Egypt Economic Report 2006

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    SUSTAINING A HEALTHY GROWTH MOMENTUM

    The Egyptian economy registered in fiscal 2006 its best performance yet this decade, spurred by

    increased domestic private consumption and investment demand, surging foreign direct

    investments and capital inflows, and the increasing pace of governmental efforts aimed at

    bolstering economic activity and reducing unemployment. Such upbeat happenings have

    translated into a robust real GDP growth rate of 6.8% in the past fiscal year. Within such a

    favorable context, inflation has surged to 7.3% in fiscal year (FY) 2006, triggering the Central

    Banks intervention to contain pressures on prices.

    The performance of the agricultural and industrial sectors, accounting altogether for almost half

    of the countrys GDP, sustained the countrys economic development process, with a good growth

    in FY 2006. While the agriculture sector recorded a real growth of 3.2% year-on-year, the mining

    sector reported a strong 20.8% growth and the manufacturing sector progressed by 5.8% in FY

    2006.

    Construction activity was a major growth driver in FY 2006, registering a 14% real growth rate

    that fuelled overall economic expansion. Implemented private and public investments in the

    sector amounted to LE 4.1 billion, growing by a striking 246% year-on-year. Cement executed

    sales, a coincident indicator of the sector, reported a significant yearly surge of 19.5% to total 38.5

    million tons in FY 2006.

    Tourism, a pillar of the Egyptian economy and the second largest source of foreign exchange,

    generated US$ 7.2 billion in receipts growing by 12.5% year-on-year, yet was somewhat affected

    by adverse security incidents in FY 2006. The growth in the number of tourists slowed down,registering 0.5% year-on-year, against a much higher 15.1% in FY 2005.

    The external sector expanded in FY 2006, within a context of increased aggregate spending and

    economic growth. Total trade movement increased by 30% when compared to FY 2005. Egypts

    structural trade deficit widened a bit in FY 2006, as the growth in imports in volume was higher

    than that of exports. The countrys trade deficit has been nonetheless regularly offset by the

    services account (tourism and transport through the Suez Canal) and by workers remittances,

    keeping the current account in surplus. The latter, standing at US$ 1.8 billion in FY 2006, along

    with record high FDIs at US$ 6.1 billion, led to a balance of payments surplus of US$ 3.3 billion.

    The public finance sector in Egypt witnessed a good year in FY 2006. Total revenues progressedby 34.9% to stand at LE 149.5 billion in FY 2006, while public expenditures increased by an

    important but lower 26.5%. As such, the overall fiscal deficit dropped by 5.2% to LE 49.0 billion,

    accounting for 7.9% of GDP in FY 2006. Domestic debt rose by 16.2% to LE 593.5 billion, while

    foreign debt slightly increased by 2.2% over the covered period to LE 29.6 billion, which pushed

    total debt up by 12.6% to LE 763.7 billion in FY 2006. The debt increase has been nevertheless

    outpaced by accrued economic growth, leading to a continuously declining debt to GDP ratio of

    123.7% in FY 2006.

    Research DepartmentBank Audi sal - Audi Saradar GroupBanque Audi Plaza, Bab Idriss

    Riad El Solh - Beirut - LebanonP.O.Box : 11 - 2560Tel : (01) 994000Cable : BanaudiTelefax : (01) 985622Swift : AUDBLBBX

    Bank Audi saeHeadquarters: 104 El Nile Street, Dokki, CairoP.O.Box 757. Postal Code 11511

    Tel:(20-2) 3362516Fax:(20-2) 3362647E-mail: [email protected]

    Real Sector p2

    External Sector p5

    Public Sector p7

    Financial Sector p8

    Conclusion p12

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    Egypts banking sector has shown in FY 2006 signs of

    receptivity to the positive growth momentum reigning

    over all economic sectors of activity, yet its expansion has

    somewhat slowed down while economic activity

    continued to pick up. Banking activity, measured by total

    assets, progressed by 8.2% to LE 761.6 billion, yet lower

    than the 13.0% average recorded over the previous five

    years. Customer deposits increased by 9.5% to LE 571.5

    billion, while total credit facilities rose by 5.1% to LE324.0 billion, thus reflecting the increasing financing

    activity of the banking sector. In parallel, shareholders

    equity grew by 14.6% in FY 2006 to reach LE 40.5 billion.

    The Cairo and Alexandria Stock Exchanges (CASE)

    ended the year 2006 with a positive growth in activity,

    despite the severe price corrections on the regions stock

    exchanges as of the first quarter of 2006. The Egyptian

    stock exchange is in fact one of the very few Arab capital

    markets to have registered a positive variation year-on-

    year, underpinning the CASEs resilience to the adverseevents on the regional stock exchanges. The Arab

    Monetary Fund (AMF) price index for the Cairo and

    Alexandria stock exchanges rose by 5.6% year-on-year,

    from 162.9 at end-December 2005 to 172.0 at end-

    December 2006. In parallel, the bond market was very

    active in 2006, with the trading value reaching LE 11

    billion, up by 23.6% from LE 8.9 billion in 2005.

    1. ECONOMIC CONDITIONS

    1.1. REAL SECTOR

    1.1.1. Agriculture and Industry

    The diversified Egyptian economy has adequate natural

    resources to benefit agricultural production and expand

    manufacturing activity. The performance of the

    agricultural and industrial sectors sustained the

    countrys economic development process, with a

    reasonable growth in FY 2006.

    Agriculture in Egypt is distinguished for its high fertility,

    rich soil, warm climate supporting crop growth, intense

    use of fertilizers, limited arable land, and significant

    dependency on the Nile river water, which is increasingly

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    2001/2002 2002/2003 2003/2004 2004/2005 2005/2006

    3.2%

    4.1% 4.5%

    6.8%

    Real GDP growth CPI

    0%

    2%

    4%

    6%

    8%

    2.7%

    -2%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    7.3%

    11.2%

    3.1%

    4.7%

    3.9%

    Real GDP Growth & Inflation

    coming under pressure. Building on such favorable

    characteristics and working around the challenges, Egypt

    has been putting significant efforts in expanding and

    reforming its agricultural sector. Implemented public

    and private sector investments in agriculture and

    irrigation totaled almost LE 8 billion in FY 2006, up by

    7.6%.

    Agriculture production at current prices was estimated atLE 81.8 billion in FY 2006. The real growth rate of the

    sector was estimated at 3.2%, almost the same rate as the

    previous year. Agriculture continued to account for

    some 15% of GDP at factor cost, employing around one

    third of the labor force, and contributing to one fifth of

    foreign exchange earnings. Self-sufficiency and surplus

    for exports has been achieved in rice, vegetables, fruits,

    and cotton.

    Although production of rice, a major staple crop,

    declined by 3.6% to 6.12 million tons in FY 2006, ricefarmed land productivity was the highest worldwide (4.2

    tons per feddan). Maize and wheat production grew by

    16.6% and 1.6% to 7.27 million tons and 8.27 million

    tons respectively, yet all other cereals reported a decline

    in FY 2006. Egypt is still only 50% to 60% self-sufficient

    in wheat. This is quite a challenge for a country with a

    huge population still growing at high rates and

    overridden with poverty. The government plans to

    expand wheat-farmed land by 10%-15%, yet will remain

    a net wheat importer, since policies will focus more on

    other crops with better comparative advantage.

    Horticulture and vegetables are perceived as promising

    crops especially after the conclusion of the EU trade

    agreement. Fruits production reached 8.97 million tons

    up by 6.4% from the previous year, while vegetables

    production amounted to 19.6 million tons, up by 2.0%.

    Likewise, sugar cane and sugar beet are considered

    strategic crops in Egypt. In FY 2006, sugar cane

    production amounted to 16.25 million tons, almost the

    same as the previous year, but its productivity was still

    ranked among the top in the world. Sugar beet

    production climbed by 44.3% to 4.13 million tons, with

    its productivity going up from 20.7 tons per feddan in FY

    2005 to 25.6 tons per feddan in FY 2006.

    Cotton is a very important export crop in Egypt, offering

    a relative advantage, in terms of high quality and

    productivity (7.1 metric qentar per feddan in FY 2006).

    Total production reached about 691 thousand tons in FY

    2006, and Egypt achieved self-sufficiency with export

    surpluses of this crop. Egyptian cotton attracts high-end

    international brand names and demand is expected to

    increase, once the US, a leading competitor cottonexporter, eliminates its farmers subsidies that distort

    pricing and international demand and supply, to meet

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    the World Trade Organizations obligations.

    Indeed, with greater liberalization of developed nations

    agricultural markets, Egypt's agricultural exports are

    expected to get a boost, especially with the intensive

    efforts put to increase the sectors potential. The aim is to

    reach an annual growth rate of agriculture production of

    4.1%, by focusing on a more efficient use of natural

    resources, increasing output of leading crops, enhancingmarketing and credit access, and most importantly

    developing irrigation and water resources. In parallel, the

    government has been working on land reclamation, since

    arable areas are threatened by urbanization in a high

    population growth environment. The farmed area in FY

    2006 reached about 8.47 million feddans, or 3.5% only of

    the countrys area. Egypt plans to add about 3.4 million

    feddans of new reclaimed farmlands by 2017.

    Egypts agricultural sector provides for a growing

    manufacturing sector, particularly when considering thetextile and food processing industries. Egypt has also

    important oil and gas based industries, such as

    petrochemicals and fertilizers manufacturing. Egypts

    industrial sector consists of mining and manufacturing.

    The two sub-sectors reported a real growth rate of 20.8%

    and 5.8% respectively, and accounted for around 16%

    and 17% of FY 2006 GDP at factor cost.

    Oil and gas reserves are estimated at about 3.7 billion

    barrels and 58.5 trillion cubic metres respectively,

    according to the US Energy Information Administration.The FY 2006 witnessed, according to official sources, the

    highest production ever. Crude oil and gas production

    reached about 73.7 million tons, including about 36.7

    million tons from crude oil, condensates and butane gas

    and about 37.0 million tons from natural gas in FY 2006.

    Total minerals and oil products exports amounted to

    US$ 10.43 billion, almost double the previous years

    value and accounted for 57% of total exports. The big

    leap is the result of higher prices and a surge in

    production. Investments in mining, crude oil, and

    natural gas amounted to LE 23.1 billion in FY 2006,

    rising by 33.7%. Egypt is aggressively pursuing

    exploration by luring international oil firms through tax

    incentives, and at the same time, expanding the refining

    business, and privatizing oil companies.

    Egypt's expanding oil and natural gas sectors have led to

    the development of other industrial activities, such as

    petrochemicals and manufacturing. The government-

    established Egyptian Petrochemicals Holding Company,

    in charge of developing and implementing a master plan

    for the sector, plans a US$ 10 billion investment over the

    next 20 years to complete 14 complexes, with anestimated output of up to 15 million tons per year and a

    value of US$ 7 billion in a bid to maximize the potential

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    of the recent natural gas discoveries. The aim is to create

    value-added national industries, provide feed stock for

    existing concerns, and meet domestic needs, as well as

    earning a projected US$ 3 billion from exports, especially

    that Egypt can benefit from its geographical proximity to

    Europe, a net importer of petrochemicals. Fertilizers

    production is a similar sector benefiting from the

    availability of natural gas (accounting for 30%-40% of

    production costs) and playing an important role inagriculture. Official figures show that phosphatic

    fertilizers production amounted to 1.4 million

    tons in FY 2006, up by 5.5%. Azotic fertilizers

    production amounted to 11.1 million tons in FY

    2006, up by 4.0%.

    Textiles and ready-made clothing are other

    sectors with similarly strong backward linkages

    with the primary sector, namely high-quality

    Egyptian cotton. Cotton yarn production

    totaled 301.6 thousand tons in FY 2006, up by 4.0%, andready-made clothes production amounted to 306 million

    pieces, up by 1.0% from the previous year. Receipts from

    cotton textiles exports fell to US$ 226.3 million in FY

    2006, i.e. by 26% year-on-year, but ready-made clothes

    exports generated US$ 350.3 million from exports, up by

    18% year-on-year. Indeed, although this sector is the

    non-oil second largest in Egypt, it has not been operating

    at full potential, yet. It is suffering from stagnation and

    neglect, with most spinning and weaving activities still

    government-owned. Public entities are over-staffed and

    lack technical skills, creativity and upscale designers.Egyptian textiles also suffer from international obstacles,

    such as unfair competition from US cotton dumping,

    and Chinese and Indian similarly low cost production.

    The sector, however, is perceived to have a promising

    outlook due to a number of comparative advantages.

    Egypt can benefit further from low-cost labor, cheap

    energy prices, not to mention its high quality cotton

    input. The Egyptian government set an export

    development strategy targeting particular markets for

    textiles exports. The government also started the

    privatization of its textile business, with private sector

    textile businesses proving more profitable.

    The above-mentioned strategies of Egypts major

    industrial sectors fall under a comprehensive

    modernization process stretching over the next 20 years.

    The government started the Industrial Modernization

    Programme (IMP) with support from the European

    Union to upgrade its industrial base and diversify the

    economy. The Industrial Development Authority was

    also established to form industrial policies, set up

    industrial areas, and attract industrial investment. In FY2006, the Industrial Development Authority agreed on

    allocating lands for 120 industrial projects with an

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    investment cost of LE 2.7 billion, providing about 70

    thousand job opportunities. Egypt also set a program to

    be carried out during 2006-11 to encourage the

    partnership between the private sector and the banking

    sector and build one thousand big factories following

    international standards or expanding the working

    factories with investments of more than LE 15 million.

    Egypt is, thus, working hard to become moreinvestment-friendly. Public and private investments in

    manufacturing and oil products amounted to LE 16.4

    billion in FY 2006, rising by 29.1%. The industrial

    modernization process, however, is still at its onset.

    Obstacles such as a complex bureaucracy, corruption,

    weak standardization and quality measures will take time

    to be overcome. More importantly, Egypt will need to

    strike the right balance between economic liberalization

    of the old style strongly managed economy,

    implementing the necessary reforms, while at the same

    time taking into account social constraints, especiallyemployment.

    1.1.2. Construction

    Construction activity was a major growth driver in FY

    2006, registering a 14% real growth rate that fuelled the

    overall economic expansion. The construction and

    building activities share out of GDP (at factor cost) is

    estimated at 4.1% during the said year. Implemented

    private and public sector investments in the sector

    amounted to LE 4.1 billion, during FY 2006; a striking

    growth of 246% year-on-year.

    Cement executed sales, a coincident indicator of the

    sector confirming the upward trend in construction,

    reported a significant surge of 19.5% year-on-year to

    total 38.5 million tons in FY 2006. However, this is not

    only for local consumption. Cement companies that

    have been privatized since the end of the nineties are also

    exporting, with sales abroad amounting to 8.7 million

    tons (22.5% of the total) in FY 2006. Indeed, the cement

    sector, benefiting from its access to local natural gas, has

    been upgrading its facilities, especially that consolidationand privatization allowed entry of multinational players,

    in a context of growing demand.

    The construction boom is the result of spiraling foreign

    direct investments, large infrastructure projects, such as

    building power stations, water supply and irrigation

    projects, refineries, airport expansion, and land

    reclamation, not to mention the regular need for new

    housing units. The tourism sectors recently observed

    resilience against adverse security developments has also

    propped construction activity. Tourism is projected toincrease, with the government aiming for 14 million

    annual visitors by 2011, necessarily leading to the

    expansion of the hospitality industry. The government

    aims at increasing hotel rooms by 15,000 per year. Large

    real estate developers also revealed gigantic mixed use

    projects in Egypt, such as a new US$ 1.7 billion project by

    Emaar, called Marassi, expected to take more than five

    years to complete, and the US$ 4 billion Egyptian-

    Kuwaiti Madinat Al Salam city project that is expected to

    take ten years to complete.

    Moreover, regulatory amendments and improved

    government relations with contractors create a

    conducive setting for project development. The

    government has also clearly announced a number of

    major public infrastructure investments to be carried out

    in the coming years. Add to all these projects, the high

    population growth that should also continue to fuel

    demand for new residential buildings. Hence, for all

    these long-lasting reasons, demand is expected to climb

    over the short and medium term, suggesting a positive

    outlook for the construction sector.

    1.1.3. Trade and Services

    The trade and services sectors, a cornerstone of the

    Egyptian economy, captured around 43% of GDP (at

    factor cost) and reported a real growth of 6.4% to reflect

    the favorable economic performance of FY 2006. The

    most important growth in FY 2006 was in

    communications (10.3%), and storage and

    transportation and Suez Canal activity (8.3%).

    Implemented investments in these sectors increased by

    20.5% in FY 2006 to reach LE 23.1 billion.

    Transport is an important sector in Egypt being a

    primary source of foreign exchange, thanks to the Suez

    Canal. In FY 2006, the Canal generated some US$ 3.56

    billion up by 7.6% year-on-year, due to both increased

    traffic and higher fees. The number of ships transiting

    the canal increased by 6.6% year-on-year to 18,476 ships.

    Overall, the ship tonnage climbed by 8.7% to 702.3

    million tons during the said year. The Suez Canal activity

    registered, thus, a real growth rate of 9.4% (at factor

    cost), over FY 2006. While the Suez Canal terminal isconsidered quite developed, many of Egypts other 14

    ports require overhauling, especially if the government

    wants to reach its objectives of increasing the maritime

    cargo handling capacity and expanding its role in

    international transit.

    Likewise, the air and land transport sectors require

    significant upgrading. Land transport, particularly

    railways, is characterized by limited productivity and

    mismanagement. The Egyptian government, fully aware

    of these problems, has been investing in transportinfrastructure. Aviation is witnessing a series of reforms

    to increase capacity and meet international competition.

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    At the same time, a new terminal is being built at the

    Cairo International Airport. Massive highways projects

    and railway extensions across the country are also either

    under serious consideration or already initiated in FY

    2006. However, despite these major efforts, the transport

    sector in Egypt will continue to face new challenges with

    time, as the economy becomes more and more export-

    oriented, tourism - a promising business - continues to

    expand, and population growth remains high.

    Tourism is, indeed, a pillar of the Egyptian economy. It

    absorbs a large share of labor force and is closely related

    to many complementary industries and services sectors.

    More importantly, tourism is the second largest source of

    foreign exchange (after oil exports receipts) with FY 2006

    tourism receipts going up by 12.5% year-on-year to

    reach US$ 7.2 billion and cover some 60% of the years

    trade deficit. Investments in the hospitality sector

    increased by a good 24% to LE 3.4 billion in the said year,

    notwithstanding a relative stagnation in tourism activityin FY 2006, as the sectors outlook was still favorably

    perceived.

    However, tourism was not at its best in FY 2006, because

    of the bombings of a Red Sea resort last April. The

    impact was not drastic, since activity did not completely

    deteriorate but only slowed down. The number of

    tourists increased by 0.5% year-on-year to reach around

    8.7 million and the number of nights spent in hotels was

    still on average 10.4 days, the same as the previous year.

    European travelers that constitute the majority (67%)were less by 2.7% this year, while Middle Eastern tourists

    increased by 5.2% to account for 21.1% of the total. The

    largest growth (17.4%) by nationality was that of tourists

    from the American continent, yet these still account for a

    mere 3.7% of the total. Hotels and restaurants activity, a

    sector closely related to tourism, accounted for 3.2% of

    GDP in FY 2006 and reported a modest growth of 4.3%

    5

    during the said year, compared to a remarkable 21.1%

    the previous year.

    Although FY 2006s adverse events delayed the

    development of the tourism industry, Egypt still has a lot

    of attractions and competitive advantages to boost this

    vital sector, especially in an environment of security and

    stability. In addition, the government has been

    aggressively upgrading the infrastructure for tourism,launching promotional campaigns, training employees

    of the sector, diversifying the hospitality

    services, and attracting international developers

    and contractors that have already started

    gigantic tourist projects construction. This is all

    part of a six-year strategic plan to increase the

    number of tourists to 14 million per year,

    increase tourist nights to 140 million nights, and

    increase the capacity of hotels to 240,000 rooms.

    With such ambitious objectives, it is expected

    that Egypt tourism could become a catalyst forsustainable economic development.

    1.2. EXTERNAL SECTOR

    The external sector expanded in FY 2006, within a

    context of increased aggregate spending and high

    economic growth. Total trade movement increased by

    29% when compared to FY 2005. Egypt has a structural

    trade deficit that widened a little bit in FY 2006, as

    growth of imports in volume was higher than that of

    exports. The trade deficit went up by 15.7% year-on-yearto reach US$ 11.98 billion in FY 2006, the equivalent of

    11.2% of GDP.

    Imports rose by 25.8% on an annual basis, to reach US$

    30.4 billion in FY 2006. This growth is the result of a surge

    in oil prices, free-trade agreement that cut tariffs, and an

    Year

    2006

    Real Sector

    Agricultural Production of Main Crops (000s tons)

    Vegetables

    Sugar Cane

    Bank Loans to Agricultural Sector (in LE million)

    Industrial Production

    Iron Production of Main Co. (in 000s tons)

    Electricity Generated & Purchased (in millions of KWh)

    Electricity Uses (in millions of KWh)

    Construction Activity

    Domestic Sales of Cement (executed - normal-white) (in 000s tons)

    Exports of Cement and Clinker (grey) (in 000s tons)

    Bank Loans to Industrial Sector (in LE million)

    Trade and Services

    Tourist Arrivals (in 000s)

    No. of ships transiting Suez CanalShip tonnage (in millions of tons)

    Bank Loans to Trade & Services Sectors (in LE million)

    2002/2003 2003/2004 2004/2005 2005/2006 Var 04/03 Var 05/04 Var 06/05

    66,871 68,623 71,686 74,425 2.6% 4.5% 3.8%

    16,379 18,242 19,189 19,582 11.4% 5.2% 2.0%

    16,031 16,245 16,230 16,245 1.3% -0.1% 0.1%

    4,946 5,565 6,391 5,682 12.5% 14.8% -11.1%

    1,809 2,905 2,946 3,090 60.6% 1.4% 4.9%

    88,852 94,064 100,064 107,463 5.9% 6.4% 7.4%

    74,281 78,692 85,718 92,814 5.9% 8.9% 8.3%

    26,155 24,457 24,948 29,804 -6.5% 2.0% 19.5%

    4,667 11,242 - 8,681 140.9% - -

    98,008 101,151 103,064 101,866 3.2% 1.9% -1.2%

    5,239 7,512 8,650 8,693 43.4% 15.1% 0.5%

    14,610 16,174 17,334 18,476 10.7% 7.2% 6.6%499.9 578.7 646.2 702.3 15.8% 11.7% 8.7%

    131,828 134,530 133,480 139,752 2.0% -0.8% 4.7%

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    overall boost in domestic demand, particularly in

    investment spending since the country has embarked on

    the modernization of its industrial sector. In fact,

    investment goods imports surged by a notable 61.2%

    year-on-year to account for some 26% of the total, and

    when adding intermediate goods, these two categories of

    imports increased by 39.4% to take more than half of

    total imports. Crude oil petroleum imports, which

    account for less than 10% of total imports, alsocontributed to the total growth, as they rose by 73.5%

    during the year. Consumer goods imports grew by 10.3%

    to US$ 3.5 billion and account for 11.6% of the total.

    Exports, in parallel, grew by 33% to reach US$ 18.5

    billion in FY 2006. This growth was mostly driven by

    fuel, mineral oil and related products exports which

    went up by 90.4% to reach US$ 10.5 billion and account

    for 57% of total exports. Semi-finished goods export

    increased by 53.1% mainly on account of metal and

    aluminium products. In contrast, finished goods exports,

    that account for 28% of the total, declined by 3.3% in FY

    2006 (after reporting important growth rates exceeding

    30% over the previous two years). These changes in the

    volume of export commodities highlight the importance

    of diversifying the economy to strengthen non-

    petroleum manufacturing and reduce oil dependency,

    especially as Egypts oil reserves are not abundant.

    Egypts main trade partner is the European Union (EU)

    that accounted for circa 37% of total imports and exports

    in FY 2006. Egypt is part of the Euro-Med partnership

    with the trade provisions of this agreement enforced

    since the beginning of 2004, leading to a gradual removal

    of trade barriers. The second largest trade partner is the

    US with 19% of imports and 31% of exports in FY 2006.

    The US and Egypt also have a trade agreement under the

    Qualified Industrial Zones (QIZ) which allows

    conditional free access of Egyptian goods produced in

    these zones to the US markets. The QIZ protocol wasexpected to be a step towards a Free Trade Agreement

    between the two countries, yet bilateral free-trade

    negotiations were halted. The benefits from the QIZs,

    however, will be eroded if the US decides to open its

    markets to large players such as China and India that are

    highly competitive. In addition to bilateral trade

    agreements, Egypt is a member of the WTO, and has

    been abolishing trade barriers since 1999, to comply with

    WTO commitments. It has agreements with other Arab

    countries, as well as East and South African countries

    under the COMESA agreement.

    Within this context, Egypt continued to register

    widening trade deficits. In FY 2006, it totaled US$ 11.985

    billion, up by 15.7% from the previous year. However,

    Egypts structural deficit has been regularly offset by the

    services account (tourism and transport through the

    Suez Canal) and by current transfers, namely workers

    remittances, keeping the current account

    in surplus. Tourism receipts amounted to

    US$ 7.2 billion, up by 12.5% year-on-

    year. Remittances of Egyptians workingabroad were a second source of current

    inflows amounting to US$ 5.0 billion in

    FY 2006, rising by 16.3% year-on-year.

    Suez Canal receipts provided US$ 3.6

    billion in FY 2006, up by 7.6%.

    Investment income receipts likewise

    spiraled to US$ 2 billion in FY 2006, more

    than double their previous years US$ 0.9

    billion value, as a result of the rise in

    international interest rates earned abroad.

    The current account, thus, registered asurplus of US$ 1.752 billion, yet lower by 39% due to the

    rising merchandise trade deficit and lower official aid at

    almost half their previous years level.

    The surplus of the current account was coupled with a

    surplus in the capital and financial account which

    reached US$ 3.5 billion, up by 4% year-on-year. Foreign

    direct investments (FDI) were the main reason behind

    the surplus. They totaled US$ 6.11 billion (5.7% of

    GDP), rising by 56% year-on-year to attain a record high

    level. The largest contributor to the high FDI is the USA

    with US$ 4.6 billion, or 50% of FDI inflows. Investments

    in the oil sector totaled US$ 1.8 billion, only 30% of the

    total, reflecting increased economic diversification.

    Remarkably, privatization is also not the main recipient

    for FDI, accounting for almost 15% of FDI only (up from

    11% the previous year).

    The important growth in FDI was actually rather coming

    in the form of new establishments and issued capital. The

    latter investments increased by 262% to US$ 3.4 billion,

    the equivalent of 55% of total. Real estate investments

    share, in contrast, remained unchanged at less than0.5%, in a region where property investments are usually

    the most attractive FDIs, especially for Arabs from the

    6

    Exports/Imports Current Account / GDP

    48.6%

    43.1%

    55.4% 57.2% 57.2% 60.6%

    0.0% 0.7% 2.4% 4.3% 3.3% 1.6%

    2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    -20%

    -10%

    0%

    10%

    20%

    30%

    Foreign Sector Indicators

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    Gulf. These developments reflect a perception of an

    improved business environment in Egypt. Net portfolio

    investments also rallied in FY 2006 by 233% to more

    than US$ 2.7 billion, mainly as a result of increased

    subscriptions by financial institutions in government

    securities. Hence, the capital and financial account along

    with the current transfers surplus have led to a balance of

    payment surplus of US$ 3.3 billion, lower by 27.3% than

    the previous years, mainly on account of the wideningtrade deficit.

    1.3. PUBLIC SECTOR

    The public finance sector in Egypt witnessed a good fiscal

    year. The overall favorable economic conditions, coupled

    with timely measures implemented by the Egyptian

    authorities, triggered a rise in public revenues that

    outpaced that of total expenditures, leading to a

    tightening in the overall fiscal deficit for the first time in

    recent years.

    Total revenues progressed by 34.9% to stand at LE 149.5

    billion in FY 2006, up from LE 110.9 billion in the

    previous year. Such an enhanced performance on the

    revenues side is due to the improved economic activity in

    Egypt and to the efficient measures adopted by the

    government. The authorities have lowered individual and

    corporate income tax rates to a maximum of 20% as of

    July 2005, in addition to simplifying tax procedures,

    which led to a widening of the tax base and increased

    compliance. Indeed, tax revenues, accounting for aroundtwo thirds of total revenues, rose by 29.4% year-on-year

    to LE 98.0 billion.

    In details, taxes on income and profits climbed by 53.6%

    to LE 48.5 billion, and customs duties surged by 23.5% to

    LE 9.6 billion (mainly due to enhanced imports), both

    constituting the main drivers of the said progression in

    tax receipts. Other revenues, representing the majority of

    the remaining one third of revenues, grew by 54.7% to LE

    49.9 billion, mostly owed to a doubling in property

    income to LE 36.4 billion. On the other hand, grantsretreated by 44.5% to LE 1.6 billion.

    The positive effect of the reported rise in fiscal revenues

    on public accounts was nonetheless accompanied by an

    important increase in public expenditures. The latter rose

    by 26.5% year-on-year, moving from LE 161.6 billion in

    FY 2005 to LE 204.5 billion in FY 2006. Such a hike in

    public expenditures is mainly attributable to three

    factors. The still elevated worldwide oil prices drove fuel

    subsidies upwards, the latter almost quadrupling to LE

    54.3 billion, and thus accounted for above 25% of totalexpenditures. Public sector salaries and wages, the second

    largest expenditure in Egypt, rose by 14.7% to LE 37.5

    billion. Last but not least, and as the deficit has been

    historically financed by government borrowings, total

    debt service increased by 12.1% to LE 36.8 billion, driven

    by a 14.0% progression in domestic debt service.

    As such, the overall fiscal deficit, including sales of

    financial assets, dropped by 5.2% to LE 49.0 billion, and

    represented 7.9% of GDP in FY 2006, versus a higher

    9.6% in the previous year. Excluding debt service, whichhas registered a 12.1% rise in FY 2006, Egypts primary

    deficit retreated by a more important 35.3% to

    LE 12.2 billion. It is worth stressing that if it

    werent for the substantial proceeds from

    privatization during FY 2006, the overall fiscal

    deficit would have registered an 8.3% yearly

    increase to LE 54.9 billion. Indeed, sales of

    financial assets stood at LE 6.0 billion in FY

    2006, and such proceeds are viewed to be one of

    the essential means of alleviating the growing

    stock of domestic debt.

    The need to finance the public finance deficit led to the

    government increasing its domestic borrowings, given its

    historic cautiousness as to securing financing from

    abroad. Domestic debt rose by 16.2% to LE 593.5 billion,

    while foreign debt slightly increased by 2.2% over the

    covered period to LE 29.6 billion. Total debt thus

    amounted to LE 763.7 billion, recording a 12.6% rise as

    compared to LE 678.1 billion in FY 2005. The ratio of

    total debt to GDP nonetheless pursued its decline,

    standing at 123.7% in FY 2006, against 126.0% in FY2005, 127.7% in FY 2004 and 131.3% in FY 2003, yet

    thanks to the accrued economic growth that has been

    constantly outpacing the debt increases.

    In light of such fiscal imbalances, the Egyptian

    authorities came up with a handful of reforms targeted at

    reducing the fiscal deficit by 1% of GDP per annum for

    five years, and that are expected to be gradually

    implemented starting FY 2007. The main constituents of

    said plan include reforms at the level of revenues, as well

    as expenditures.

    On the revenues side, the General Sales Tax is to be

    reformed into a unified VAT, while property and stamp

    tax rates are to be streamlined and their base broadened.

    On the expenditures side, authorities are targeting the

    reform of fuel subsidies by focusing on low income

    categories, and encouraging the switching to natural gas,

    while streamlining and enhancing the product targeting

    of food subsidies. The government also aims to

    implement wage and employment measures to prevent

    public salaries from increasing too much and contain the

    wage bill. Egyptian authorities seek to improve debtmanagement and go through with public private

    partnerships to fund the provisions of public investments

    Year

    2006

    7

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    8

    (mainly for schools and health clinics), among other

    measures.

    The IMF actually commended the Egyptian government

    on its medium term fiscal consolidation and reform

    program and believes it should ensure a sustainable

    declining path for the public debt to GDP ratio, provided

    it is entirely and promptly implemented, while

    simultaneously bolstering the efficiency of publicspending. The Fund yet believes that a more ambitious

    fiscal consolidation program, backed by the strong

    economic activity and focused on subsidy reduction and

    the early introduction of a modern VAT, could very well

    reverse debt dynamics without jeopardizing economic

    growth.

    1.4. FINANCIAL SECTOR

    1.4.1. Monetary Situation

    The buoyant economic activity and the record high level

    of FDI flows witnessed in Egypt during the FY 2006,

    along with the continued confidence in the monetary

    policy, positively affected the monetary sector, yet were

    accompanied by an increase in prices that triggered the

    Central Banks intervention to contain inflationary

    pressures.

    The strength of FDI and other substantial capital inflows,

    along with the surge of the countrys total exports,

    altogether prompted a significant rise in the CentralBanks net international reserves from US$ 19.3 billion at

    the end of FY 2005 to US$ 22.9 billion at the end of FY

    2006, well above the 1997 record level of US$ 20.3 billion,

    thus covering nine months of imports. The said reserves

    of US$ 22.9 billion accounted for 23.6% of the money

    supply (M2) at the end of FY 2006, versus a lower

    coverage ratio of 22.6% at the end of the previous FY.

    Such favorable conditions were also one of the main

    contributors to a growth in money supply during FY

    2006. In fact, the expansion in the narrow measure ofmoney supply (M1) reached 21.8%, moving up from LE

    90 billion at the end of FY 2005 to LE 109 billion at the

    121.0%

    458,774

    548,588

    131.3%127.7%

    2001/2002 2002/2003 2003/2004 2004/2005 2005/2006

    LE million

    Public Debt/GDPPublic Debt

    100,000

    200,000

    300,000

    400,000

    500,000

    600,000

    700,000

    800,000

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    140%

    620,308

    126.0% 123.7%

    678,097 763,719

    Public Indebtedness

    end of FY 2006, while the broader measure (M2) reported

    a 13.5% increase at the end of FY 2006 relative to the

    previous fiscal year.

    The overall favorable economic conditions and robust

    foreign currency inflows, the sustained confidence in the

    Central Banks monetary policy, but also the

    establishment of an inter-bank foreign currency market

    increasing the perception of foreign currency availabilitywithin the banking system, resulted in an overall

    appreciation of the Egyptian pound versus the US Dollar

    in 2006. The rate stood at LE 5.75 per US Dollar at end-

    June 2006, against a higher LE 5.78 per US Dollar at end-

    June 2005.

    These favorable monetary developments however could

    not prevent inflationary pressures from arising

    progressively. The consumer price index inflation, quite

    moderate till March 2006, started to accelerate as of April,

    reaching 7.3% in FY 2006, versus a lower 4.7% in FY2005, and surging to 12.4% year-on-year in December

    2006.

    The rising inflationary pressures since April 2006 are

    attributed to the strengthening of domestic demand

    fuelled by large cuts in income tax rates and robust

    economic growth, the avian flu in early 2006 that has led

    to a general increase in the prices of meat and non-

    poultry protein, and the reduction in state fuel subsidies

    that has boosted fuel prices by 30%, with spillovers on

    many sectors such as transport, recreation and culture.

    During the moderate inflation period, the Central Bank

    of Egypt loosened its monetary policy, by reducing the

    overnight deposit rate from 9.50% in the FY 2005 to

    8.00% in the FY 2006 and lowering the lending rate from

    12.50% in the FY 2005 to 10.00% in the FY 2006.

    However, the strong upsurge in inflation witnessed since

    April 2006 led the Central Bank of Egypt to increase its

    key intervention rates later on, in order to contain the

    increasing inflationary pressures in the medium term.

    The Central Bank also resorted to indirect open market

    tools to absorb the liquidity surpluses. It introduced new

    19.3%

    54,936

    63,806

    91,887

    19.4%

    23.4%

    2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006

    LE million

    Gross Official Reserves / Money Supply M2Gross Official Reserves

    15,000

    30,000

    45,000

    60,000

    75,000

    90,000

    105,000

    120,000

    135,000

    0%

    5%

    10%

    15%

    20%

    25%

    89,874

    21.1%22.6%

    23.6%

    111,660

    132,027

    Exchange Market Indicators

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    instruments, namely certificates of deposits (CDs) with

    maturities of up to one year, and Central Bank of Egypt

    notes with maturities of over one to two years. The

    Central Bank sold these two instruments to banks

    through outright sales. The balance of open market

    operations totaled around LE 93.7 billion at end of FY

    2006, against LE 72.4 billion at end of FY 2005.

    As such, the Central Bank managed to meet its primaryobjective of maintaining stability of prices, and keeping a

    relatively steady local currency, in a context of solid

    economic growth and abundant capital inflows. The

    Central Bank has actually been undergoing a reform

    process to increase its autonomy and enhance policy

    formulation in order to have sound management of

    inflation and the monetary framework at large.

    However, as the Egyptian economy is expected to

    continue benefiting from an upbeat activity and surging

    capital inflows, a new challenge would arise in the nearand medium term. In such a strong aggregate demand

    environment driving prices upwards, the monetary and

    economic authorities would need to contain inflationary

    pressures and, at the same time, keep the foreign

    exchange rate at an adequate level so as to maintain

    Egyptian exports competitiveness as the economy is

    turning more and more towards export orientation, in

    the ultimate aim of ensuring monetary stability at large.

    1.4.2. Banking Activity

    Egypts banking sector has shown in FY 2006 signs of

    receptivity to the positive growth momentum reigningover all economic sectors of activity, yet its expansion

    has somewhat slowed down while economic activity

    continued to pick up. The major banking aggregates,

    namely assets, deposits, loans, and especially

    shareholders equity, all reported a positive performance

    in FY 2006. Banking activity, measured by total assets,

    grew by 8.2% to LE 761.6 billion, as compared to a

    higher 13.0% average recorded over the previous five

    years.

    Customer deposits, the main driver behind the sectors

    growth and representing nearly three quarters of total

    assets on the liabilities side, progressed by 9.5% to LE

    571.5 billion, against a more important 14.0% average of

    the previous five years. Non-government sector

    deposits, accounting for over 85% of total banking

    deposits, rose by 12.7% year-on-year in FY 2006, and

    were responsible for the said increase in total deposits,

    mostly owing to the large scale capital inflows to the

    country. Government deposits -mainly those in local

    currency- retreated by 6.4% over the period.

    Total credit facilities, another growth driver in theindustry, increased by 5.1% to LE 324.0 billion in FY

    2006, close to the 6.4% five-year growth

    average, thus reflecting the expanding financing

    activity of the banking sector, mainly catered

    for the funding of large scale projects in a

    booming economy. In parallel, shareholders

    equity rose by 14.6% in FY 2006 to reach LE

    40.5 billion, and recorded one of its highest

    growth rates of these past few years. The

    progression in shareholders equity was mainly

    owed to the current restructuring of the sector, and thesubsequent entries of private sector and foreign players

    injecting new funds into the banking industry.

    The overall healthy performance of the banking sector

    has pushed banking coverage ratios upwards. Indeed,

    deposits per branch totaled LE 194.1 million in FY 2006,

    up by 5.7% from LE 183.6 million in the previous year.

    Deposits per capita likewise progressed by 7.5%,

    exceeding the LE 8,000 threshold. With above 24,000

    people per branch, retail banking activity in Egypt is thus

    currently intensifying, with banks seeking to market

    retail products and services to their clientele at large.

    The upbeat conditions prevailing in Egypt, coupled with

    intensified reform measures on the part of the Central

    Bank, have also had positive spillover effects on the

    sectors financial soundness. The sector regulator has

    indeed launched, as of September 2004, a plan aimed at

    overhauling the sector and increasing its

    competitiveness. The Banks agenda focuses on

    consolidating the sector, ameliorating capital adequacy,

    and tackling the issue of non-performing loans, in

    addition to going through with privatizations and

    bolstering the efficiency of state-owned banks, among

    other measures.

    The Central Bank decided to raise the minimum capital

    Year

    2006

    9

    Monetary Indicators

    in LE million

    Var M2 (LE million)

    Consumer price index

    Cleared checks (LE million)

    Income velocity of money (GDP/M2) (times)

    2002/2003 2003/2004 2004/2005 2005/2006 Var 04/03 Var 05/04 Var 06/05

    55,534 50,649 58,973 66,472 -8.8% 16.4% 12.7%

    3.9% 11.2% 4.7% 7.3% 7.3% -6.5% 2.6%

    244,581 248,224 262,423 288,715 1.5% 5.7% 10.0%

    1.09 1.12 1.09 1.10 2.8% -2.7% 0.9%

  • 8/12/2019 Egypt Economic Report 2006

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    requirements of banks to LE 500 million for local banks

    and US$ 50 million for foreign banks, in order to render

    them more competitive and help them meet the

    stringent Basle II requirements. Consequently, some

    banks were forced to exit the market or merge with other

    players in order to meet said capital requirements. The

    total number of banks operating in Egypt has

    progressively declined to 43 at the end of FY 2006,

    against 52 in the previous year and 61 in the year before.Also, capital adequacy ratios strengthened, with total

    equity accounting for 5.6% of total assets at the end of

    FY 2006 and the BIS ratio at a higher 14.5% as per the

    latest IMF figures.

    Liquidity witnessed an improvement as well, as the share

    of credit facilities in total deposits has retreated to the

    advantage of more liquid uses. Credit facilities

    represented 56.7% of total deposits, against a higher

    59.1% at the end of the previous fiscal year. The

    regression was actually on the local currency side, as the

    ratio of credit facilities in LE to total deposits in LEdropped from 62.8% to 59.2%, while that of credit

    facilities in FC to deposits in FC slightly nudged up,

    moving from 49.9% to 50.7% at the end of FY 2006.

    Profitability ratios continued their upward trend, in line

    with the favorable conditions and within the context of

    accrued net profits for the sector. Return on equity stood

    at 12.3% in FY 2006, versus a lower 10.6% in the

    previous year, while return on average assets reached

    0.7%, against 0.6% in the previous year, thus depicting

    enhanced banking profitability. Both ratios nonetheless

    remain poor compared to emerging and global averages.

    Indeed, the former ratio stood much lower than the

    17.8% emerging countries average and the 17.6% global

    average, and the latter ratio compared unfavorably to a

    1.7% emerging countries average and a 1.5% global

    average.

    In order to boost the profitability and overall efficiency

    of banks performance, a major pillar of the Central

    Banks reform agenda, privatization, has been gaining

    momentum recently. The proceeds of such operations

    are anticipated to be utilized to fund the restructuring of

    the banking system, and deal with the lingering asset

    quality issue in the remaining state-owned banks. For

    instance, the privatization of Bank of Alexandria took

    place early in FY 2007, with an 80% stake awarded to

    Italys Sanpaolo IMI for a more important than expected

    US$ 1.6 billion. The Italian firm has outbid severalEuropean and Arab banks. Likewise, a number of public

    shares in joint venture banks were sold to privately-

    owned players for several hundreds of millions of US

    Dollars. As such, the Central Bank is seeking to gradually

    streamline the sector, in an aim to optimize its yet

    untapped potential, and elevate banking activities to

    advanced and international standards.

    1.4.3. Equity and Bond Markets

    The Cairo and Alexandria Stock Exchanges (CASE)

    ended the year 2006 with a positive growth in activity,

    despite the severe price corrections on the regions stock

    exchanges as of the first quarter of 2006. The Arab

    Monetary Fund (AMF) price index for the Cairo and

    Alexandria stock exchanges rose by 5.6% year-on-year,

    from 162.9 at end-December 2005 to 172.0 at end-

    December 2006. However, over the first half of the

    calendar year, the price index fell by 25.6% only to

    resurge by 42.0% over the second half of 2006.

    Banking Sector Indicators

    Banking Coverage

    Total assets / GDP

    Total deposits / GDP

    Total credit facilities / GDP

    Deposits / Branches (LE million)

    Deposits / Population (LE)

    Population / Branches (000s)

    Growth ratios (YOY)

    AssetsCredit Facilities

    Deposits

    Capital + Reserves

    2002/2003 2003/2004 2004/2005 2005/2006 Var 04/03 Var 05/04 Var 06/05

    138.4% 130.5% 130.9% 123.3% -7.9% 0.4% -7.6%

    97.1% 95.5% 96.9% 92.5% -1.5% 1.4% -4.4%

    68.2% 61.0% 57.2% 52.5% -7.2% -3.8% -4.7%

    156.9 166.6 183.6 194.1 6.1% 10.2% 5.7%

    6,020.6 6,757.3 7,453.5 8,014.9 12.2% 10.3% 7.5%

    26.1 24.6 24.6 24.2 -5.7% -0.1% -1.6%

    16.6% 9.6% 11.1% 8.2% -7.0% 1.5% -2.9%7.0% 4.0% 4.0% 5.1% -3.0% 0.0% 1.1%

    18.3% 14.5% 12.6% 9.5% -3.8% -1.9% -3.1%

    26.0% 6.1% 11.2% 14.6% -19.9% 5.1% 3.4%

    Financial Soundness Indicators

    2005/2006

    ROA*

    ROE*

    Capital/AssetsBIS ratio**

    NPLs/Total loans**

    * net profits realized in the last approved FY

    ** as at end-December 2005

    Egypt

    0.7%

    12.3%

    5.6%14.5%25.0%

    Emerging

    Countries

    1.7%

    17.8%

    10.2%15.9%

    7.7%

    Total

    World

    1.5%

    17.6%

    9.1%15.1%

    6.4%

    10

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    The Egyptian stock exchange is one of the very few Arab

    capital markets to have registered a positive variation

    year-on-year, underpinning the CASEs resilience to the

    adverse events on the regional stock exchanges. The

    AMF composite index for all the MENA bourses actually

    registered a 42.5% yearly drop in 2006. The positive

    year-on-year performance in 2006 was mainly driven by

    the strong momentum characterizing the Egyptian

    economy and its accrued FDI flows, together with theactive implementation of the privatization program and

    the series of mergers and acquisition deals with regional

    and international financial institutions, executed via the

    stock exchange.

    Along with the rise in prices year-on-year, the market

    capitalization improved by 17.1%, moving up from LE

    456 billion at year-end 2005 to LE 534 billion at year-end

    2006. The market capitalization came to represent 80%

    of GDP at year-end 2006, up from 74% at year-end 2005.

    In parallel, the total trading value for the year 2006

    amounted to LE 286.7 billion, up by 78.5% from the

    value reported in the year 2005, with foreign and Arab

    investors accounting for around 30% of the total.

    Subsequently, the turnover ratio rose from 31.1% in

    2005 to 50.8% in 2006, further reflecting the positive

    momentum that reigned over the countrys stock

    market.

    The price drop on the CASE during the first half of

    calendar year 2006 resulted in a decline in valuation

    ratios, yet still to sustainable levels. The latter remained

    strong in absolute terms yet lower than but close to

    regional benchmarks. In fact, the CASE price-to-

    earnings ratio fell from 31.5 times in FY 2005 to 14.3

    times in FY 2006, lower than an average MENA P/E ratio

    of 18.2 times, and the price to book value ratio dropped

    from 8.02 times in FY 2005 to 3.20 times in FY 2006,close to an average P/BV of 3.7 times in the MENA

    region.

    The CASE authorities have continued their

    efforts targeted at improving the efficiency and

    infrastructure of the stock market, by

    introducing new legislation, at the image of the

    elimination of the 5% daily limit on share price,

    and modern technology, such as the launching

    of a new blue-chip, namely the Dow Jones

    CASE Egypt Titans 20 Index, in an ultimate aim to enticeforeign investors. Moreover, the CASE became the first

    Arab bourse to become a full member of the World

    Federation of Stock Exchanges in 2006, thus highlighting

    the serious steps made to improve the quality, efficiency

    and infrastructure of the CASE.

    In parallel, the bond market was very active in 2006.

    According to CASE figures, the trading value reaching

    LE 11 billion, up by 23.6% from LE 8.9 billion in 2005.

    The traded volume surged from 9 million

    bonds in 2005 to 12 million bonds in2006. The total amount of listed bonds

    reached LE 65,725 million in FY 2006,

    versus LE 35,313 million in FY 2005, up

    by a significant 86.1%.

    As such, the strong capital inflows

    pouring in and the subsequent high

    levels of liquidity expected to prevail in

    the near term, coupled with the

    governments plans for the country to

    become a regional center of financial

    activities, provide the countrys capital

    Year

    2006

    AMF Price Index (in US$) (Dec 95=100) Turnover Ratio

    35.8

    54.1

    36.0

    43.4

    74.2

    162.9172.0

    37.8%

    22.0% 21.1%

    13.4% 15.5%

    31.1%

    50.8%

    2000 2001 2002 2003 2004 2005 2006

    12

    36

    60

    84

    108

    132

    156

    180

    -10%

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    Stock Market Performance

    Financial Sector (non banks)

    Market Capitalization (LE billion)

    Market Cap/GDP (in %)

    Total value traded (in LE million)

    Foreign participation as %

    of total value traded

    Total volume of traded securities (million)

    Total number of transactions (000s)Turnover ratio (in %)

    No. of listed companies

    No. of traded companies

    2002 2003 2004 2005 2006 Var 03/02 Var 04/03 Var 05/04 Var 06/05

    122 172 234 456 534 41.0% 36.0% 94.9% 17.1%

    29% 35% 43% 74% 80% 6.0% 8.0% 31.0% 6.0%

    34,176 27,764 42,374 160,635 286,740 -18.8% 52.6% 279.1% 78.5%

    17.3% 12.7% 20.5% 16.4% 16.6% -4.6% 7.8% -4.1% 0.2%

    904 1,422 2,435 5,310 9,081 57.3% 71.2% 118.1% 71.0%

    834 1,229 1,744 4,210 6,821 47.4% 41.9% 141.4% 62.0%21.1% 13.4% 15.5% 31.1% 50.8% -7.7% 2.1% 15.6% 19.7%

    1,151 978 795 744 595 -15.0% -18.7% -6.4% -20.0%

    671 540 503 441 407 -19.5% -6.9% -12.3% -7.7%

    11

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    This publication is undertaken in the aim of informing and should not be considered as an encouragement to any form of financial or commercial activity.

    Although Bank Audi Sal considers the contents very reliable, it declines any responsibility for any action or decision based on contents herein.

    The Egypt Economic Report can be accessed via Internet at the following web address :http://www.banqueaudi.com

    markets with lucrative prospects, thus underlining the

    important dual role they could play as an efficient

    financial intermediation vehicle catering to funding the

    needs of economic agents, and hence as a catalyst for

    economic activity at large.

    2. CONCLUSION

    Over the past year, Egypts economic growth gained

    additional momentum and investment picked up

    relatively. A healthy foreign exchange position was

    maintained, while financial sector reforms were gaining

    pace gradually. The country witnessed the conclusion of

    a number of important privatization projects, with flows

    in foreign direct investment exceeding expectations.

    Confidence in the depth and pace of structural reforms

    was the main factor behind such developments.

    An in-depth growth analysis confirms that the leadinggrowth drivers are still the natural gas industry and the

    construction boom, fuelled by expansionary policies and

    petrodollars from oil exporting countries in the region.

    The question that thus arises is whether the nature and

    composition of growth can put the Egyptian economy

    more at risk of overheating and hard landing at a later

    stage.

    Among the most important rising challenges is the pick

    up in inflation recently. The growing inflationary

    pressures are partly attributed to supply factors, of which

    the adjustments in fuel prices, but also partly tied to

    demand factors within the context of a buoyant

    economic activity. According to the IMFs last mission

    report, monetary policy remains vigilant and is apt to act

    appropriately to contain inflation expectations and

    ensure market confidence.

    Although real interest rates are still negative, higherinterest rates rekindled carry-trade interest in the

    Egyptian Pound. The currency is fundamentally

    competitive as the Egyptian Pound is some 25% below

    its 10-year mean in trade-weighted terms vis--vis its

    trading partners. As such, the Egyptian Pound would

    likely remain under appreciation pressure. If some

    currency appreciation is allowed by authorities, it might

    represent a considerable tool to contain runaway

    inflation.

    Maintaining price stability over time and sustainingeconomic growth requires also a tightening of fiscal

    policy. Persisting fiscal imbalances are a source of

    inflation and a threat to durable growth. The

    government has actually embarked on a reform program

    that aims at reducing budget deficit to GDP by at least

    1% per annum over five years through both revenue and

    expenditure measures. It is the timely implementation of

    such a program that would determine the pace of

    sustainability of government indebtedness relative to the

    size of the domestic economy in the medium term.

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