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Cablegate: Quarterly Economic Report

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

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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)

RICCIARDONE

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