ECONOMIC MONTHLY REPORT: October-November 2005

UNCLAS SECTION 01 OF 04 CAIRO 009385

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: ECONOMIC MONTHLY REPORT: October-November 2005


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Summary
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1. (U) In this edition: The Central Bank of Egypt (CBE)
narrows the overnight interest rate band, and issues new
checking regulations. Planners from the World Economic
Forum (WEF) meet with GOE officials to discuss the WEF
meeting on the Middle East, to be held in Sharm el Sheikh in
May 2006. The National Competitiveness Council issues its
second report on Egypt's competitiveness, while Merrill
Lynch and Capital Intelligence issue reports on Egypt's
currency rating and economic outlook. The GOE decides to
increase its export of natural gas, while Apache sells part
of its holding in Egypt and Oriental Weavers signs an
agreement with the Holding Company for Petrochemicals to
build a new petrochemical facility. The GOE also announces
plans to issue licenses to provide services currently
provided only by Telecom Egypt. The GOE also announces new
air pollution monitoring facilities, and attends a number of
meetings on Nile Basin issues. End summary.

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Monetary Policy
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2. (U) In its monthly meeting held on October 5, 2005, the
Monetary Policy Coordinating Committee (MPCC) decided to
narrow from 2.5% to 2% the width of the overnight interest
rate corridor (the range of interest rates within which
banks may set overnight lending rates). The corridor was
thus reduced from 9-11.5% to 9-11%. According to a
statement by CBE, the MPCC believes that any potential
inflationary risk stemming from the reduction in the
corridor is balanced in the near term by other economic data
available regarding spending-saving ratios.

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Banking Regulations
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3. (U) In early October, the CBE circulated instructions to
all banks to start application of new check regulations, as
stipulated in Trade Law No. 17 of 1999. The execution of
this legal requirement was delayed for six years due to lack
of preparedness on the part of both banks and the business
community. The regulations (Article 473 of the trade law)
strictly define the type of checks for which legal
protection applies: only checks issued on the official
paper of the bank from which it is drawn. Many Egyptian
businesses deal primarily in unofficial, or non-banking
checks (also known as handwritten, office or personal
checks). Some members of the business community reacted
negatively to the new instruction, but the CBE made it clear
in the instruction that it would not allow further delay in
executing the legal requirements of the law.

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World Economic Forum
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4. (U) On October 5 representatives of the WEF and Egypt's
Ministry of Foreign Trade and Industry met in Sharm El
Sheikh to sign a Memorandum of Understanding for the WEF on
the Middle East, to be held May 20-22, 2006, in Sharm el
Sheikh. The WEF on the Middle East will devote a
considerable part of the agenda to business issues in the
Middle East as well as political, security, energy, and
reform issues. According to Egyptian Minister of Foreign
Trade Rachid, the WEF on the Middle East signals an
important milestone for Egypt. Rachid stated "The decision
to bring the WEF to Sharm El Sheikh sends a clear signal:
Egypt is open for business. We are serious about reform.
We are determined to engage - as an equal and active partner
- with our global peers. The international community
believes in our commitment and is prepared to support Egypt
as it strives for change."

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Second National Competitiveness Report
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5. (U) The National Competitiveness Council issued the
second National Competitiveness Report (2004-2005) for Egypt
in October. The report concluded that Egypt remains behind
its peers in competitiveness. The report did not, however,
take into consideration the economic reforms of the Nazif
administration. The Executive Opinion Survey (EOS) - a tool
used by the Competitiveness Council to translate perceptions
about the country's economic environment into measurable and
comparable indicators - was conducted in March 2004, before
the Nazif administration took office in July 2004. In
analyzing the impediments to business in Egypt, the EOS
identified eight constraints, ranked in order of
significance: 1) access to financing; 2) tax regulations
and rates; 3) inefficient bureaucracy; 4) policy
instability; 5) foreign currency regulations; 6) inflation;
7) an inadequately educated workforce; and 8) restrictive
labor regulations. Although many of these impediments
remain unchanged, the Nazif administration has addressed
some of them, such as tax rates and regulations, which were
changed by a new law passed in June of 2005.

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Ratings Institutions On Egypt
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6. (U) A report by Merrill Lynch in October forecasted an
appreciation in the real value of the Egyptian Pound (LE) in
the medium term, while the nominal value was not expected to
change significantly, in light of the GOE's intention to
boost non-oil exports. The report also estimated that
recent tariff cuts would help keep inflationary pressures
under control, as would stability of the LE due to CBE's
success in controlling liquidity, and the still wide supply-
demand margin. The report predicted the national economy
would continue to recover, with a real growth rate rising
from 5.1% in 2004/2005 to 6% in the present fiscal year,
which will end June 2006. Recent economic growth has been
driven primarily by export growth, but growth in domestic
consumption and private sector investment will likely
increase in the present fiscal year.


7. (U) Capital Intelligence (CI),the international
emerging markets rating agency, announced on October 12,
that it affirmed Egypt's BB+/B long- and short-term foreign
currency ratings and its BBB/A3 long- and short-term local
currency ratings. The outlook remains stable. According to
CI, Egypt's ratings are supported by improved international
liquidity and a manageable external debt burden. CI also
noted that while the rate of economic growth has accelerated
over the past few years, it remains below the level needed
to absorb the approximately 3% annual growth in the labor
force. CI noted that the GOE's renewed commitment to
structural reform raises the prospect that a more resilient
and dynamic economy will emerge over the medium term.

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Industrial Development
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8. (U) In mid November Minister Rachid met with the
Federation of Industries and the presidents of chambers of
commerce to discuss the GOE's 2005-2025 industrial strategy.
The goal of the strategy is for Egypt to become the leading
industrial country in the MENA region, and a center of low-
technology exports. To reach this goal, the GOE plans to
increase industrial production, target export development,
and attract more FDI. The 20-year strategy sets growth
targets for real industrial production (from 5 percent in
2005 to 9 percent in 2020),industrial investment (from a
projected LE 16 billion in 2006 to LE 229 billion in 2025),
exports (from an estimated LE 20 billion in 2006 to LE 291
billion in 2025),and new jobs (from an expected 134,000 in
2006 to 911,000 in 2025).

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Intellectual Property Rights
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9. (U) In late November an Egyptian delegation participated
in the Fifteenth International Intellectual Property Rights
Conference in Geneva. The delegation pressed the case for
making Egyptian cotton an internationally recognized
geographical indicator, as a way to protect the use of the
Egyptian cotton trademark.

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Energy
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10. (U) In late October, press reports indicated that the
GOE decided to allocate a quarter of Egypt's proven reserves
of natural gas for export. Reports estimates proven gas
reserves at approximately 67 trillion cubic feet (TCF),with
an additional 80-100 TCF of probable/undiscovered reserves.
Exports of natural gas come chiefly from three liquefied
natural gas projects: 1) Damietta, from which the Spanish
electric utility, Union Fenosa, began exporting in January
2005; 2) Idku, which came on line in October and is operated
by British Gas and the Malaysian state oil company Petronas;
and 3) the Arab Gas Line to Jordan, which started operation
in mid-2003. Oil and gas accounted for approximately 12% of
Egypt's GDP and total exports of natural gas are expected to
double to 12 million tons in FY 2005/06.


11. (U) On October 9, the Egyptian Holding Company for
Petrochemicals and Oriental Weavers signed an agreement for
the construction of a new petrochemical facility. Total
investment in the facility will be $350 million, shared by
the Egyptian Holding Company for Petrochemicals, the
Oriental Weavers Group, and the latter's subsidiary
Sharqioun for Petrochemicals. The new facility will produce
an annual 350,000 tons of poly-propylene, a major component
in manufacturing carpets, ready-made clothes and pipelines.


12. (U) In mid October, Apache Corporation reached an
agreement with Amerada Hess Corporation to sell its 55%
interest in the deepwater section of Egypt's West
Mediterranean Concession for $413 million. Apache has also
agreed to purchase Amerada Hess's interests in eight fields
located in the Permian Basin of West Texas and New Mexico,
six of which are currently operating, for $404 million.


13. (U) In mid November, press reports indicated that a new
370 km section of the Arab Gas Line to Jordan has been
completed. This section of the pipeline will transport
Egyptian natural gas from Al Aqaba port in southern Jordan
to the Samra and Rehab power stations in the north. A joint
venture company, "Egyptian-Jordanian Fajr Company,"
constructed the pipeline at a cost of $300 million. The
pipeline is part of a broader plan to distribute Egyptian
natural gas throughout the region, including to the Zahrani
refinery in northern Lebanon and to Banias, Syria. Gas
exports to Jordan generated gross revenues of approximately
$60 million in FY 2003/04 and have already reached $85
million in the current FY.


14. (U) In early November, press reports indicated that the
Ministry of Electricity was implementing a project to
modernize the High Dam Electricity Station. The project
will be funded with a loan of $580 million from the German
Reconstruction Bank.

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Telecommunications
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15. (U) In mid-October, Minister of Communications and
Information Technology Tarek Kamel indicated that new
telecom services licenses would be offered internationally
before the end of 2005 for international gateway and Voice
over Internet Protocol (VoIP) services currently monopolized
by Telecom Egypt (TE). These measures are part of overall
plans to deregulate the telecommunications sector by the end
of 2005 in accordance with Egypt's obligations under the
Basic Telecom Agreement, a part of the WTO General Agreement
on Trade in Services.


16. (U) On November 1, Alex Shalaby replaced Osman Sultan as
President and CEO of MobiNil. Shalaby has extensive
experience in the telecom field and joined Mobinil in 1998.
During the third quarter of 2005, Mobinil succeeded in
adding 1.4 million subscribers, bringing the total number of
Mobinil subscribers to about 7 million, a 26% increase over
the first half of 2005.


17. (U) On November 11, the Egyptian National
Telecommunications Regulatory Authority (NTRA) gave Mobinil
and Vodafone two months to improve services and raise
network capacity to accommodate new subscribers. Official
reports released in November indicate that total mobile
subscribers have increased to more than 13.5 million,
exceeding fixed-line subscribers (10.3 million) for the
first time. The increase was driven by a big jump in low-
income subscribers to mobile services. A separate report
published in late November predicted that Egypt's mobile
market would reach 21.1 million by the end of 2008.


18. (U) In late November, Alaa Fahmi, Executive Director of
NTRA, stated that a third cell phone operator is expected to
launch its services in Egypt by the end of 2006. He added
that the third operator would receive benefits that will
enable it to compete with the other existing two GSM
operators and noted that six international firms have
expressed interest in investing in Egypt's telecom sector.
In a recent meeting with Akeel Bashir, Chairman of TE,
Bashir told embassy staff that while TE does not have a
wireless license, it owns 25.5% of Vodafone. He added that
TE would not compete for the third cell phone license,
unless it was confident that it could increase profits over
its shares in Vodafone.


19. (U) In mid November, Minister Kamel headed the Egyptian
delegation to the World Summit on the Information Society
(WSIS) held in Tunis in November 16-18, 2005. The
delegation included government, private sector and civil
society representatives. During the summit, Dr. Kamel held
bilateral meetings with counterparts from various countries,
and affirmed that Egypt's telecom services would be
liberalized by early 2006, including issuance of licenses to
provide VoIP services. At the end of the Summit, the
minister warned against broadband becoming a new digital
divide between developed and developing countries.

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Environment
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20. (U) In late October, Egyptian Minister of State for
Environment Affairs, Maged George, told the press that LE
4.5 million would be allocated for refurbishment of four
pollution-monitoring centers within Greater Cairo. In
addition, six new centers would be built. All 10 locations
will be linked to a central station, which will monitor
pollution levels and issue advisories as appropriate.

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Nile River
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21. (U) Several meetings related to Nile Basin issues took
place in October. In early October the Egyptian-Sudanese
Nile Water Authority met in Khartoum to discuss future
projects, including resumption of the Jonglei Canal project.
In mid-October Dr. Abdel Fattah Metawi, First Undersecretary
of the Ministry of Irrigation and Water Resources, headed
the Egyptian delegation to the Nile Basin Initiative
technical meeting in Holland. The press also reported in
October that this year's Nile flooding was slightly above
average, with the water level at Lake Nasser rising to 174.5
meters above sea level.

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Economic Statistics
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22. (U)

Exchange Rate:
(09/29/05) (11/30/05)
Egyptian Pounds/$ Buying Selling Buying Selling
Avg. Bank/Bureau Rate 575.10 577.70 575.22 577.55

Capital Market:
(09/29/05) (11/30/05)
Capital Markets Authority Index 1988.58 2055.64
Hermes Financial Index 48113 49354
EFG Index 25123 25210

Interest Rates:
(percent, monthly comparison)

Interbank Overnight 9.42 8.86 (12/4)
T-bills (182 days) 9.46 9.36 (10/31)
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)

(09/2005) (11/2005)
21,113.1 21,212.1