currency market,” said Osama Mourad, a financial analyst. “We have been able to get rid of the responsibility of the exchange rate which was seen clearly from the new governor’s statement.”

Over the weekend, Ramez sent a strong message to Egypt and the financial world, who are closely watching developments in Cairo, that “the bank’s number one priority was overseeing a ‘balanced’ currency market and that the central bank ‘has all the tools needed to intervene’”, according to the Al Arabiya report.

He sought to reassure  jittery investors (and simultaneously enter himself into the club of Egyptian officials unruffled about the state of the economy) by saying “there is no reason to worry” about price movements on the Egyptian pound which has lost nearly 6% of its dollar value in the past two weeks. “The situation is not out of control.”

Yet, control is the last word that comes to mind when describing Egypt’s economy.

With demand for dollars still high, almost daily dollar auctions have continued to drive the pound lower.

The scale of dollarisation was also highlighted when Egypt signalled that the $2 billion loan from Qatar arrived in December, implying that the money had already been eaten up defending the currency.

What is more worrying, however, is how the transaction exposes the fragility of Egypt’s economy:

“Without Qatari aid, Egypt was on course for a full-blown financial crisis and, perhaps, a forced deal with the IMF by February,” Said Hirsh of Maplecroft said, according to Reuters.

Once again, Egypt has been bailed-out by its big brothers, giving the government little incentive to make much-needed reforms, including in the costly energy subsidy system.

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Another indication of how Egypt is living hand-to-mouth is the constant rollover of debt.

Egypt’s Finance Ministry said on Thursday it would offer $1 billion of one-year treasury bills for auction on January 14. This would effectively roll over maturing US dollar-denominated bills from last year.

Though it alleviates pressure on Egypt’s creaking budget, the country will now have to refinance around $2.5 billion in 2013.  Dependance on local banks to buy into these securities is highly unsustainable. 

Economists have said that the rate of spending on interest payments on bonds and bills is now exceeding the rate at which the government spends on energy subsidies. Egypt is spending about 15% or 16% of its budget on these payments now. A considerable amount.

The upside is that Egypt’s treasury yields are attractive to foreign investors who look at emerging and frontier markets. Egypt has among the most attractive yields of the frontier markets, according to Silk Invest, the London-based investment banking boutique:

Silk Invest CEO Zin Bekkali says in a note to investors:

“Interest rates in developed markets have reached unsustainable levels in both the government and the corporate sectors. Frontier markets currently offer one of the worlds’ most interesting fixed income opportunities with the potential for double digit returns in hard currency, local currency as well as for corporate bonds.”

Egypt’s Central Bank yesterday published a strangley frank statement that sheds light on the country’s terrible spending habits and signals how the Morsi administration is losing its grip on the economy. 

Just hours after the country’s president Mohammed Morsi made a speech to declare the economy was showing signs of improvement, the Central Bank said it plans to start foreign-exchange auctions in order to preserve foreign reserves after they plunged to “minimum and critical” levels.

Egyptian private equity outfit, Citadel Capital, has appointed petroleum industry veteran, Mohamed Shoeb, as Managing Director of its energy division.

It is the latest sign of how Citadel is quietly moving toward filling a gap in the energy market which is likely to be left after a reform of the country’s energy subsidies.

Shoeb is the former head of the state-run gas company, Egyptian Natural Gas Holding Company (EGAS), and prior to that was the vice Chairman for operations at the state oil company, Egyptian General Petroleum Corporation (EGPC).

The problems attached to both companies do not reflect kindly on Shoeb; EGAS was at the centre of a politically controversial cancellation of a gas contract to Israel, while EGPC is facing a potential bail-out from Egypt’s banks because of a mounting debt pile to foreign oil companies and banks for energy exploration.

However, the former EGAS head brings experience and knowledge of the nation’s state energy industry (and its specific challenges) that would be hard to find elsewhere.  Importantly, he has deep connections in the sector that will come in very useful for Citadel at a time when its most high-profile investments are in the energy market. These include:

- a $3.7 billion financing package for the Egyptian Refining Company project 

- A joint venture with Qatari investors to import liquefied natural gas into Egypt from mid-2013

UPDATE - This morning Citadel Capital sent a statement saying it had sold one of its investments, in a further sign that the private equity firm is focusing its strategy around five sectors including energy and transportation.

Its portfolio company National Petroleum Company Egypt Ltd. sold National Petroleum Company Shukheir Marine Ltd. to Sea Dragon Holding Ltd., a subsidiary of Canada’s Sea Dragon Energy.

“This transaction is the first of a number that will see us exit non-core portfolio and platform companies as part of our transformation over the coming three years into an investment company,” said Citadel Chairman Ahmed Heikal.

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A spat between EGPC and Centamin’s Sukari goldmine appears to be almost resolved after customs authorities on Sunday allowed an export shipment of 1,600 kilograms of gold to the Netherlands, Egypt Independent reports.

Shipment had been halted by Egyptian customs because the petroleum and finance ministries had said Centamin owed the authorities back-dated payments for fuel. Centamin denied this and said its payments were up to date.

Josef El Raghy, chairman of Centamin, has faced labour strikes and fuel shortages that have forced the firm to halt production twice this year.

It’s a stark reminder of both a highly bureaucratic state where the lack of a signature can halt valuable exports that could shut a company down, and how fuel shortages at EGPC have the potential to trickle into important industries across Egypt.

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One clear characteristic of the Morsi administration’s economic programme is its resemblance to Mubarak-era projects.  The following is no exception.  Egypt Independent reports:

Prime Minister Hesham Qandil has tasked the agriculture, irrigation, electricity and investment ministries to begin implementing a project the government hopes will reclaim and cultivate a million new acres of farmable land over four years

Land would be sold to private companies for a small fee under the BOT scheme, granting them use anywhere between 20 to 25 years. Products used by private companies in the production of renewable energy sources would not be subject to taxes or customs duties.