EGYPT: MAY 2006 MONTHLY ECONOMIC REPORT

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 -------------- SUMMARY -------------- ¶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. -------------- 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. -------------- 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. -------------- 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. -------------- 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. -------------- 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. -------------- 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. -------------- 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. -------------- 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. -------------- 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