EGYPT MONTHLY ECONOMIC REPORT: MAY-JUNE 2005

UNCLAS SECTION 01 OF 04 CAIRO 005344

SIPDIS

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV ENRG EWWT EG
SUBJECT: EGYPT MONTHLY ECONOMIC REPORT: MAY-JUNE 2005


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Summary
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1. In this edition: More Egyptian companies make it into
international emerging market stock indices and the GOE
signs an S&T agreement with the EU. The Ministry of
Communication and Information Technology announces a third
mobile phone license will be issued and minister Tarek Kamel
visits the U.S. Orascom Telecom purchases an Italian
telecom. President Mubarak inaugurates a new liquid natural
gas facility, the Ministry of Petroleum announces new oil
and gas deals as well as new oil discoveries, and Egypt and
Israel sign an MOU on gas exports. Air traffic controls go
on a "go-slow" strike and Suez Canal revenues increase 18%
over last fiscal year. End summary.

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Macroeconomic Developments
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2. In mid-May Morgan Stanley International (MSI) announced
the addition of seven Egyptian companies to its emerging
markets indices, bring the total number of Egyptian
companies on MSI indices to seventeen. MSI increased
Egypt's weight in its indices, which cover all emerging
markets, from 0.77% to 0.78%. The change raises Egypt's
market capitalization in the MSI indices to $1.22 billion.
The seven new companies included are EFG-Hermes Holding,
Egyptian American Bank, Egyptian Financial and Industrial
Co., Ezz Rebars, Egypt Beni Souef Cement, Olympic Group and
Sinai Cement. The companies were chosen based on largest
private sector ownership, market capitalization and trading
activity in the Egyptian market. Other Egyptian companies
included in the MSI indices include domestic blue chips like
Commercial International Bank, AlWatany Egyptian Bank,
Eastern Tobacco, Media Production, EIPICO, Mobinil, Nasr
City Construction, Misr International Bank, Orascom
Construction and Orascom Telecom Holding.

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Science and Technology
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3. S&T Conference: On May 28, PM Nazif opened the First
National Conference for Scientific Research in Egypt. About
4,000 Egyptian scientists and researchers, including
Egyptian expatriate scientists, and various Cabinet
ministers attended the two-day event. The conference
focused on soliciting feedback from the S&T community on
development of a new strategy for promoting scientific
research, services and technology in Egypt. For the first
time in recent memory, ministers fielded direct questions
from working-level Egyptian scientists and listened to their
opinions on S&T issues. Minister of Foreign Trade and
Industry Rashid discussed plans to increase private sector
funding of R&D projects and Minister of Higher Education and
Scientific Research Salama noted that his ministry would
establish a fund to support R&D.


4. The conference produced a series of recommendations to
shape a new national S&T strategy for Egypt. The most
significant decision was to increase the GOE budget
allocation for scientific research by 10-50%. The increase
would include salaries and administrative costs for
scientific institutions. The conference action plan will be
published at the end of July. (Comment: PM Nazif's
commitment to increasing the S&T budget and the presence at
the conference of reform-minded ministers such as Rashid
indicates that the GOE is serious about reform in the field
of scientific research. Private sector involvement will be
key, however, and the GOE's ability to attract foreign
investment in S&T will depend on continued commitment to
macroeconomic reform. End comment).


5. EU-Egypt S&T Agreement: On June 21, PM Nazif attended
the signing of a new S&T agreement between Egypt and the EU.
According to Fawzi El Refaei, President of the Egyptian
Academy of Scientific Research and Technology, the agreement
aims to expand S&T cooperation and provides for Euro 11
million in funding for S&T projects. The agreement allows
Egyptian scientists and research institutions to apply for
funding of specific R&R projects from EU sources. El Refaei
indicated that funding from this agreement would be
channelled into areas of development identified in Egypt's
new S&T strategy.

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Telecommunications and Info Tech
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6. In mid-May, Minister of Communication and Information
Technology (MCIT) Tarek Kamel announced that the GOE would
soon issue a license for a third mobile phone operator. The
RFP would be issued in 3-4 months and proposals would be
reviewed by early 2006, with the goal of getting the third
operator in place by mid-2007. Kamel indicated that MCIT
anticipated LE 2.5 billion in licensing fees from the new
operator. The coming RFP would be "technology neutral,"
i.e., either GSM or CDMA. According to a study by the
National Telecommunications Regulatory Authority (NTRA),
Egypt's mobile market growth rate is currently 12%, but is
expected to reach 25% within five years.


7. In late May, the Information Technology Industry
Development Authority (ITIDA) invited Egyptian and
international firms to apply for e-signature licenses under
Law 15 of 2004, which regulates e-signatures. According to
ITIDA, use of e-signature technology will encourage new
investment in e-commerce and e-business projects and
facilitate access to global e-business sectors. Details of
the licensing requirements can be found at
www.itida.gov.eg/csp.


8. Also in late May, Orascom Telecom (OT) announced the
$130 million sale of its controlling stake in Libertis, a
GSM company in the Democratic Republic of Congo, and
Libertis' operator Oasis Telecom. Also in late May, Naguib
Sawiris, CEO of OT, announced the purchase of Wind, the
telecom subsidiary of Italian conglomerate Enel, by the
newly established "Weather Investments." Sawiris owns 73.9%
of Weather Investments and Enel owns the remaining shares.
OT plans to eventually transfer 51% of its shares to Weather
Investments. The total cost of the purchase was Euro 17.2
billion.


9. MCIT Minister Kamel made his first official visit to the
U.S. June 18-28. The delegation included the Chairman of
NTRA, the President of Telecom Egypt and representatives
from approximately 20 Egyptian IT firms. Kamel held meeting
with USG officials and on the Hill, and also met with
Microsoft Chairman Bill Gates and executives from Intel,
Cisco, and Oracle. The visit led to establishment of a U.S.-
Egypt IT consultative council. Kamel also witnessed the
signing of several business deals, including a $5 million
agreement between Egypt's QuickTel and Qualcom to service
wireless networks in Egypt. The minister also announced
that NTRA would soon issue licensing terms for Voice-over
Internet Protocol (VoIP) service in Egypt.

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Energy
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10. On May 30, President Mubarak inaugurated the liquefied
natural gas (LNG) plant at the Mediterranean Gas Complex in
Damietta. The LNG facility is owned and operated by the
Spanish Egyptian Gas Company (SEGAS),which is 80% owned by
Union Fenosa Gas (50% Union Fenosa of Spain and 50% ENI of
Italy),and 20% owned by Egyptian State Holding Companies.
The $1.3 billion facility was built by a joint venture of
Halliburton KBR, JGC Corporation of Japan, and Tecnicas
Reunidas of Spain. The output of the facility, 5.5 mt/yr,
has already been committed for the next 25 years. The
Mediterranean Gas Complex near Damietta is a joint
investment between the Italian AGIP and British Petroleum.


11. In mid-June, Petroleum Minister Fahmi announced that
the GOE had signed 36 new oil and gas exploration agreements
over the last year for a total investment of $250 million.
The agreements will result in the drilling of 55 new wells
in the Western Desert, the Nile Delta, and off the
Mediterranean coast and Gulf of Suez. Foreign investors in
the agreements include British Gas, Malaysian Petronas,
International Egyptian Oil Company (an Italian subsidiary of
AGIP) and Apache. Announcement of the new exploration
agreements was followed by three new oil discoveries in late
June. The largest was at Ras Gharib-Amr, a 50-year-old oil
field in the Gulf of Suez, 2 km offshore. The discovery was
the first at Ras Gharib-Amr in the last 40 years. The
second discovery was at El Tamad, approximately 90 km
northeast of Cairo. This was the first on-shore oil
discovery in the northern Nile Delta region. The third
discovery was at El Diyur in Egypt's Western Desert. Total
reserves from the new discovery were estimated at 70 million
barrels of crude oil.


12. Egypt-Israel Gas Agreement: On June 30, Fahmi signed
an MOU with Israeli National Infrastructures Minister
Binyamin Ben-Eliezer, clearing the way for a long-awaited
$2.5 billion commercial gas deal between Eastern
Mediterranean Gas (EMG) and the Israeli state-owned
Electrical Company (IEC). While the commercial details
remain to be determined, EMG will export approximately 25
billion cubic meters of gas over 15 years from the Egyptian
port of El Arish to the port of Askalon in Israel. EMG is
an Egyptian-registered company 25% owned by Israel's Merhav
Group. Egyptian businessman Hussein Salem owns another 65%
of EMG and the Egyptian Gas Holding Company owns the
remaining 10%.


13. The MOU provides a "political umbrella" for the
commercial agreement, and commits the GOE to providing gas
to EMG and the GOI to providing tax exemptions for equipment
and materials. Completion of the project is expected to
take two years. Announcement of the MOU was coordinated
with announcement of cooperation between the GOE and the
Palestinian Authority on gas exports. Headlines of some
opposition papers tried to portray the MOU as an attempt to
appease the USG and deflect pressure for further political
and democratic reform.

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Aviation
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14. In early May, Egyptian air traffic controllers went on
a "go-slow" strike, their second in the span of two months,
to protest the Ministry of Civil Aviation's penalization of
8 air traffic controllers for delays at Sharm El Sheikh
airport. The Association of Egyptian Air Traffic
Controllers threatened to bring air traffic to a total halt
if the penalties were not lifted. Controllers also demanded
a doubling of salaries over three years, better health
insurance and better promotion opportunities. The strike
ended after Minister of Civil Aviation Shafik promised to
look into the strikers' demands for better pay and
conditions. Aviation officials indicated that the
controllers conducted the go-slow in line with International
Civil Aviation Organization standards, but failed to
announce the go-slow to the airlines in advance. Unofficial
reports indicated that losses from the go-slow amounted to
$31 million.

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Suez Canal and Maritime Transport
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15. In early May, the Suez Canal Authority indicated that
revenues from Suez Canal tolls during FY 2004/2005 would
exceed $3.2 billion, compared to $2.82 billion during FY
2003/2004. During the first 9 months of FY 2004/2005 (July
2004- March 2005),revenues increased by $369 million to
$2.446 million, up 18% from the previous year. A recent
study by the Ministry of Transportation indicated that total
revenue from port facilities, excluding customs, duties and
taxes, increased in 2004 by 25% to L.E. 2.24 billion.

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Economic Statistics
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16.

Exchange Rate:
(05/31/05) (06/30/05)
Egyptian Pounds/$ Buying Selling Buying Selling
Avg. Bank/Bureau Rate 578.79 581.22 578.24 580.84

Capital Market:
(05/31/05) (06/30/05)
Capital Markets Authority Index 1644 1789
Hermes Financial Index 36344 41772
EFG Index 19599 22692

Interest Rates:
(percent, monthly comparison)

Interbank Overnight 9.49 9.55
T-bills (182 days) 9.88 8.39
T-Bond (maturing 01/06) 4.15 4.15
T-Bond (maturing 04/09) 5.50 5.50

Foreign Reserves:
(US $ billion, official gov't figures)

(04/2005) (05/2005)
18.470 18.712