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Cablegate: Egypt: May 2006 Monthly Economic Report

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DE RUEHEG #3704/01 1650820
ZNR UUUUU ZZH CCY ADXE1B99C MSI0369 612
R 140820Z JUN 06
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9174
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0153

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
USAID FOR ANE/MEA MCCLOUD
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.

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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.

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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.
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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.

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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

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