VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #7133/01 3471439
ZNR UUUUU ZZH
R 131439Z DEC 06
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 2915
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0238

UNCLAS CAIRO 007133 
 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR NUGENT/HIRSON 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ENRG EWWT EG
SUBJECT: OCTOBER - NOVEMBER ECONOMIC REPORT 
 
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SUMMARY 
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¶1.  IN THIS EDITION: 
 
MACROECONOMIC: 
 
¶2.  INFLATION:  Highest rate in two years 
¶3.  MONETARY POLICY:  Interest rate increase 
¶4.  FDI:  $7.5-8b by year-end? 
¶5.  FDI: One-stop Shops 
¶6.  CAPITAL MARKETS:  Enhanced regulatory regime 
¶7.  UNEMPLOYMENT:  Survey shows unemployment down 
¶8.  MORTGAGE FINANCE:  Financing reaches $113 million 
¶9.  PUBLIC PRIVATE PARTNERSHIP:  GOE investment plans 
 
LEGISLATION: 
 
¶10.  PENSIONS:  New pension law being drafted 
¶11.  TENDERS AND AUCTIONS:  Rules reforms implemented 
 
TRADE: 
 
¶12.  U.S.-EGYPT:  Exports to U.S. double 
¶13.  CHINA-EGYPT:  Nine new trade agreements 
 
SECTORS: 
 
¶14.  INDUSTRY:  GOE establishes new industrial zones 
¶15.  AGRICULTURE:  Exports reach $1.2 billion 
¶16.  ELECTRICITY:  Price increases and cutoffs 
¶17.  OIL/GAS:  New agreements with Russia and Canada 
¶18.  PHARMACEUTICALS:  U.S. firms purchase Amoun 
¶19.  TELECOMS:  New intercontinental cable 
¶20.  TELECOMS:  Lucent Technologies to help schools 
¶21.  TELECOMS:  Orascom subscribers reach 46 million 
¶22.  TELECOMS:  Telecom Egypt launches IPTV service 
¶23.  TRANSPORT:  Suez Canal transit has record day 
¶24.  HEALTH:  Cholera outbreak 
¶25.  PETROCHEMICALS:  New petrochemical plant in Port Said 
¶26.  RETAIL:  Metro to invest 300m euros in Egypt 
 
¶27.  ECONOMIC INDICATORS 
 
------------- 
MACROECONOMIC 
------------- 
 
¶2.  INFLATION:  Inflation rose to 11.8% in October, the highest rate 
in two years, despite easing of global oil and non-oil commodity 
prices.  The Consumer Price Index, which measured 4.4% in April, has 
more than doubled in the past six months.  Although prices rose in 
most sectors in October, cement and steel prices actually declined. 
To keep construction costs down, the Ministry of Trade and Industry 
(MTI) placed a voluntary cap of LE 295 ($52) per ton on cement 
prices last August.  In early November, MTI announced that most 
producers had complied with the cap, and prices had dropped 15%, to 
LE 340 ($60) per ton, compared to LE 380 ($67) per ton in July. 
Steel rebar prices also declined 10% in October, to LE 2980-3500 
($523-614) per ton.  Industry sources attribute the decline to lower 
global prices for inputs such as iron, copper and aluminum, as well 
as lower demand during Ramadan. 
 
¶3.  MONETARY POLICY:  In response to rising prices, the Central Bank 
raised its overnight deposit and lending rates in November to 8.5% 
and 10.5% respectively, both up 0.5%.  The Monetary Policy Committee 
(MPC) released a statement on November 2 indicating the decision to 
raise rates was based on inflationary pressure brought on by 
accelerated growth, particularly in the construction and 
manufacturing sectors.  The MPC indicated future rate decisions will 
consider the outlook for inflation and growth.  Most observers 
believe the MPC will raise rates again in December. 
¶4.  FOREIGN DIRECT INVESTMENT (FDI):  UNCTAD's World Investment 
Report 2006 indicated FDI flows to Egypt in 2005 stood at $5.376 
billion, placing Egypt second after South Africa in terms of FDI 
flow to Africa.  The non-energy sector made up 70% of FDI in 
FY05/06, compared with 33% and 20% in the two previous fiscal years. 
 The steady rise in FDI has boosted foreign reserves to $24.9 
billion, contributing to the Egyptian pound's stability.  Commenting 
on the report, Minister of Investment Mohieldin predicted FDI would 
climb to $7.5-8 billion by June 2007.  Speaking at the Egypt Invest 
conference in November, Chairman of the General Authority for 
Investment and Free Zones (GAFI) Zaid Bahaa El Din admitted that 
despite increased FDI, investors still face problems in Egypt, 
especially obtaining business licenses.  The licensing regime in the 
Suez Industrial Zone, however, works well and Bahaa El Din hoped it 
could serve as a model.  GAFI's One-stop Shop is also working to 
reduce waiting time for tax registration cards.  Bahaa El Din noted 
Egypt still has no bankruptcy law, but "exit" rules are improving 
and GAFI is also addressing investor concerns such as financing and 
dispute settlement. 
¶5.  On a related note, MTI will soon open commercial registry 
branches in local chambers of commerce, as part of an overall trade 
modernization plan.  The Federation of Egyptian Chambers of Commerce 
said the registries will be part of One-stop Shops planned for each 
of its branches, to facilitate commercial licensing for small 
investors and small and medium enterprises (SMEs).  The One-stop 
Shops will host representatives from various GOE agencies, including 
the Ministry of Finance, Customs and the Social Insurance Agency. 
The shops are expected to open in the coming year. 
¶6.  CAPITAL MARKETS:  The Chairman of Egypt's Capital Market 
Authority (CMA) announced implementation of enhanced regulations on 
the Cairo and Alexandria Stock Exchange (CASE), aimed at reducing 
investment risk.  The regulations include new solvency requirements 
for listed companies and new membership and transparency rules for 
brokerage firms.  The CMA hopes the new regulations will attract 
more corporate investors to balance the large number of individual 
traders and stabilize the market.  The number of individuals 
investing on the CASE increased from 300,000 to 1.7 million in the 
last 10 months.  Individual traders accounted for 90% of trading 
during the bear market from March to July 2006. 
 
¶7.  UNEMPLOYMENT:  The Economic Research Forum, in cooperation with 
the Population Council and the Central Agency for Public 
Mobilization and Statistics, released the annual USAID-funded Egypt 
Labor Market Survey for 2006 in October.  The survey covered 8,349 
households and showed economic reform has reduced unemployment from 
11.7% to 7.8% in 2006, with the biggest impact in rural areas.  The 
survey also found that although real wages have increased, earnings 
inequality has widened.  New labor market entrants are increasingly 
relying on informal jobs.  Males are transitioning from school to 
work 1-2 years earlier than in previous years, with no change for 
females.  A population bulge of youth under 25 is now entering the 
labor market, just as Egypt's economy is beginning to grow again. 
The new generation of workers is expected to increase the number of 
breadwinners per capita, despite continuing barriers to entry of 
young women into the labor market. 
¶8.  MORTGAGE FINANCE:  Mortgage Finance Authority Chairman Osama 
Saleh announced that total mortgage lending had reached LE 650 
million ($113 million) in September.  The figure is up from LE 514 
million ($89 million) in June 2006 and LE 15.8 million ($2.74 
million) in June 2005.  Saleh expects total lending to reach LE 1 
billion ($173 million) by the end 2006.  In an effort to increase 
mortgage activity, Minister of Investment Mohieldin announced plans 
to restrict lending activities by real estate developers, a common 
practice, in order to allow banks to play a more active role in the 
housing market.  The GOE's goal was to increase lending to 5% of GDP 
or LE 20 billion to LE 30 billion ($3.5 billion-$5.2 billion) by the 
end of 2007. 
¶9.  PUBLIC-PRIVATE PARTNERSHIPS (PPP):  The GOE is planning to use 
PPPs to increase investment in sectors such as energy, water and 
sewerage, health, transport, and education, according to Minister of 
Investment Mohieldin.  Speaking at the Euro-Med Conference in 
Marseille in November, Mohieldin said he envisaged $1 billion per 
year for investment in the health sector alone, with $600 
million/year for electricity, $200 million/year for education and $2 
billion over three years for transport.  He estimates long-term 
financing needs of $25 billion for wastewater treatment over the 
next several years.  Mohieldin recognized the image of PPPs in Egypt 
is adversely affected by foreign currency problems associated with a 
series of build-own-operate-transfer (BOOT) projects carried out in 
the mid-1990s.  New regulations are under preparation, however, to 
prevent a recurrence.  The GOE will likely frame the regulations 
sector-by-sector, according to Mohieldin. 
----------- 
LEGISLATION 
----------- 
 
¶10.  PENSIONS: Minister of Finance Boutros Ghali announced in late 
October that a new draft pension law is under review.  The bill will 
maintain the current pension system, but create a parallel scheme 
for new subscribers, including temporary workers, who will pay 17% 
of their monthly salaries into the system.  Of the 17%, 12% will go 
into non-tradable treasury bonds, and 5% into financial assets. 
Citizens over 65 will receive relatively lower pensions through the 
Social Solidarity Scheme.  The bill will create a pension commission 
with representatives from the Ministries of Finance, Investment, 
Social Solidarity, Manpower and Emigration, as well as the CMA and 
the Egyptian Insurance Supervisory Authority.  The commission will 
supervise regulations and performance of pension authorities.  The 
new system is designed to ensure adequate pensions based on stable 
financial sources with sound management and efficient and 
transparent investment of funds. 
 
¶11.  TENDERS AND AUCTIONS: In October, regulations implementing the 
Tenders and Bids Law were amended to streamline contract procedures. 
 The changes shorten the period required for announcing tenders and 
evaluating bids, lower charges for tender documents, oblige clients 
to hold pre-bid meetings to clarify items in tenders, and include 
model contract terms clearly setting out rights and obligations of 
contractors.  The amendments allow small- and medium-sized 
enterprises to acquire tender documents at cost, in order to help 
such firms to win business. 
 
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TRADE 
----- 
 
¶12.  U.S.-EGYPT:  Egyptian exports to the U.S. more than doubled in 
the first half of 2006.  Minister of Trade and Industry Rachid 
announced exports to the U.S. soared to $1.5 billion between January 
and June 2006, compared to $925 million during the same period last 
year, a 56% increase.  Egyptian imports from the U.S. have increased 
by 28% during the first six months of the current year to reach $1.8 
billion, compared to $1.4 billion during the same period last year. 
A study prepared by Egypt's International Trade Point found that the 
Qualifying Industrial Zones (QIZ) agreement was the main factor in 
boosting Egyptian textile exports to the U.S. market.  January-June 
2006 QIZ exports increased to $347.9 million, 24.1% of Egypt's total 
exports and 41.8% of Egypt's total non-petroleum exports. 
¶13.  CHINA-EGYPT:  Egypt signed nine bilateral trade agreements with 
China at the China-Africa Summit in November.  The agreements are 
designed to promote Chinese investment in Egypt and correct Egypt's 
balance of payment deficit with China.  At the conference, President 
Mubarak and Minister of Trade and Industry Rachid stressed the 
importance of cooperation and encouraged the Chinese government to 
promote investment in Egypt by providing incentives to Chinese 
investors.  The two sides agreed to develop and increase Egyptian 
exports, with China offering to train and develop Egyptian human 
resource in marketing and exporting and to conduct studies in Egypt 
to help increase exports.  A delegation of Egyptian businessmen also 
attended the summit, and contracts were signed for new electric 
cable, textiles and electrical appliance factories in Egypt and for 
the exchange of technical knowledge on SMEs.  An agreement on 
cooperation in science and technology was also signed.  The first 
project under the agreement will be a fish-farming laboratory at 
Suez Canal University in Ismailia. 
------- 
SECTORS 
------- 
¶14.  INDUSTRY:  The GOE has set up an agency to develop a series of 
industrial zones characterized by "business-friendly" regulations. 
Prospective investors are invited to submit prequalification 
applications for projects in sample zone sites in four existing 
industrial cities - 6 of October, 10 of Ramadan, Borg al-Arab and 
Sadat.  The new agency, the Industrial Development Authority, will 
operate under the umbrella of the MTI.  Private companies will 
develop, finance, promote, lease or sell, manage, operate and 
maintain the industrial zones under contractual agreements.  The 
areas will be eligible for QIZ designation. 
¶15.  AGRICULTURE:  In October, the Ministry of Agriculture announced 
Egypt's agricultural exports reached LE 7 billion ($1.2 billion) in 
2005, and predicted they would grow 15% in 2006.  Potato exports in 
2005 were 394,000 metric tons (mt), and citrus exports, 700,000 mt. 
Citrus exports are expected to grow significantly as a result of 
recently-signed agreements with Australia and China.  The ministry 
plans to spend LE 160 million ($28 million) to combat fruit flies, a 
chronic problem for Egypt's agricultural sector. 
 
¶16.  ELECTRICITY:  In October, electrical distribution companies 
raised prices 4.9 to 8.1%, depending on consumption, the third 
increase since 2004.  However, electricity subsidies are still about 
LE 3 billion ($526 million)/year.  Electrical Holding Company 
President Mohammed Awad announced Egypt needs LE 6 billion ($1.1 
billion) in additional revenues to meet an average 10.3% annual 
increase in demand.  Finally, for the first time in living memory, 
Minister of Electricity Hassan Younis received permission from Prime 
Minister Nazif to cut off electricity to government buildings that 
had not paid their bills.  In October, electricity to several Cairo 
governorate buildings was cut off.  In addition, warning notices 
were sent to the Ministries of Interior (LE 3.85 million, or 
$675,000 behind) and Higher Education (LE 500,000, or $87,000), as 
well as Cairo University (LE 6 million, or $1.1 million).  The move 
received considerable press coverage, and water utilities are 
expected to follow the lead of the electricity sector. 
 
¶17.  OIL/GAS:  Minister of Trade and Industry Rachid signed an MOU 
with Gazprom for cooperation in Egypt's natural gas sector in 
October in Moscow.  The MOU covers exploration, sharing technology 
and marketing.  In late November, the Egyptian Mineral Resources 
Authority and the Canadian consortium Centurion Energy International 
signed an agreement to study possible reserves of oil shale in Egypt 
and exploitation and marketing feasibility.  According to Minister 
of Petroleum Fahmi, Egypt's estimated oil shale reserves are 
equivalent to 5.7 billion barrels of oil.  Centurion Energy 
International Inc. was recently acquired by Dana Gas, a UAE-based 
energy company.  The consortium also has facilities in Tunisia and 
Nigeria. 
 
¶18.  PHARMACEUTICALS:  Two U.S. firms, Citigroup Venture Capital 
International and Capital International Private Equity Fund IV, 
together with Concord International Investments, bought 93% of 
Egypt's Amoun Pharmaceuticals for LE 2.623 billion ($458 million). 
The firms bought the majority stake from Amoun Chairman Sarwat 
Bassily and his family, company officials said.  Bassily, who 
founded the company in 1998, will stay on to manage it.  The company 
produces international products under license and exports to 
countries in sub-Saharan Africa, central Asia, and throughout the 
Middle East. 
 
¶19.  TELECOMS:  In late October, India's Videsh Sanchar Nigam Ltd 
(VSNL) signed an MOU with several telecom service providers, 
including Etisalat, Saudi Telecom Company, Telecom Egypt and Telecom 
Italia Sparkle, for the construction of a new submarine cable system 
linking India with Europe, Africa, Asia and the Middle East.  VSNL 
says the India-Middle East-Western Europe cable system will be ready 
by mid-2008; construction contracts will be awarded by year-end. 
The cable will use Dense Wavelength Division Multiplexing 
technology, with a proposed capacity of at least 2.56 terabits 
per-second. 
 
¶20.  Also in late October, Minister of Communications and 
Information Technology Kamel and Minister of Education El Gamal 
announced a contract with Lucent Technologies and its business 
partner TeleTech to provide high speed internet access and data 
delivery to public schools, under the Egyptian Educational 
Initiative.  Lucent will work with TeleTech to deliver a 
next-generation CDMA2000 1xEV-DO (Evolution-Data Optimized) and WiFi 
trial network to complement Telecom Egypt's CDMA2000 1X network in 
the El Max area.  The trial network will provide wireless data 
services such as broadband Internet access, e-mail and distance 
learning at very high speeds for students and educators. 
 
¶21.  In mid-November, Orascom Telecom (OT) announced its mobile 
subscriber base is over 46 million.  Revenues during the third 
quarter of 2006 rose 35% to $3.216 billion.  Egyptian subsidiary 
MobiNil made up 12% of the company's revenues.  OT has mobile 
operators in Algeria, Pakistan, Egypt, Iraq, Tunisia, Bangladesh, 
Africa and the Republic of the Congo and recently acquired an 
additional 8% stake in its Algerian subsidiary for $399 million, 
raising its stake in Algeria to 95.6%. 
 
¶22.  In late November, Telecom Egypt (TE) launched Egypt's first 
IPTV dedicated service, joining recent entrants in the market such 
as Germany's Deutsche Telekom, Telecom Italia and Swisscom's Bluewin 
TV service.  TEData, TE's internet subsidiary, began on-demand 
content to both TEData's existing customers and new ADSL subscribers 
in November.  The service is called TE-VU. 
 
¶23.  TRANSPORT:  On October 26, a record 76 vessels transited the 
Suez Canal, earning a one-day record $13 million in tolls for the 
Suez Canal Authority (SCA).  In September SCA's revenues were $332.2 
million, 10% over September 2005, despite the sinking of an Egyptian 
dredger that halted traffic for several hours.  The GOE hopes to 
increase inland maritime traffic as well.  Press reports indicate 
the Ministry of Transport will offer four river ports, and a total 
of 180,000 square meters of land for development under 
build-operate-transfer terms.  The ports include the Tebin Port, 
located south of Cairo, and Qena Port in Upper Egypt. 
 
¶24.  HEALTH:  In early October the press reported several cholera 
cases in the western Delta govenorate of Daqahliyya, and said 
victims were being treated in the Mansoura Viral Hospital.  Also in 
October, there were fifty poisoning cases in the western Delta 
governorate of Sharquiyya, resulting in two deaths.  The press 
blamed those cases on contaminated water.  In both cases, the 
Ministry of Health denied that the illness was cholera; the 
governors of the two affected governorates also said the problem was 
not contaminated water but food poisoning. 
 
¶25.  PETROCHEMICALS:  In mid November, Oriental Weavers signed an 
agreement with the German company ODA for construction of a new 
plant to produce propylene in Port Said.  Total investment is $680 
million.  Sixty-five percent of production will be exported, 
beginning in 2009.  Oriental Weavers Chairman Mohamed Khamis 
indicated the project will use locally-produced propane gas.  Other 
investors include Yemen's Haiel Said Group, UAE's Amwal El Khalig 
Company, and the Arabic Company for Libyan Investments. 
 
¶26.  RETAIL:  The International Metro Cash & Carry supermarket chain 
is expected to invest an estimated 300 million euros in Egypt in a 
food and farm products marketing chain, according to the Ministry of 
Investment, which hosted a delegation of Metro representatives in 
October.  Metro Cash & Carry is the largest division of German 
retail giant Metro, with total 2005 sales of 28 billion euros. 
 
------------------- 
ECONOMIC INDICATORS 
------------------- 
 
¶27. 
 
Exchange Rate: 
                 (09/28/06)     (11/30/06) 
Egyptian Pounds/$      Buying Selling Buying Selling 
Avg. Bank/Bureau Rate         573.17  575.00 571.23  573.37 
 
Capital Market: 
                (09/28/06)     (11/30/06) 
CASE 30 Index       6,427(09/27)   6,561 
Hermes Financial Index         57,059         57,974 
EFG Index        29,014         29,170 
 
Interest Rates: 
(percent, monthly comparison) 
 
Interbank Overnight              8.9(09/27)   9.6 
T-bills (182 days)               9.55         9.86 
T-Bond (maturing 12/08)         no trade     10.81 (11/27) 
T-Bond (maturing 10/11)          10.3(09/27)  10.88 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
         (09/2006)      (11/2006) 
         24,064.9      24,900.8 
 
Inflation 
                                (08/2006)      (10/2006) 
Consumer Price Index (CPI)         8.9            11.8 
RICCIARDONE