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DE RUEHEG #3704/01 1650820
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R 140820Z JUN 06
FM AMEMBASSY CAIRO
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INFO RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS CAIRO 003704 
 
SIPDIS 
 
C O R R E C T E D  C O P Y - (ADDING SIGNATURE) 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
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USTR FOR SAUMS 
TREASURY FOR NUGENT/ADKINS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ENRG EWWT SENV EG
SUBJECT: EGYPT:  MAY 2006 MONTHLY ECONOMIC REPORT 
 
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SUMMARY 
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¶1.  In this edition: The People's Assembly passes new 
economic legislation, and reform of tax administration 
continues.  Public sector wages are increased, as the GOE 
opens a debate on petroleum subsidies and the future of the 
petroleum sector.  The GOE gets closer to settlement of some 
non-performing loans to public sector enterprises, online 
trading begins on the stock exchange, and Egypt's credit 
rating improves.  Egypt-EU trade gets a boost, as does intra- 
Arab trade, but transportation deficiencies still hamper 
expansion of regional trade.  The Minister of Health cites 
subsidies as an impediment to increased pharmaceutical 
exports, while the Minister of Trade and Industry calls for 
expanded intellectual property protection.  Tourism remains 
buoyant, Egypt and Yemen sign agreements on the environment, 
and France's Alcatel and the U.S. Intel expand their 
operations in Egypt.  End summary. 
 
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ECONOMIC LEGISLATION 
-------------------- 
 
¶2.  In mid May, the People's Assembly passed a Consumer 
Protection Law, which complements the Competition Law issued 
last year.  The law, which GOE drafters based on UN 
principles of consumer protection, defines the rights of 
consumers' vis--vis goods and producers, including the 
right to disclosure of health and safety information about 
products.  The law also allows consumers to bring lawsuits 
for damages incurred from consumption of defective goods. 
In addition to disclosure of accurate health and safety 
information, the law also requires producers/suppliers to 
refund or exchange flawed products and to issue receipts for 
all sale transactions.  The law also establishes a Consumer 
Protection Authority to implement the law and allows the 
Authority to establish committees for resolving disputes 
upon the request of a consumer. 
 
¶3.  In late May, the Cabinet of Ministers approved a Real 
Estate Tax Law, which reduces real estate taxes from 40 to 
10 percent of rental fees and exempts leases below LE 600 
per annum.  The law also reduces agricultural land taxes 
from 14 to 10 percent of the land's rental fee.  Discussions 
are ongoing in parliament regarding amending the 
registration and authentication fees, particularly for low 
income earners.  Also in late May, the Capital Market 
Authority authorized the Real Estate Bank to issue 
securitization bonds worth LE 500 million, with a face value 
of LE 1000 and 7 year duration, to be offered for public 
subscription.  While legislation allowing securitization was 
passed in mid-2004, to date no such operations have been 
carried out. 
 
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MORE TAX REFORM 
--------------- 
 
¶4.  In late May, Presidential Decree No. 154 established the 
Egyptian Tax Authority, which brings into one entity the 
General Tax and Sales Tax authorities.  The merger is 
expected to take a few years, during which time the two 
authorities will continue to operate separately.  According 
to the Ministry of Finance, the new entity is the first step 
in creating a more modern, efficient tax administration 
regime to complement legislative and tax policy reforms. 
USAID contractor Bearing Point is providing assistance in 
the process of modernizing the tax regime, through the 
Technical Assistance for Policy Reform II Program. 
 
------------- 
FISCAL POLICY 
------------- 
 
¶5.  PUBLIC SECTOR WAGES:  The GOE has authorized a wage 
increase for the lowest-earning public sector employees 
beginning July 1, 2006.  Wages will be increased 15% for 
basic salaries below LE 300 per month.  Employees earning 
above LE 300 will continue to receive the annual 10% 
increase set in 1993.  The increase will not be taxed for 10 
years, after which it will be added to the basic salary 
level and taxed at normal rates.  President Mubarak 
announced a one-time, 20% increase in public sector salaries 
in July 2005, shortly before the first multi-candidate 
presidential election in Egypt's history, in September 2005. 
 
¶6.  SUBSIDIES:  On May 24, Minister of Petroleum Sameh Fahmi 
opened a discussion with the Industry Committee of the 
People's Assembly on petroleum subsidies, noting that 
subsidies are a strain on the budget and price stability can 
not be guaranteed.  Subsidies of petroleum products amounted 
to approximately LE 41 billion in the current fiscal year. 
In late May Prime Minister Nazif formed a ministerial 
committee to establish a regulatory body for the petroleum 
sector that would be tasked with regulating production and 
estimating future demand and optimal use of energy 
resources.  The committee was charged with providing a 
strategic vision for the petroleum sector through 2030, 
including expected increases in demand and prices. 
 
---------------- 
FINANCIAL SECTOR 
---------------- 
 
¶7.  NON-PERFORMING LOANS:  Minister of Investment Mohieldin 
made several public statements in May indicating that an 
agreement would be concluded shortly to settle public 
enterprise debts owed to banks on the order of LE 20.5 
billion.  During the Arab Economic Forum in Beirut and later 
at the Amcham's annual financial sector conference, 
Mohieldin noted that most of the debt is owed to the three 
public banks, National Bank of Egypt (NBE), Banque Misr and 
Banque du Caire.  Mohieldin did not specify the method of 
settlement, but indicated several options were under 
consideration, including NBE "buying over" the debts, as was 
the case with settlement of public enterprise debts to the 
Bank of Alexandria. 
 
¶8.  ONLINE TRADING:  On May 14, the Capital Market Authority 
(CMA) issued Decree No. 50 for 2006, authorizing online 
trading on the Cairo and Alexandria Stock Exchange. The 
decree opened the door for brokerages to receive requests 
for buying and selling shares by clients via the internet. 
The decree specifies the infrastructural requirements that 
brokerage firms must meet in order to be eligible to provide 
this service, mainly a web security system.  The decree is 
limited to online purchase/selling requests of securities, 
and does not address transaction settlements or 
transfer/collection of dividends via the internet.  Market 
insiders believe extending the online facility to these 
areas is currently not feasible, given that online banking 
is still undeveloped in Egypt. 
 
--------------------- 
INTERNATIONAL RATINGS 
--------------------- 
¶9.  Several international rating agencies modify their 
assessments of Egypt, including: 
- Moody's:  In a recent report, Moody's upgraded its rating 
for the Egyptian private sector's foreign financing risk and 
revised Egypt's foreign currency country ceiling for bonds 
upward to Baa2 with a continued stable outlook.  The 
revision was due to a chance in Moody's methodology. 
Egypt's investment evaluation was also raised by two points 
and now exceeds ratings for Jordan, Brazil, Turkey, 
Argentina, Columbia and Croatia.  Moody's stated that risks 
for foreign financers of Egypt's private sector have 
decreased, and noted the GOE's consistency in meeting 
external commitments and its progress on integrating Egypt 
into the international economy.  The report should allow the 
Egyptian private sector to raise financing in international 
markets more easily at lower cost. 
 - Standard Chartered Bank:  Standard Chartered Bank issued 
an overall positive report on the state of Egypt's economy, 
referring to FDI increases resulting from improving 
confidence in GOE reforms; substantial development in the 
Ministry of Investment's "Asset Management" or privatization 
program; sale offerings in the banking sector; the new GOE 
industrial strategy; and investment incentives in the QIZs. 
The report also noted that tax revenues have increased 
despite a reduction in tax rates, which has spurred economic 
growth. 
 - JP Morgan:  A report by JP Morgan highlighted the 
positive developments in Egypt's economy, noting a large 
increase in net FDI, which rose to USD 3.9 billion in the 
first half of the current financial year (FY2005/06) from 
USD 2 billion in FY2003/04 and is expected to reach USD 5 
billion by the end of 2005/06.  The report highlighted the 
diversity of Egypt's promising sectors such as petroleum, 
tourism, and particularly building and construction, which 
has recorded 12 percent growth in the current financial 
year.  The report also noted that the Egyptian bourse's 
performance topped global markets in 2005 and predicted that 
the recent downturn would prove temporary. 
----- 
TRADE 
----- 
 
¶10.  EGYPT-EU TRADE AGREEMENT:  Minister of Trade and 
Industry Rachid and the EU ambassador in Cairo reached 
agreement to amend the Egypt-EU Association Agreement to 
allow greater access for Egyptian agricultural exports to 
Europe.  Separately, Rachid discussed with the chairman of 
the Egyptian European Bank the possibility of providing 
special credit facilities for Egyptian exporters to help 
boost Egypt-EU trade.  Meanwhile, Secretary General of the 
Arab Investors' Union Gamal Bayyoumi predicted that unless 
an FTA is concluded between the U.S. and Egypt, the U.S. 
will experience significant Egyptian trade and investment 
diversion to Europe as a result of Egypt's Association 
Agreement with the EU. 
 
¶11.  INTRA-ARAB TRADE:  In May Rachid also publicly stated 
that over the past two years, intra-Arab trade has increased 
from 8 to 13 percent as a result of local firms expanding 
operations in the region.  The Minister said numerous local 
companies throughout the region, including Orascom Telecom, 
Orascom Construction, and EFG-Hermes, are focusing on 
regional strategies rather than serving purely local 
markets. 
 
¶12.  REGIONAL TRANSPORTATION DEFICIENCIES HURT TRADE: At the 
recent World Economic Forum in Sharm El Sheikh, Arab 
ministers of transport blamed inadequate regional transport 
infrastructure for weak economic integration among Arab 
countries, despite the trend toward liberalized trade 
arrangements.  Noting a variety of problems that hinder the 
flow of merchandise and people, the ministers called for 
collaborative efforts among Arab countries to develop and 
increase the capacity of Arab ports and link them with new 
rail and road networks. 
 
¶13.  PHARMACEUTICAL INDUSTRY:  Minister of Health Hatem El 
Gabaly recently outlined the reasons for Egypt's failure to 
increase pharmaceutical exports, which currently are less 
than $100 million per annum.  Though export volume of 
pharmaceuticals is high, the export value is low because 
export prices are based on local prices which are kept low 
through government subsidization and price controls.  He 
also cited the lack of a national export strategy for 
pharmaceuticals and the lack of local R&D as impediments to 
a growth in the sector.  The Health Ministry is working a 
health sector reform plan that will attempt to address these 
issues. 
 
¶14.  IPR:  In May Rachid called for development of an 
intellectual property rights culture in Egypt to foster a 
healthy climate for encouraging innovation in all fields, 
adding value to Egyptian exports, and creating job 
opportunities.  The Minister's recent appointment of a 
highly respected IPR lawyer as head of Egypt's trademark 
office is an important step in strengthening IPR protection 
in Egypt. 
 
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TOURISM 
------- 
 
¶15.  The number of tourists visiting Egypt increased 2.4 
percent in the first quarter of 2006, reaching 2.2 million. 
Despite the increase, figures for number of hotel nights 
dropped slightly from 19.3 to 19.2 million in the same 
period.  European tourists continue to top the list of 
visitors, followed by tourists from other Middle Eastern 
countries.  Although Europeans make up the majority of 
tourists, their numbers dropped 2.7 percent in the first 
quarter of 2006 compared to the same period in 2005.  The 
number of Gulf Arab visitors to Egypt, on the other hand, 
rose to 0.4 million in the first quarter of 2006, an 
increase of 23.3 percent over the same period in the 
previous year. 
 
----------- 
ENVIRONMENT 
----------- 
 
¶16.  On May 17, Yemen and Egypt signed several agreements on 
mutual cooperation at the conclusion of the sixth meeting of 
the Joint Yemeni-Egyptian Supreme Committee for Economic and 
Trade Cooperation.  The agreements will launch cooperative 
programs in the areas of education, water resources and 
sanitation, electricity, environment, agriculture and 
fisheries.  Under the fisheries agreement, Egyptian fishing 
boats will be allowed to operate in Yemen's territorial 
waters and Egypt and Yemen will establish jointly operated 
aquatic farms. 
 
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TELECOMS 
 
 
 
-------- 
 
¶17.  In mid May, France's Alcatel signed a contract with 
Telecom Egypt (TE) to upgrade part of TE's network and offer 
VoIP services.  Alcatel said in a statement that its IP- 
based network transformation solution will enable TE to 
expand its subscriber base with new user-centric 
communications services.  The value of the deal was not 
disclosed.  In late May, MobiNil announced that it had spent 
approximately LE 5 billion on upgrading its wireless 
infrastructure and would allocated an additional LE 3.6 
billion to upgrade its network in 2006. 
 
¶18.  In late May, Intel announced formation of a new joint- 
venture company with Egypt's Orascom Telecom (OT).  The new 
company, Orascom Telecom WiMax, will deploy WiMax networks 
throughout the Middle East, as a basis for offering low-cost 
broadband internet access.  The new company is part of 
Intel's "Digital Transformation Initiative," a multi-year 
program to expand economic, educational and technology- 
related investment throughout the Middle East, Turkey and 
 
 
 
Africa. 
 
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STATISTICS 
---------- 
 
¶19. 
 
Exchange Rate: 
                                (05/02/06)     (05/31/06) 
Egyptian Pounds/$             Buying Selling Buying Selling 
Avg. Bank/Bureau Rate         574.40  576.35 575.78 577.77 
 
Capital Market: 
                                (05/02/06)    (05/31/06) 
Capital Markets Authority Index  2191.20        N/A 
Hermes Financial Index           57,935         47,364 
EFG Index                        29,168         24,055 
 
Interest Rates: 
(percent, monthly comparison) 
 
 
 
 
Interbank Overnight              8.809 (05/28) 8.185(05/30) 
T-bills (182 days)               8.649 (03/30) 8.727(05/31) 
T-Bond (maturing 12/08)          8.4 (02/28)   8.94(05/25) 
T-Bond (maturing 10/11)          8.6 (04/18)   8.9 (05/15) 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
                              (04/2006)       (05/2006) 
                               22,794.3        22,860.0 
RICCIARDONE