VZCZCXYZ0001
RR RUEHWEB

DE RUEHEG #0829/01 0811012
ZNR UUUUU ZZH
R 221012Z MAR 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 4189
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0265

UNCLAS CAIRO 000829 
 
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/OBERG 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ENRG EWWT EG
SUBJECT: QUARTERLY ECONOMIC REPORT 
 
REFTEL:  CAIRO 361 
 
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SUMMARY 
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¶1.  In this edition: 
- Strong macroeconomic indicators 
- Unemployment, inflation remain high 
- The government introduces a new five year plan 
- Ministry of Finance announces bad-debt repayment plan 
- State-owned banks merge 
- Wages stagnate... 
- ...and consumer confidence dips 
- Capital Markets Law amended 
- New securitization rules 
- Draft real estate tax reductions 
- New Islamic mortgage finance company 
- Google signs agreement with GOE 
- New oil and gas investment companies 
- Cairo hosts Arab Water Conference 
 
------------- 
MACROECONOMIC 
------------- 
 
¶2.  Egypt ended 2006 on a strong note, registering a real growth 
rate of 7.1% in 4Q2006, and 6.9% for the full fiscal year 2005-2006 
(June 2005 - July 31, 2006).  Egypt's foreign reserves stood at $26 
billion in December 2006, and year-on-year (y-o-y) growth in exports 
rose 34.2% in 2006. Egypt ranked second among African countries in 
attracting foreign direct investment (after South Africa), reaching 
$6.1 billion in FY 2005/06.  Growth in credit to the private sector 
also exceeded growth in bank deposits for the first time since 1999. 
 The GOE also made progress in reducing the debt of state-owned 
companies to LE 10 billion, down from LE 31.5 billion in 2004. 
 
¶3.  Downsides included continued unemployment, though figures vary 
on the actual numbers of unemployed and underemployed.  The GOE 
claims unemployment fell to 9% in 2006, but most analysts place it 
closer to 11-12%, at a minimum.  Inflation also continued to climb 
through December and January, reaching a high of 12% (y-o-y) at the 
end of January.  In light of the average Egyptian's worries about 
high inflation, on February 4, President Mubarak called for 
government policies to curb inflation and protect low-income groups 
(reftel).  He also asked the government to quickly approve a package 
of incentives to encourage investment in Upper Egypt, emphasizing 
the importance of securing an additional LE 20 billion ($3.4 
billion) for waste water projects in Upper Egypt and the Delta. 
Finally, he supported continued financial sector reform. 
 
¶4.  Five-year Development Plan:  On the heels of Mubarak's 
statement, the GOE introduced a new five-year economic and social 
development plan that calls for investment of LE 150 billion ($26 
billion) in FY2007/08, with annual increases to LE 850 billion ($147 
billion) by 2012.  The plan, drafted by the new Ministry of Economic 
Planning, targets 8% growth in the first year.  The government will 
focus on developing infrastructure that improves the investment 
climate, while the private sector will be encouraged to take a 
greater role in project finance.  The plan prioritizes completion of 
projects begun under the previous five-year plan.  In accordance 
with Mubarak's directives, the plan focuses on Upper Egypt, 
particularly water, sewage, road construction, and agriculture and 
land reclamation projects. 
 
¶5.  Public Sector Debts:  In mid-December, Minister of Finance 
Boutros Ghali (YBG) announced a plan to use LE 9.2 billion ($1.6 
billion) of the proceeds from sale of the Bank of Alexandria (BOA) 
to settle the debts of 54 state-owned enterprises (SOE).  The funds 
will be used to settle the bad debts, owed mostly to state banks, of 
certain petrochemical, textile, food, mineral and construction 
companies.  This is the second round of SOE debt settlements, the 
first occurring earlier in 2006, when the government paid LE 6.9 
billion ($1.2 billion) to settle BOA's debts and LE 1.6 billion 
($278 million) to settle the debts of other SOEs to other 
state-owned banks.  This second round of settlements will reduce the 
total SOE debts to state and private banks to LE 9.8 billion ($1.7 
billion), down from LE 31.5 billion ($5.4 billion) in June 2004, 
when the current banking reform process began. 
 
¶6.  State-owned Bank Merger:  Banque Misr's takeover of Banque du 
Caire was finalized in mid-February, according to Banque Misr's 
Chairman Mohamed Barakat.  The two state-owned banks will soon 
release their financial statements for the second half of 2006, and 
then hold a joint annual general meeting.  Barakat added that the 
government intends in 2007 to use the LE 9.2 billion in para 5 to 
settle the remaining non-performing loans of SOEs to both Banque 
Misr and Banque du Caire. 
 
¶7.  Wages:  A study by Egypt's National Planning Institute revealed 
that, from 2001 to 2005, average wages declined, mainly due to 
decreases in farmers' income, the main source of employment in 
Egypt.  Although farming accounts for 27% of Egypt's GDP, farmers 
receive less than 8% of total wages.  Moreover, despite efforts to 
shift the economy from the public to private sector, in 2006 the GOE 
paid 30% of all wages. 
 
¶8.  Consumer Confidence:  In line with the poor outlook for wages, 
consumer confidence in Egypt slipped in the second half of 2006. 
Despite the decrease, however, Egypt has the fourth highest level of 
consumer confidence in the Middle East, according to a MasterCard 
survey.  Egypt stood at 78.2 points on the index's 100-point scale, 
down from 83 points in the first half of 2006, its highest point 
since 2004.  The index consists of questions on five variables: 
unemployment, economic growth, income, the stock market and standard 
of living.  Any score above 50 indicates positive consumer 
confidence.  The index, which has a standard of error of less than 
3%, is used by international corporations, including MasterCard, to 
help make investment foreign investment decisions. 
 
----------- 
LEGISLATION 
----------- 
 
¶9.  Capital Market Law Amendments:  In February, Minister of 
Investment Mohieldin issued amendments to the executive regulations 
of the Capital Market Law No. 95 of 1992 regarding purchasing of 
controlling shares in joint stock companies.  Under the new rules, 
an investor may not purchase more than a third of a company's total 
capital or voting rights through the stock exchange or other market 
mechanisms.  Any investor seeking more than one-third of a company 
must bid on all outstanding shares of the company and convertible 
bonds.  The new rule is designed to reflect international standards 
and best practices and aims to improve disclosure and bidding 
valuations to protect minority shareholder rights.  The investor 
must have an independent financial adviser if the bidding price is 
less than the average market price over the previous six months, if 
shares are swapped or if the investor buys from a shareholder who 
holds more than 25% of the company's capital. 
 
¶10.  Securitization Rules:  The Ministry of Investment also amended 
the executive regulations of the Investment Incentives Law to make 
it easier for companies to raise short-term capital through 
securitization.  The amendments designate securitization as a 
non-banking financial service and allow the minimum capital 
requirement of securitization companies to be set in any convertible 
currency, and the capital to be deposited at any of the commercial 
banks registered with the Central Bank of Egypt.  The new rules 
require that 50% of companies' capital be deposited in the 
convertible currency.  Financial statements must be reported in the 
same currency as the company's capital. Securitization allows 
companies to discount their short-term debt, which increases cash 
flow and improves efficiency. 
 
¶11.  Property Tax Law:  A new draft property tax law, which would 
lower property taxes from 46% to 10% of the rental value of a home, 
has been approved by the government and submitted to parliament. 
The law proposes a flat annual tax on all properties including 
registered and unregistered limited-income housing communities and - 
as with the new income tax law - eliminates most exemptions in 
exchange for the lower tax rate.  It does not, however, eliminate 
partial exemptions currently applicable to limited-income housing 
and all units with a rental value of less than LE 150 per month. 
More than 80% of properties in Egypt are unregistered, according to 
Ministry of Finance (MOF) figures.  MOF representatives believe the 
new tax law will create some incentive for property owners to 
rectify this problem. 
 
¶12.  Mortgage Finance:  Amlak Finance, the UAE's biggest publicly 
traded Islamic mortgage company, is opening a mortgage financing 
unit in Egypt.  Amlak, 45% owned by Emaar Properties, provides 
Islamic home, car and yacht finance to individuals.  The new 
Egyptian office, Amlak Finance and Real Estate Investments, will be 
located in Cairo and will only offer Islamic real estate mortgages. 
Amlak officials are anticipating a dramatic growth in Egypt's real 
estate market with the introduction of legislation simplifying the 
registration of property. Establishing a mortgage market is a key 
GOE reform goal. 
 
----- 
Trade 
----- 
 
¶13.  QIZs CHINESE INDUSTRIAL ZONE:  In January, the textiles 
committee at the Egyptian Federation of Commerce Chambers wrote 
Prime Minister Ahmad Nazif protesting against establishment of a 
Chinese industrial zone for readymade garments in the 10th of 
Ramadan City, east of Cairo.  Committee members expressed fears that 
the new industrial zone would curb the chances for Egyptian 
investors to increase their exports to the U.S. as a result of price 
competition with Chinese products.  The memo also highlighted 
concerns that Chinese textiles production would undercut Egyptian 
products in the domestic market and increase the employment of 
Chinese workers at the expense of Egyptians.  Minister of Trade and 
Industry Rachid had approved the memorandum of understanding for the 
textile industrial zone with the Chinese government during his visit 
to China last year.  According to data from the Ministry of Trade 
and Industry, joint venture investments with China in Egypt amounted 
to $70.6 million as of March 2006. 
 
------------------ 
Telecommunications 
------------------ 
 
¶14.  In December, Google signed two agreements with the Ministry of 
Higher Education and the Ministry of Education enabling 3 million 
university students and 8 million preparatory students to use Google 
applications for email, instant-messaging, and calendar functions. 
Each student will receive 2 gigabytes of email storage.  This is the 
first agreement of its kind in the region.  Google CEO Eric Schmidt 
visited Cairo for the signing of the agreements with the Egyptian 
ministries. 
 
---------------------- 
Oil and Petrochemicals 
---------------------- 
 
¶15.  New Petroleum Investment Company:  In December Minister of 
Petroleum Sameh Fahmi announced establishment of the Arab Company 
for Petroleum Investments -APICORP- under the umbrella of the 
Organization for Arab Oil Exporting Countries (OAOEC).  The 
newly-established company will participate in financing hydrocarbon 
and petrochemicals projects in Egypt. 
 
¶16.  Natural Gas Investment:  Also in December, Dourad, an Israeli 
energy company, announced it had concluded a $2 billion contract for 
the import of Egyptian natural gas from the Egyptian - Israeli Joint 
venture company EMG.  The contract spans 15-20 years, and Dourad 
will receive 1.2 billion cubic feet annually beginning in 2008 when 
the EMG pipeline is completed from Al Arish in Northern Sinai to 
Ashkelon on the Israeli Mediterranean coast. 
 
----- 
Water 
----- 
 
¶17.  In December, Egypt hosted the third regional conference on Arab 
Water, sponsored by the Arab Water Council (AWC).  Egypt is 
currently AWC Chair.  Minister of Public Works and Water Resources 
Mahmoud Abu Zaid discussed development of a common Arab vision for 
handling water shortages.  Abu Zaid also encouraged enhanced 
cooperation with the World Water Council.  The three-day conference 
brought together 350 scientists and international water experts to 
discuss the challenge of future water needs in the Arab world. 
 
------------------- 
ECONOMIC INDICATORS 
------------------- 
 
¶18. December - January 
 
Exchange Rate: 
                 (12/27/06)     (01/31/06) 
Egyptian Pounds/$     Buying Selling   Buying Selling 
Avg. Bank/Bureau Rate       570.49  572.40  559.18  571.07 
 
Capital Market: 
                (12/28/06)   (01/31/07) 
CASE 30 Index                     6,973         6,676 
Hermes Financial Index         61,291        58,220 
EFG Index                31,096    29,775 
 
Interest Rates: 
(percent, monthly comparison) 
 
Interbank Overnight            9.8 (12/26)      9.5 (12/30) 
T-bills (182 days)             9.86(12/26)      9.67(12/30) 
T-Bond (maturing 12/08)                       10.86(12/25) 
T-Bond (maturing 10/11)                        no trade 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
         (12/2006)      (01/2007) 
         26,045         26,089.4 
 
Inflation 
                                (12/2006)      (01/2007) 
Consumer Price Index (CPI)         12.4           N/A 
(y-on-y) 
 
 
¶19.  January - February 
 
Exchange Rate: 
                 (01/31/07)     (02/28/07) 
Egyptian Pounds/$     Buying Selling   Buying Selling 
Avg. Bank/Bureau Rate       569.18  571.07   569.02  570.83 
 
Capital Market:             (01/31/07) 
CASE 30 Index                     6,676           7,165 
Hermes Financial Index         58,220          62,987 
EFG Index                29,775          32,170 
 
Interest Rates: 
(percent, monthly comparison) 
 
Interbank Overnight            9.5 (12/30)      8.77 
T-bills (182 days)             9.67(12/30)      8.45(02/27) 
T-Bond (maturing 12/08)      10.86(12/25)     10.71(02/16) 
T-Bond (maturing 10/11)         no trade       10.88 
 
Foreign Reserves: 
(US $ billion, official gov't figures) 
 
         (01/2007)       (02/2007) 
         26,089.4        26,215.7 
 
Inflation 
                                (01/2007)       (02/2007) 
Consumer Price Index (CPI)        12.4%            N/A 
(y-on-y) 
 
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