Research Department

Egypt Country Report

24 April 2008

Update Report
General Information
Egypt Capital Market Indicators

Glory Tinted With Rust

Summary
Achievements Egypt managed to grow at 7.1% in FY07 versus 6.9% in FY06 and 8.1% in 2Q07/08 against 6.6% in 2Q06/07. This gave Egypt several reasons to rejoice as it managed to draw foreign investors' attention and managed to place itself on the map of world investments. Foreign direct investments (FDI) almost doubled reaching USD11.0 billion in FY07 in comparison to USD6.1 billion in FY06 and it expected to reach USD15.0 billion in FY08 on the back of vast interest coming from the west and the Arab world, coupled with the expected sale of a 51%-67% stake in Banuqe du Caire scheduled to take place by the end of fiscal year 2008. US sub prime crisis and its impact on Egypt FY08 is not expected to be hit by the slowdown in the US and the expected slowdown in Europe. Results might be seen in FY09 on trade, workers remittances, and tourism. However, we expect investments to pour in emerging markets that are rich in natural resources and have potential for growth in the primary sector, especially since commodity and oil prices are skyrocketing, and so Egypt might attract more foreign interest. Egypt has potential in the oil and gas, petro-chemicals, gold mining, and the agriculture sectors. Setbacks Egypt has a setback arising from an increasing budget deficit on the back of heightened inflation rates that hit 16.4% in April 2008. The government plans to increase the subsidy and wages bills to accommodate the surge in local prices. In that respect, the government's plan of an annual reduction of 1.0% of budget deficit to GDP has been put aside. Also, the hikes in the overnight deposit rate seems to have had little if not any impact on the three months and the one year deposit rates offered at local banks. The government is thus resorting to other methods to curb inflation such as banning exports of cement and rice. This in itself, if continued, might depress foreign investments and free trade. Table 1: Economic Indicators (FY02-FY07)
Real GDP Growth (%) Nominal GDP (EGP bn) Inflation-CPI (%) Inflation-WPI (%) Total Domestic Debt (% GDP) Gov. Domestic Debt (% GDP) 3- Months T-Bills Avg Yield (%) M2 Growth YoY (%) Government Exp. (EGP bn) Government Revenues (EGP bn) Overall Budget deficit/GDP (%) NIR (USD bn) Reserves (import months)
*Egypts fiscal year ends in June. Source: CBE, MOF, HC Brokerage

Market Cap % of FY07 Nominal GDP Equity Turnover in 2007 Equity Turnover YTD HCMI Performance 2005 2006 2007 2008 YTD Corporate Earnings Growth 2006 2007 2008 (expected) Market P/E FY07 FY08 (forecast)

USD121bn 89% USD44bn USD46bn

127% 4.6% 51% -5.5%

37% 35% 16%

18.2x 15.3X

FY02 3.2 378.9 2.4 2.1 87.0 58.4 7.8 15.4 115.5 78.3 10.2 14.1 11.6

FY03 3.2 417.5 3.2 11.7 88.8 60.4 8.3 16.9 127.3 89.3 10.5 14.8 12.0

FY04 4.1 485.3 4.9 17.4 89.6 60.3 8.4 13.2 145.9 102.0 9.5 14.7 9.7

FY05 4.6 538.5 11.4 10.1 94.9 64.8 10.4 13.6 161.6 110.8 9.6 19.3 9.6

FY06 6.9 617.7 4.2 4.0 96.1 62.8 8.8 13.5 204.5 149.5 8.2 22.9 9.0

FY07 7.1 731.2 11.0 10.1 87.1 65.3 8.6 18.3 222.0 180.2 7.5 28.6 9.1

Analyst
Tel e-mail Sales Tel Fax

Reem Mansour, MA ECID & Yasmin El Batrawy

+ 2 02 3749 6008 (ext. 368 & 362) rmansour@hc-si.com, yelbatrawy@hc-si.com + 2 02 3749 6008 + 2 02 3749 6051

Disclaimer
This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.

Egypt Economy

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Table of Contents
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. Summary Who can help? Fiscal Policy Monetary Policy: Inflation Under A Microscope Investments, the Name Of The Game Balance of Payments US Sub Prime Crisis & Egypt The Map of Investments The Egyptian Stock Market Appendix: Key Macro Indicators Appendix: Main CBE Banking Regulations 3 5 8 15 19 21 26 28 32 34 35

Egypt - Economy

I. Summary
Playing Devil's Advocate
Fiscal Policy Egypt celebrated two years of a falling deficit to GDP but this has now come to an end. Although Egypts budget deficit fell from 8.2% in FY06 to 7.5% in FY07, this trend is not expected to be taken forward, with the government expenditures far surpassing revenues due to raising subsidies and wages to accommodate for rising inflation rates. Tax revenues grew by 16.6% in FY07, which can be considered pretty high. Only when compared to FY06s growth rate of 29.7%, do we realize that the government may not be able to sustain such high levels of tax revenues over the years. We expect the growth rate of tax revenues will continue to fall gradually over the next few years, and then stabilize eventually, along with a gradual reduction in privatization proceeds over the years since it is viewed as a non recurring source of income. As a result, our outlook over the countrys future deficit is a skeptical one. In its attempts to tame escalating inflation rates, the government has been increasing subsidies substantially, whether it is on food or energy, as well as raising salaries and wages. This only strains the governments budget further, resulting in a widening deficit. Moreover, growth in government expenses is not matched by revenue growth at the same rate. on May 1st, 2008, the government approved (a) 30% raise in salaries to the public sector amounting to EGP6.2 billion (b) a 20% increase in pensions where a floor limit of EGP100 per month is set this should cost the government EGP3.5 billion (c) a 25%-75% boost in incentive payments to local council workers that would at amount to EGP1.3 billion (d) subsidies of basic goods, including sugar, rice and cooking oil which will cost EGP1.6 billion. These increases will cost the government a total of EGP14.0 billion. Later in the month on May 6th, 2008, the government announced the following plan to raise revenue to be able to cover the aforementioned costs (a) free zone incentives offered to energy intensive companies are removed (b) extraction fees on clays and quarries are imposed (c) vehicle license fees are raised to 2% of the total amount of cars above 2000cc (d) sales tax on cigarettes increased (e) tax exemptions on treasuries and educational institutions are removed (f) the prices of 90, 92 and 95 octane gasoline, industrial natural gas, diesel and kerosene increased. This should generate 12.0 billion to the government. We are concerned about the government's ability to decrease budget deficit to the announced 4.5% to GDP by 2010. Monetary Policy & Inflation Due to the Egyptian economy seeing rapid growth, inflation has also seen unprecedented double digit rates; up from 4.2% in FY06, to 11.0% in FY07 and reaching 16.4% in April 2008 signaling negative real interest rates. Reasons behind skyrocketing inflation rates range from rising international food prices to increased domestic demand and consumption, surging oil prices which hit record highs of USD122 per barrel in May 2008, and skyrocketing cement and steel prices that fed into rising real estate prices. In response to higher inflation, the Central Bank of Egypts Monetary Policy Committee hiked both overnight deposit and lending rates in three consecutive meetings by125bps, from an earlier 8.75% and 10.75% to 10.0% and 12.0% respectively. This upsurge, however, was not reflected in the three month deposit rates of commercial banks, thus having practically no effect on inflation rates. We believe that an appreciation of the EGP against the faltering USD may be pursued as a strategy to limit imported inflation, and can be maintained in the short term, however, we expect the fair value of the EGP to USD to depreciate in FY09. Foreign Currency With the Fed cutting interest rates in an attempt to rectify the economic situation in the US, and the CBE raising its overnight deposit and lending rates in hopes of lowering inflation rates, the current nominal spread between the two currencies comes in at a remarkable 800 bps. Moreover, Egypts shadow exchange rate, which determines whether or not it is trading at a fair value, shows that the EGP is currently trading at its fair value. And with a huge stack of FX fortunes standing at USD33.8 billion as of April 2008, the CBE has the luxury to allow the EGP to appreciate against the USD without having to worry about dollarization over the short-medium term.

Egypt - Economy

Balance of Payments In FY07, the Egyptian economy boasted a positive balance of payments expanding by 62.4% YoY, due to surpluses in both the current and capital accounts. Oils share in Egypts exports fell this year, while non-oil exports rose remarkably, signaling profitable prospects in non-oil sectors. Nevertheless, imports also increased considerably, with non-oil imports booking the lions share, on the back of soaring oil prices. Tourism receipts and private transfers continued to boost Egypts current account, and are expected to carry on the trend over the coming years. A huge influx of FDI, which almost doubled from FY06 to FY07, was the main driver behind Egypts capital account surplus in FY07, with investment inflows expected to rise even further during FY08, as Egypts emerging market may seem more appealing to foreign investors than the US and Euro region tainted with the sub prime crisis. Looking Ahead Egypt aims to lower its inflation rate back to a previous range of 6.0%-8.0%, while maintaining real growth rates around 7.0%, and a budget deficit to GDP of 6.9% in FY08. We believe that the chances of lowering inflation rates in such a short period of time are rather slim. However, given the substantially increasing levels of FDI and the expected privatization proceeds for the year, we think that Egypt may be able to attain its planned growth rate. Over the long term, Egypt needs to utilize its investment inflows in an optimal manner that does not put the country at a risk of FDI and portfolio reversal. The US sub prime crisis is expected to benefit emerging markets and the Middle East in terms of investments. We believe investors' decisions would be influenced to a great extent in favor of the commodity and energy sectors on the back of skyrocketing international food and oil prices. In that respect, and in comparison to other emerging markets, Egypt's main competitors are Malaysia, Indonesia and the Gulf area where there are good macro indicators, positive sovereign ratings, and there is a considerable amount of proven oil and natural gas.

Egypt - Economy

II. Who can help?

Politics Since 2004, political and economic reforms has topped the Egyptian governments agenda, as President Hosny Mubarak appointed an economically progressive cabinet. Former Telecommunications Minister Dr. Ahmed Nazif was made Prime Minister, and other cabinet positions were filled by business leaders. They were charged with creating a business friendly environment to encourage investments and enhance growth through a reform process. In March 2007, Egypts national referendum on constitutional amendments saw several alterations in the Egyptian constitution, aiming to create a more stable social and political environment to encourage sustainable economic growth. These amendments included banning the creation of political parties based on any religious position and the application of an antiterrorism law to replace the emergency law passed in 1981, which gives the President the right to refer terrorism criminals to court. As of December 2007, a Cabinet Committee has been set up to draft a new anti- terror law, which should be debated in parliament soon. Officials emphasize the importance of this bill in the transitional process towards democracy. Another significant amendment entailed eliminating direct judicial supervision over elections, which would instead be supervised by an independent Higher Committee. Moreover, issues such as poverty, healthcare, education, and overpopulation were all discussed, but with no clear outcome as to how they will be dealt with. Even though these constitutional amendments aim towards paving the way to democracy and social and political stability, they still fail to adequately address fundamental issues of political reform, at the heart of which is the question of presidential succession. With the persistence of such political concerns, future progress may be constrained by fears of potential political instability. Political unrest has recently emerged on the back of social discontent due to rising food prices, especially bread prices, with Egypt being one the worlds largest consumers of bread. This places huge financial burdens on the Egyptian population, 20.0% of which are currently living below the poverty line. According to the UNDPs latest Human Development Report, Egypt ranks 48th in the Human Poverty Index out of 108 developing countries. The governments attempts to solve the problem include raising the subsidy bill, increasing pensions, incentive payments and 30% increase in the wages bill, which will probably have negative implications in the future, further widening the budget deficit. We believe that it is now time to shed more light over the role of civil society in rectifying the social situation which gives rise to political instability. Currently, a total of approximately 22,470 NGOs are operating under the Ministry of Social Solidarity, with activities ranging from supplying the poor with food and shelter, education, employment services, and health facilities. Egypt suffers from unequal distribution of wealth, with the rich getting richer and the poor getting poorer. Egypts Gini coefficient, an index measuring the equality of wealth distribution, came in at 0.34 in FY07, indicating that wealth in Egypt is to a great extent unequally distributed (a value of 0 represents total equality and a value of 1 indicates total inequality). The role of charitable organizations, although many believe is marginalized, can actually make a remarkable difference in the redistribution of income among the society, by gathering donations from richer social segments, whether in the form of funds or in kind, and allocating them towards feeding the poor and raising their standards of living. This would, in a way, remove part of the load placed on the governments shoulders, and perhaps ease political unrest stemming from the aggravated inflationary situation. After all, there is a limit as to the extent the government can continue expanding its subsidy bill. Nevertheless uncertainties about growing inflation rate still poses a risk of political unrest.

Egypt - Economy

Progress and Concerns Egypts economic progress did not show any signs of slowdown in FY07, with the government expecting the positive note to be taken on into FY08. The governments five year plan 20072012 targets many ambitious goals that continue to work on implementing market liberalizing strategies. In FY07, GDP growth rates hit 7.1%, up from 6.9% in FY06, with the government targeting future growth rates of 8.0%-9.0% over an unstated time span. Gross domestic consumption was ruled by private consumption, comprising 82.5% of GDP in FY07. Expansionary fiscal policies have induced domestic demand and thus growth. All the while, public consumption represent only a small portion of GDP due to the government's policy to promote private consumption, which stood at 71.0% of GDP in 1H08, as opposed to 78.6% in 1H07. Investments came to light in the recent years. Although local investments share in total investments is high, representing 71.8% of total investments, and 21.2% of GDP, growth was mainly stimulated by foreign direct investments accounting for 8.4% of GDP, and taking GDP growth rates up to 7.1% in FY07. The importance of FDI is growing and there goes with it the risk of an FDI reversal. Foreign direct investments were unleashed, skyrocketing to USD11.1 billion in FY07 against USD6.1 billion in FY06 and targeted to reach USD15.0 billion in FY08. FDI to GDP as of 1H08 stood at 10.7%, compared to 11.8% in 1H07. Net exports of goods and services represent 4.1%. We expect growth in FY09 to stem from (a) public consumption growing on the back of increased government expenditure due to social concerns and (b) investments coming from the Gulf and Europe. Net exports are expected to dip further into the red on a growing trade deficit. We expect GDP to grow by 7.1% in FY08 and 7.0% in FY09. Fiscal spending on the other hand has become one of the Egyptian governments top concerns, considering the inflationary situation at hand. The government, trying to alleviate financial burdens arising from rising international commodity prices, is in fact adding more pressure on its budget. This is conveyed in the government's decisions to relocate the usage of subsidies. As a result, the subsidy bill in FY08 is expected to reach EGP70.0 billion, up from EGP58.4 billion in FY07. Effective from September 2008, natural gas prices paid by manufacturers are set to rise from a current USD1.85 per MBTU to USD2.65 per MBTU, according to the CEO of the General Authority of Petroleum. This price increase will be applied on 40 factories, which consume about 66 million cubic meters of natural gas on a yearly basis and 60% of total government subsidies. Consequently, this move is anticipated to reduce energy subsidies by approximately EGP15.0 billion over the coming five years, easing the weight placed on the governments budget. The fiscal expansionary policy which took effect in 2005 proved its success for the second year in a row where tax revenues have continued its upward ride, up 16.6% in FY07 although this is down from 29.7% in FY06. The good news for FY07 was that GDP growth was led by the manufacturing sector followed by trade, financial intermediaries, construction, hotels and restaurants, and real estate sectors. Growth generated from all those sectors grouped together decreases reliance on new discoveries of oil and natural gas fields which are ultimately unsustainable sources of growth. This is one of Egypt's advantages that makes it a diversified economy resilient to external shocks. This, however, does not undermine the oil and gas extractions sector's importance; for both are part and parcel of the economy of Egypt, raking fourth after manufacturing, agriculture and trade industries and constituting 9.0% of GDP and especially since we expect heavy investors to flood into oil sectors in the Middle East to benefit from high international oil prices. The private sector continues to lead the economic growth, generating 62.3% of GDP in FY07 as opposed to 61.4% in FY06.

Egypt - Economy

Chart 1: GDP by Sector (FY06 & FY07)

FY06

Education, Health &

Social solidarity Personal Activities Insurance 2% 3% 0% General Government Real Estate 4% 8% Restaurants & Hotels 3% Financial Intermediaries 5% Suez Canal Communication 3% 2%

FY07

E ducat o n, Heal h & i t P er sonal A c t v t e s i ii Soci l s ol ar t y a d i i I ns ur ance 3% 2% 0% Gener al Gover nment Real E st at e 4% T r ade 12% 9% Res t aur ant s & Hot el s 3% Fi anc a l I nt er medi r e s n i a i 6% Suez Canal 4% Communi at o n c i Wat er 2%

Trade 12%

Agriculture 14%

Water 0% Construction 4% Electricity 1%

Transportaion 4%

A gr c ul ur e i t 15%

0% o T r anspor t ai n 5% Cons t r uc t o n i 5%

E e ct r c t y l ii Extractions 15% Manufacturing 17% E x t r ac t o ns i 9% M anuf act ur n g i 19% 2%

Source: CBE, HC Brokerage

Other goals have been met with budget deficit going down second year in a row by roughly 1.0% to GDP standing at 7.5% in FY07 as opposed to 8.2% in FY06. Investments are also going up, reaching 29.6% of GDP as of FY07 against 24.4% of GDP in FY06. This is to remind the reader that the targeted level of investments by 2012 is set at 30.0% of GDP. Staking Fortunes yet Absolute Poverty Rising With ongoing economic progress, the unemployment rate dropped to 9.0% in FY07 as opposed to 11.0% in FY03, said Dr. Ahmed Nazif, the Prime Minister. This might give Egypt a reason to rejoice; that not only economic growth is accelerating, benefiting only the rich, but also the middle and low income groups get the chance to reap part of the fruits. But the fact still lies that absolute poverty has risen where for every five Egyptians, one is suffering from a lack of basic necessities, according to United Nations (UN) operations in Egypt. Needless to say that job creation still lags behind population growth where 31.8% of total population is below 14 years old. This still cries out for the need to accelerate job creation (RE: No Time for The Prices and the Populace The unemployment and poverty problems are intensified with inflation rates rising in FY07 hitting 11.0% for the fiscal year against 4.2% in FY06. Prices are still going up, hitting 16.4% in April 2008. This in itself corners the government in an awkward situation where it had to sacrifice budget deficit reduction and market liberalization to make living easy for the populace. Only this is still not a sustainable solution as a rising budget deficit eventually leads to higher inflation rates. The solution thus lies in collaborative actions coming also from civil societies to help pass the dilemma with the least possible costs. Civil societies have been recently active in Egypt and are working on solving the recent bread problem, developing under-developed areas and helping the impoverished. Though this is still not enough, it creates the basis for the government to build on. Inflation, political stability and budget deficits are fabrics that weave Egypt's current problems. Though FDI is high, hitting 8.4% of GDP and helping unprecedented growth rates, investors might shy away over those concerns.

Complacency).

Egypt - Economy

III. Fiscal Policy

The Ministry of Finance has been implementing an expansionary fiscal policy since 2007, with individual and corporate tax income going down to 20.0%, and customs and tariffs dropping to 6.9%. Beating all odds, this helped the government to generate more tax revenue than it used to in the past. It is worth noting that the government has been broadcasting campaigns to induce transparency, which in turn enhanced tax payers trust and encouraged payments. This helped in pushing tax revenue up 29.7% in FY06 and 16.6% in FY07. In our ''No Time for Complacency'' report published in April 2007, in the best case scenario for budget deficit we highlighted that for the government to work on reducing the budget deficit by 1.0% per year and with GDP growing at 7.0%, revenue had to increase by at least 15.0%, which the government managed to exceed. Nevertheless, moving in line with our expectations, the government has delayed the budget deficit to GDP reduction plan on rising subsidy burden. Not just that but also, we believe that it is rather challenging for the government to raise high revenue growth rates, like the past two years, especially that the tax revenue growth rate has dropped by almost half from FY06 to FY07. Expenditures All the while, government expenditures have expanded: In FY07, government expenditure to GDP dropped from 33.0% to 31.8%, mainly due to a substantial increase in nominal GDP from EGP617.7 billion in FY06 to EGP731.3 billion in FY07. When comparing government expenditure to GDP, even with the most recent increase in the subsidy bill, expenditure still maintains the 30%-31% to GDP trend. However, in absolute terms, government expenditure is on the rise, driven by higher subsidies spending to accommodate oil and food price hikes; and increasing wages and salaries to accommodate inflation. (i) Subsidies: In FY07, subsidies amounted to EGP58.4 billion, making up a hefty 24.3% of total expenditure and 7.4% of FY07 GDP. This is compared to EGP54.60 billion in FY06, which constituted 26.7% of total expenditure and 8.8% of FY06 GDP. The subsidy bill includes food, housing, and other items, but is top heavy with EGP40.0 billion of energy subsidies (74.1% of subsidy bill), constituting 18.0% of total expenditure and 5.5% of FY07 GDP as opposed to EGP41.6 billion (76.2% of the subsidy bill) in FY06, which stood at 20.3% of total expenditure and 6.7% of GDP. As of FY08, the governments planned subsidy bill is stated at EGP55.7 billion, however, government officials announced that it will be further increased to EGP70.0 billion to accommodate for rising oil prices and inflation. (ii) Wages & Salaries: Egypt has a long standing social policy of promising employment to all college graduates. In FY07, wages and salaries stood at a massive EGP52.1 billion, or 23.5% of total expenditure and 7.1% of FY07 GDP, up from EGP45.9 billion in FY06, which made up 22.4% of total expenditure and 7.4% of GDP. (iii) Interest: With the pace of borrowing increasing to fund a growing cash deficit, interest payments expanded to EGP47.7 billion in FY07 (21.5% of total expenditure and 6.5% of GDP), up dramatically from EGP36.7 billion in FY06 (17.9% of total expenditure and 5.9% of GDP), making up a huge portion of current expenditures. Local interest amounted to 93.7% of total interest, up slightly from 92% in FY06, while interest payment of foreign debt made up only 6.3% of the total as opposed to 8.0% in FY06. (iv) Other: The Ministry of Finance provides a breakdown for public expenditure as a percentage of all spending (see chart 1), but does not assign monetary values to the categories. Among the largest components of public spending include general public services (30.0%), social security (26.0%) and education (13.0%).

Egypt - Economy

Chart 2: Average of Public Expenditure (FY03-FY07)

Education 13% Youth, cutlure & religious affaris 4% Social security 26%

Housing & Public Utilities 2% Health 5% Environment Protection 1% Economic Affairs 6% Public Order & Public Security 5%

Defense & National Security 8%

General Public Services 30%

Source: MOF, HC Brokerage

Revenues Total revenue grew by 19.2% in FY07 versus 36.4% in FY06. In our ''No Time for Complacency'' report published in April 2007 we questioned the ability of revenues to grow by 15.0% especially since historically the government has been raising revenues by an average of 9.0% per year excluding the spree of income seen in FY06 triggered by income tax rate reductions. In FY07, the increase in total revenue came from a 24.2% surge in non-tax revenue which was boosted by a 156.5% jump in property income. i) Taxes: Egypts most crucial source of income is taxes. Tax revenues rose by 16.6% in FY07, to stand at EGP114.3 billion, or 63.4% of total revenues and 15.6% of FY07 GDP, up from EGP98.0 billion in FY06 which constituted 65.5% of total revenues and 15.9% of FY06 GDP. Taxes on goods and services, or sales tax, stood at EGP39.4 billion in FY07, increasing by 14.5% from last years EGP34.4 billion. Sales tax composed 34.5% of tax revenues in FY07 as opposed to 35.1% in FY06. ii) Tariffs: Customs and tariffs, or Taxes on International Trade, are a fundamental source of revenue for Egypt, earning EGP10.4 billion in FY07, up from EGP9.6 billion in FY06. The ratio of customs to total revenues has been decreasing regularly in recent years, down from 11.9% in FY04 to 6.3% in FY06 and 5.7% in FY07, as tax revenues have captured a greater share of total revenue. Tariffs constituted only 1.4% of FY07 GDP, slightly down from 1.6% of the FY06 GDP. And, recent news suggests that they may decline further; Egypts Finance Minister announced on February 6th, 2007, that the Egyptian government would lower the average import tariff rate to 6.9%, a 25% decrease. Now 90% of all tariff clauses are in a 10%-or-less import duty bracket. This move may be a boon to the economy, by putting downward pressure on inflation and making certain components of Egyptian products cheaper. But, according to the Ministry of Finance estimates, the reductions will cost the government an estimated EGP1.4 billion in lost revenues to the Treasury. However, as imports rise due to the lower tariff scheme, total revenue collected may actually rise, surpassing the amount lost as a result of lower tariffs.
Chart 3: Breakdown of Tax Revenue by Type
FY06
Taxes on International Trade 10% Other Taxes 4% Property Taxes 1% Taxes on Goods & Services 28%

Taxes on Goods & Services 35%

FY07

Taxes on International Trade 10% Other Taxes 5%

Property Taxes 1%

Income Taxes 50%

Income Taxes 56%

Source: MOF, HC Brokerage

Egypt - Economy

The Never Ending Deficit Given that expenditures far surpass revenues, Egypt runs both a fiscal deficit, which includes the consolidated operations for the general government: the budget sector, National Investment Bank (NIB) and social insurance funds; and a budget deficit, which includes the operations of the budget sector: the central government, local governments and public service authorities.
Table 2: Fiscal Deficit (FY04-1H07/08)
EGP billion

FY04 FY05 FY06 Budget Consoli- BudgeConsoli- Budget ConsoliSector dated dated Secto dated Sector Total Revenues 102.0 124.1 110.8 133.1 151.2 174.5 Tax Revenues 67.1 67.1 75.7 75.7 97.7 97.7 Taxes on Income 27.2 27.2 31.5 31.5 48.3 48.3 Taxes on Property 0.7 0.7 1.0 1.0 1.2 1.2 Taxes on Good & Services 26.5 26.5 31.4 31.4 34.4 34.4 Taxes on International Trade 9.2 9.2 7.7 7.7 7.7 9.6 Other Taxes 3.2 3.2 3.9 3.9 3.9 3.9 Grants 5.0 5.0 2.8 2.8 2.4 2.4 Other Revenues 29.8 51.9 32.2 54.5 54.3 75.7 Returns on Financial Assets 14.5 19.9 17.7 23.3 23.6 43.4 Sale of Good & Services 9.4 9.4 7.1 7.1 7.8 7.8 Financing Invest. 2.6 2.6 3.1 3.1 3.7 3.7 Other 3.0 19.8 4.0 20.0 3.1 20.7 Total Expenditures 145.9 153.3 161.6 170.8 207.8 223.2 Compensations of employees 37.2 37.6 41.5 42.0 46.7 47.3 Purchases 9.3 9.4 12.6 12.7 14.4 14.4 Interest Payment 30.7 27.5 32.7 29.8 36.8 34.5 Foreign Interest 2.9 2.9 3.0 3.0 2.8 2.8 Domestic Interest 27.7 24.5 29.7 26.8 33.9 31.7 To NIB 10.4 10.0 8.7 0.0 To others 17.2 24.5 19.7 26.8 25.1 31.7 Sub. Grants & Social Benefits 24.7 34.8 29.7 41.2 68.7 85.9 Subsidies 10.3 10.3 13.7 13.7 54.3 54.3 To GASC 8.1 8.1 11.2 11.2 9.4 9.4 To Petroleum 0.0 0.0 0.0 0.0 41.7 41.7 To others 2.1 2.1 2.5 2.5 3.1 3.1 Grants 1.5 1.5 1.8 1.8 2.1 2.1 Social Benefits 12.8 22.9 14.0 25.0 12.3 29.5 To SIF 12.0 22.0 13.0 24.0 11.0 28.1 Other 0.8 0.8 0.9 0.9 1.4 1.4 Other 0.0 0.0 0.002 0.002 0.014 0.014 Other Expenditures 21 21 21.6 21.7 19.7 19.7 Defense 14.4 14.4 14.5 14.5 15.7 15.7 Other 6.6 6.6 7.1 7.1 3.9 3.9 Investments 22.8 22.8 23.2 23.2 21.2 21.2 Cash Deficit* 43.9 29.2 50.7 37.7 56.5 47.6 Cash Deficit (Surplus) 9.1% 6.0% 9.4% 7.0% 9.2% 7.7% % of GDP Net Acquisition of Financial 0.4% 2.2% 0.1% 1.9% (0.95) 0.6% Assets (%GDP) Overall Fiscal Deficit 45.9 40.0 51.6 47.9 50.3 56.6 Overall fiscal balance 9.5% 8.3% 9.6% 8.9% 8.2% 9.2% (%GDP)

FY07 Budget ConsoliSector dated 180.2 205.7 114.3 114.3 58.5 58.5 1.8 1.2 39.4 39.4 10.4 10.4 4.2 4.2 3.9 3.9 62.0 87.4 45.1 50.6 9.8 9.8 4.4 4.4 2.7 22.7 222.0 244.0 52.1 52.7 17.0 17.1 47.7 38.4 3.0 3.0 44.7 35.4 17.3 0 27.4 35.4 58.4 88.7 54.0 54.0 9.4 9.4 40.1 40.1 4.5 4.5 2.6 2.6 1.6 31.9 0 0 1.6 31.9 0.272 0.272 21.2 21.6 17.7 17.7 3.5 3.9 25.5 25.5 41.8 38.4 5.7% 5.3% 1.8% 54.7 7.5% 2.4% 56.2 7.7%

1H07/08 Budget Consoli Sector -dated 64.3 73.7 44.4 44.4 17.3 17.3 0.8 0.8 20.1 20.1 5.7 5.7 0.5 0.5 0.7 0.7 19.2 28.6 13.3 14.8 2.6 2.6 0.6 0.6 2.7 10.6 96.2 106.3 28.1 28.4 6.1 6.1 18.9 13.6 1.6 1.6 17.3 11.9 8.8 0 8.5 11.9 22.8 38.0 17.2 17.2 9.1 9.1 3.9 3.9 4.2 4.2 2.1 2.1 3.3 18.5 2.0 0 1.3 18.5 0.094 0.094 10.6 10.6 9.1 9.1 1.5 1.5 9.6 9.6 31.8 32.6 3.8% 3.8% 0.0% 31.8 3.8% 0.8% 35.8 4.2%

*The cash deficit is the overall deficit excluding net acquisition of financial assets. Source: MOF, CBE, HC Brokerage

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Government's plan to reduce budget deficit is on hold Egypt has been striving recently to lower its budget deficit as a percentage of GDP, and while it has been successful in doing so over the period FY05-FY07, a few concerns have risen in FY08. On the brighter side, the (consolidated) fiscal deficit of the general government was reduced from 9.2% of GDP in FY06 to 7.7% of GDP in FY07 and the deficit of the budget sector amounted to 7.5% of FY07 GDP, down from 8.2% of FY06 GDP. This decline came on the back of rising tax revenues by 16.6% year on year, as well as a 24.2% increase in the other revenues balance on the back of the government sale of licenses for the Third Mobile License. On top of that, the governments plan to raise the subsidy bill to EGP70.0 billion in FY08, and the fact that energy and food subsides alone in FY09 will reach EGP70.0 billion and USD20.0 billion, respectively, up from expected EGP57.0 billion and EGP15.0 billion in FY08, gives us more reason to doubt the sustainability of the decline in budget deficit to GDP neither in FY08, nor over the coming years unless it resorts to privatization proceeds or receives a spree of incoming revenue from non-tax income. According to the Ministry of Finance, the subsidy, grants, and social benefits are expected to amount to EGP64.3 billion in FY08 while total revenue would amount to EGP187.2 billion, up only 4.0% from FY06 which accounts for 6.9% of budget deficit to GDP. However, on December 31st, 2007, Prime Minister Ahmed Nazif stated that the subsidy bill would go up to EGP70.0 billion in FY08; hence we expect the cash deficit (which excludes the privatization proceeds) to climb to EGP62.8 billion or 7.3% of GDP, up from EGP41.8 billion in FY07, 5.7% of GDP. These expectations are based on the government's planned revenue of EGP187.2 billion. It is worth noting that according to the Central Bank of Egypt (CBE), 1H07/08 revenues reached EGP64.3 billion, which is less than half of the planned total revenue. However, it was recently announced in a news item that eight months results for tax and tariffs revenues stand at EGP107.0 billion. And based on historical evidence, tax revenue amounted to an average of 65.0% of total revenues over the past four years, therefore non-tax revenue should stand now at EGP57.6 billion. In that respect an additional EGP30.6 billion is required so that budget deficit to GDP would drop to the planned 6.4%. The government is targeting Egypt's budget deficit-to-GDP to reach 4.5% by 2010. In line with our skepticism, the Ministry of Finance announced that the budget deficit is expected to drop only to 6.9% of GDP. We believe that this may be an obtainable target if only based on the announced 8-month results of FY08. On top of the 8-month results, an additional EGP25 billion is required to take the deficit down to 6.9% of GDP. I'm coming, I'm comingnowhere to run to, no where to hide Standing on a dusty pile of accumulated deficit and preserving a legacy of government expenditure, though plans have been set to breakthrough those bar walls and rise a free market era, an increasing deficit still seems to be Egypt's inevitable destiny. First half results for FY08 indicate a relapse after celebrating two years of budget deficit reductions. It is true that in FY06 budget deficit to GDP went down to 8.2% from 9.6% in FY05, but this was due to an unprecedented GDP growth rate and stake/ licenses sale (as it will be discussed further below), and it was not only limited to that as total revenue jumped 36.0%, boosted by a 29.0% growth in tax revenue. This was a result of restructuring policies which induced transparency and encouraged tax payments. In 1H07/08, however, the picture seems less bright as revenues stood at less than half the planned increase in total revenue, with a considerable chunk. It even dims when noting that the planned increase in government revenue in FY08 is only 4.0% versus a planned 26.0% increase in FY07; though actual revenue increased in FY07 by 19.0% which indicates that the government is not even conservative in its projections. Expenditures stood at 3.8% of GDP in 1H07/08 versus 1.5% of GDP in 1H06/07, mainly generated by a 17.0% increase in wages and salaries, which underscores the government's concern of political unrest. Subsidies, grants and social benefits, however, in 1H07/08 grew by only 12.0%, amounting to EGP22.8 billion versus a planned total of EGP64.3 billion excluding Ahmed Nazif's Prime Minster announcement that subsidies will reach EGP70.0 billion in FY08. Behind The Scenes: Declining Deficit to GDP Looking at the budget deficit in absolute terms and comparing it to a ratio of budget deficit to GDP explains better the main engines behind a declining trend. Budget deficit to GDP fell from 8.2% in FY06 to 7.5% in FY07, yet in absolute terms it actually increased by 11.9% from EGP50.4 billion in FY06 to EGP54.7 billion in FY07 (See chart 5).
Egypt - Economy 11

Therefore, we can conclude that the declining trend in the overall budget to GDP is attributed to increasing GDP and not a decreasing budget deficit, mainly due to expanding government expenditures. In FY07, government expenditure to GDP dropped from 33.0% to 31.8%, mainly due to a substantial increase in nominal GDP from EGP617.7 billion in FY06 to EGP731.3 billion in FY07. Despite this drop, it continues to stand within its average range of 30.0%, which is still a pretty high figure. However, in absolute terms, government expenditure is on the rise, driven by higher subsidies spending to accommodate oil price hikes and increasing wages and salaries to accommodate for inflation. According to Minister of Finance Youssef Boutros Ghali, the government plans to raise public sector salaries by 15.0% over the next fiscal year, adding on to government expenditure. Sequel to that on May 1st, 2008, the government approved (a) 30% raise in salaries to the public sector amounting to EGP6.2 billion (b) a 20% increase in pensions where a floor limit of EGP100 per month is set this should cost the government EGP3.5 billion (c) a 25%-75% boost in incentive payments to local council workers that would at amount to EGP1.3 billion (d) subsidies of basic goods, including sugar, rice and cooking oil which will cost EGP1.6 billion. These increases will cost the government a total of EGP14.0 billion. Later in the month on May 6th, 2008, the government announced the following plan to raise revenue to be able to cover the aforementioned costs (a) free zone incentives offered to energy intensive companies are removed (b) extraction fees on clays and quarries are imposed (c) vehicle license fees are raised to 2% of the total amount of cars above 2000cc (d) sales tax on cigarettes increased (e) tax exemptions on treasuries and educational institutions are removed (f) the prices of 90, 92 and 95 octane gasoline, industrial natural gas, diesel and kerosene increased. This should generate 12.0 billion to the government. In addition to that the government has been and will be resorting to stake sales income to keep the budget deficit to GDP at 6.9%, let alone take it down to 4.5% of GDP as planned by 2010. On the other hand, it is worth pinpointing that the restructuring plan for reducing government expenditure is still being taken forward. The government is undergoing pension restructuring, in which it capped the increase in pensions at 7.5% in July 2007. It is also studying the possibility of investing pension funds in assets, rather than keeping them tied in bank deposits. This should help generate extra income for the pension fund, as well as help develop the fixed income market. In FY07, the drop in budget deficit as a percentage of GDP came mainly from a shoot up in non tax revenue, primarily due to the sale of the third mobile license, which according to government officials, was worth EGP3.34 billion. Chart 4 shows the governments cash deficit and overall deficit to GDP, while in FY07 we exclude the sale of the third mobile license. Not accounting for the income generated by the sale of the third mobile license, the cash deficit came in at 7.5% of GDP, instead of 5.7%, while the overall deficit came in at 9.2% of GDP instead of 7.5%. This shows how the Egyptian government relies greatly on sales in reducing its budget deficit, which seems to be working fine on the short and medium term. However, in the long term, this might not be a sustainable source of income for the government, as it may be non recurrent.
Chart 4: Cash Deficit and Overall Deficit to GDP Excluding Sale of Third Mobile License in FY07
Cash Deficit Overall Deficit 10.50% 9.10% 9.10% 9.50% 9.40% 9.60% 8.90% 7.90% 7.50% 9.20%

14.00% 12.00%

% of GDP

10.00% 8.00% 6.00% 4.00% 2.00%

FY03

FY04

FY05

FY06

FY07*

*FY07 cash deficit and budget deficit excluding the sale of the third mobile license worth EGP3.34 billion. Source: HC Brokerage

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Chart 5: Budget Deficit and Cash Deficit* of Budget Sector

11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00

% of GDP
10.5 9.5 9.1 9.1 9.6 8.9 7.9 7.5 Cash Deficit Overall Deficit 9.4
60 50

Absolute Terms (EGP bn)

Cash Deficit Overall Deficit 43.6
40

54.9 51.6 50.7 48.9

54.7

45.9 43.9

41.8

37.9

30

20

5.7

10

FY03

FY04

FY05

FY06

FY07

FY03

FY04

FY05

FY06

FY07

*The cash deficit is the overall deficit excluding privatization proceeds, i.e. acquisition of financial assets Source: MOF, HC Brokerage

Planned budget deficit FY08/09 Looking forward, the planned budget deficit for FY08/09 is expected to come in at EGP88.1 billion, according to the Ministry of Finance, on the back of government expenditures amounting to EGP365.2 billion, and revenues coming in at EGP277.1 billion. Among the components adding on to government expenditures is subsidies, grants and social benefits expected to stand at EGP128.4 billion, wages and salaries projected at EGP72.8 billion, and total interest payments of EGP52.9 billion, among other expenses. Government revenues, on the other hand, are expected to include EGP152.9 billion in tax revenues and EGP10.0 billion in privatization proceeds, among other sources of income. As a result, the budget deficit to GDP is estimated to come in at 8.8%, according to IMF estimates which assume a nominal growth rate of 17.2% and a real growth rate of 7.1% for FY08/09 (Nominal GDP is projected to come in at EGP1,005.4 billion in FY08/09). This confirms the notion that the government will not be able to go along with its previously stated plan of reducing its budget deficit by 1.0% on a yearly basis, despite rapid growth in GDP. This however was prior the recent planned announcements of the EGP14.0 billion increase in the expenditure bill versus EGP12.0 billion boost in revenues. This raises government expenditure to GDP to 37.7% from a current 30%-31% to GDP as well as it takes budget deficit up to 8.9% of GDP in FY09. This confirms the notion that the government will not be able to go along with its previously stated plan of reducing its budget deficit by 1.0% on a yearly basis, despite rapid growth in GDP as it also raises doubts over the government's ability to reduce budget deficit to GDP at 4.5%. Government relies on local debt A growing GDP and a declining budget deficit to GDP has saved total net domestic debt (which includes the net debt of the government and economic authorities, and net dues of the NIB) to GDP from multiplying in FY07. It went down from 96.1% in FY06 to 87.1% in FY07 and finally to 79.2% in 1H07/08. Gross domestic debt (which includes balances with the banking system, including deposits) amounted to 100.0% of GDP in FY07 against 113.9% in FY06 and 123.3% in FY05. Government debt, which is the largest contributor to total debt, amounts to 75.0% of total net domestic debt while NIB and economic authorities net debt amounted to 6.9% and 17.9%, respectively, in FY07. T-bills and bonds still gained the lions share, amounting to 88.3% of total domestic debt against 70.0% in FY06, although this is an indication that the government is increasing its borrowing from the market and inhibiting investments, loans to deposits ratio in banks amounted to 54.5% in December 2007. This is still a large figure, however proves that funds are available for investors to invest. The government is also a net depositor to the banking system, which strengthens the argument. But even though government debt is now proven not to be guilty in inhibiting investments, it can not escape being blamed for fuelling inflation since the amount of borrowing in absolute terms is actually growing, which suggests that the government has two options: 1) to raise taxes, or 2) to resort to seignorage to pay back its debts.

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Chart 6: Total Domestic Debt (% GDP)

100 90 80 70 60 50 40 30 20 10 0 2002

NIB Debt Eco n. A utho rities Debt Go vernment Debt

2003

2004

2005

2006

2007

1H07/08

Source: CBE, HC Brokerage

Breakdown of Domestic Debt in FY07 and 1H07/08 Government debt accounts for 75.0% of total domestic debt representing EGP478.2 billion; economic authorities 6.9%, or EGP44.6 billion; and NIB 17.9%, or EGP114.5 billion.

Table 3: Total Domestic Debt of the Government, Economic Authorities and NIB (FY05-FY07)
EGP Bil. (1) Government Balances of Bonds & Bills Notes & Bonds Treasury Bills Borrowing from NIB Net balance with banking Facilities Deposits (-) % GDP (2) Economic Authorities Net balance with banking Facilities Deposits (-) Borrowing from NIB % GDP (3) NIB(net) Resources Social Insurance Fund for Civil Servants Social Insurance (Public & Private) Post Office saving accounts NIB account balances with banking (net) Investment certificate Proceeds Accumulated interest on invest. certificates Uses Government Economic authorities Public & private sectors % GDP Total domestic Public Debt (1+2+3)
% GDP Source: CBE, HC Brokerage

FY05 349.0 340.8 215 124.9 143.7 (135.5) 17.9 153.4 64.8% 47.2 (11.1) 23.4 34.5 58.2 8.8%

FY06 387.7 349.9 246 103.1 142.6 (104.4) 5.0 109.9 62.8% 47.3 (2.8) 23.3 26.0 50.1 7.7%

FY07 478.2 562.9 444.2 118.7 -(89.2) 23.6 112.8 65.4% 44.6 (7.2) 28.9 36.1 51.7 6.1%

1H07 453.4 549.5 443.2 106.4 -(96.1) 12.5 108.7 62.1% 50.2 (1.6) 26.0 27.6 51.9 6.9%

1H08 502.2 596.8 450.8 146.0 -(98.3) 21.1 119.4 59.3% 49.2 (3.7) 37.1 40.8 53.0 5.8%

316.5 122.9 96.1 33.9 (4.9) 68.5 6.6 316.5 143.7 58.3 114.5 21.3% 510.8 94.9%

351.2 135.7 105.7 39 (3.7) 74.3 7.0 351.2 142.6 50.1 158.3 25.6% 593.4 96.1%

166.2 27.5 20.6 43.6 (3.0) 68.5 7.6 166.2 -51.7 114.5 15.6% 637.2 87.1%

155.2 25.0 18.7 38.9 (2.5) 66.3 7.2 155.2 -51.9 103.3 14.2% 607.0 83.2%

172.2 27.4 20.6 43.8 (1.6) 73.1 7.7 172.2 -53.0 119.2 14.1% 670.6.0 79.2%

Foreign borrowing a safe haven Growing foreign reserves, which reached a high of USD33.8 billion in April 2008, has blessed Egypt with the opportunity to raise its short-term foreign debt without having to worry about external shocks that have led to financial crises in other countries such as the Asian crisis. Short-term to foreign reserves stood only at 6.9% in December 2007, which indicates a safe haven for foreign investors to invest in Egypt. Though Egypt can borrow from abroad it prefers a localized debt strategy to spare exposure to foreign exchange rate volatility.
Egypt - Economy 14

IV. Monetary Policy: Inflation Under A Microscope

Egypt's most distressing challenge for the time being lies in inflation. It was dormant for a year before it started unleashing again in 1Q06/07 when the government decided to raise the 90 Octane Fuel by 30.0% in July 2007 accompanied with the external supply shocks that hit some of the administered items on the consumer price index coming from the Avian flu. The inflation rate hit a high of 16.4% in April 2008. The situation was controlled as the effects were fading out, but only for a short while, until food prices in international markets started climbing. Being directly linked to the inflation situation in Egypt, as it imports 70.0% of total wheat imports from the US, prices of wheat has gone up to EGP2,740 per ton in mid March 2008, up from EGP2,380 per ton in early March 2008. Food items constitute 43.9% of the Consumer Price Index (CPI). The correlation between rising food prices and the inflation rate since the inflationary trend started erupting in the local market is illustrated in chart (7). Although the graph shows positive correlation, the reasons behind the hike in inflation rate back then was attributed to the energy subsidy cut that took place in summer 2006 and the supply shocks of the Avian flu. We expect that the recent energy price increases will take inflation further up.
Chart 7: International Food Prices (2005-2008)
14 12 10 8 6 4 4 2 0 Jun-05 Jun-06 Jun-07 Feb-08 0 Inflat ion Flour Rice Cooking Oil Beans Poultry M ilk Cheese Whit e 8 12 16 20

* Cooking oil value is per 1 litre Source: Al Alam Al Youm, HC Brokerage

But, we believe that there is more to the story then just that. Unprecedented economic growth rates spurred domestic consumption pushing demand to exceeded supply. It encouraged investments which fed into the construction and real estate sectors. Both sectors demand bigger quantities of steel and cement which pushed their prices up 50.0% and 44.0%, respectively, from FY07 to March 2008. Also, the increase in demand on housing units from the Arab world due to excessive petrodollar money and the Arab World's desire to diversify their portfolios played a role. Like a domino effect, real estate prices started shooting up. Housing, water, gas, electricity and other fuel constitute 13.5% of CPI. Gas and fuel did not witness any price increases in 2007. (Please update with latest developments)
Table 4: Construction materials Prices (F2005-2008)
2005 Construction Materials Steel (ton) Cement (ton)
Source: Al Alam Al Yom, HC Brokerage

2006 3,200 340

2007 3,600 360

2008 5,400 520

2008% 50.0% 44.4%

AVG % (2005-2007) 14.4% 9.6%

2,750 300

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Risk averse investors have little to rejoice for For the first time in a year, the Central Bank of Egypt (CBE) raised the overnight deposit and lending rates on three consecutive meetings to reach 10.0% and 12.0%, respectively, on May 8th, 2008. The jump in the inflation rate from a steady 6.9% in November and December 2007 to 10.9% in January 2008, 12.1% in February 2008, 15.8% in March 2008 and 16.4% in April 2008 left the Monetary Policy Committee board members no choice but to hike interest rates. Local banks did not respond by raising their interest rates on deposits, as the three months-deposit rate hovers between 5.5% and 6.5%. The last reading for inflation in April 2008 recorded 16.4% which when compared to interest rates indicates negative real interest rates. Depositors are thus encouraged to invest in other high interest baring investments which are in nature more risky. All the while, risk averse investors might thus be encouraged to buy funds investing in T-bills, bonds, or even post office savings which offer higher interest rates yet sell lower than the current inflation rate. Post offices offer 9.25% for one year deposits against 6.75% for one year deposits in commercial banks With inflationary pressures expecting to persist, we tend to believe that the MPC might resort to taking rates upwards.
Table 5: T- bills, Bonds, and Post Office Savings Interest Rates and Maturities
Risk Free Investment T- Bills 91 day bills interest rate (3 months) 182 day bills interest rate (6 months) 364 day bills interest rate (1 year) T- Bonds Average Interest rate (2-20 years) Post Office Savings Interest rate ( 1 year)
Source: CBE, MOF, HC Brokerage

March 2008 6.1% 7.1% 7.4% 8.0%-11.6% 9.5%

The following table shows government issued stocks, matured stocks, and outstanding stocks of T-bills and bonds up until the period July 2007 to March 2008.
Table 6: Government Securities Issuance
EGP bn Issued T-Bills T- Bonds Matured T-Bills T-Bonds Net Issues Outstanding stock (End of period) T- Bills T-Bonds Average Interest Rates 91 Day T-Bills 182 Day T- Bills 364 Day T- Bills
Source: MOF, HC Brokerage

FY03 127.3 127.3 0.0 112.0 112.0 0.0 15.3 68.3 55.3 13.0 8.3 8.8 --

FY04 150.5 146.5 4.0 142.0 138.0 4.0 8.5 76.8 63.8 13.0 8.4 8.4 8.9

FY05 137.8 123.8 14.0 107.7 107.7 0.0 30.1 106.9 79.9 27.0 10.4 10.6 10.4

FY06 179.1 146.1 33.0 124.9 122.9 2.0 54.2 161.1 103.1 58.0 8.8 8.8 8.8

FY07 July- March FY08 180.7 178.8 174.7 6.0 166.2 159.2 7.0 14.5 175.6 118.6 57.0 8.6 8.9 9.1 154.3 24.5 129.0 127.0 2.0 49.8 225.4 145.9 79.5 6.5 7.1 7.4

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Table 7: Recent Changes in Monetary Policy

CBE Deposit Rate Date Rate April 9, 2006 8.00 November 2, 2006 8.50 December 14, 2006 8.75 February 10, 2008 9.00 March 24, 2008 9.50 May 8, 2008 10.0 Fed Funds Rate Date June 29, 2006 September 18, 2007 October 31, 2007 December 11, 2007 January 21, 2008 January 30, 2008 March 18, 2008 April 30, 2008 Rate 5.25 4.75 4.50 4.25 3.50 3.00 2.25 2.0 ECB Rate Date June 8, 2006 August 3, 2006 October 5, 2006 December 7, 2006 March 8, 2007 June 13, 2007 Rate 2.75 3.00 3.25 3.50 3.75 4.00

Source: CBE, FED & ECB

How else can the government curb inflation? In an attempt to control rising steel prices, the Ministry of Foreign Trade and Industry is considering making use of an article in the antitrust law which enables the Prime Minister to fix the price of strategic commodities for a limited period of time after consulting with the Antitrust Council. In the mean time, the Ministry of Foreign Trade banned exports of cement until October 2008 to ensure its availability in the local market and thus tame prices, and removed import duties on some kinds of steel and cement. Also, steel traders have agreed to sell at announced factory prices, plus additional transportation costs and taxes, which would fall within a range of EGP5,100.0-EGP5,150.0 per ton. Limiting basic commodity price hikes and increasing subsidies, as it was previously discussed, are all collective attempts to contain inflation. Moreover, the Egyptian Government has banned rice exports for a period of six months starting from April 2008 in order to ensure an adequate supply of rice in the market and stabilize surging prices, while also waiving import duties on rice, dairy products, and edible oils. Also, an appreciation of the EGP against the USD might be sought after, as another strategy that limits price increases since Egypt imports 70.0% of its total wheat imports from the US. This is backed by a trend of a depreciating USD against all other currencies coupled with the CBE hiking its overnight deposit rates. However, we do not expect this trend to last over the medium term, especially if speculators realize that the shadow exchange rate, which is a reflection of the real value of the EGP:USD, is expected to hover around USD1:EGP5.5-5.7 in FY09 with trade being negatively affected by the US slowdown. In due cause, we tend to believe that the government has the luxury to appreciate the EGP against the USD in the remaining months of FY08 with the shadow exchange rate hovering in-between EGP5.3-5.4 to USD1 if not less. If speculators realize that the value of the EGP:USD should actually depreciate in FY09 to hover around USD1:EGP5.7, demand on the dollar will rise. Indeed, Egypt has a backlog of foreign reserves amounting to USD33.8 billion in April 2008 to preserve its managed float system, but even that did not save the EGP from being severely battered by speculators in 2002-2003 and taking it close to its shadow exchange rate. The government, in the late 1990's, with a fixed exchange rate system, resorted to injecting foreign reserves into the economy to maintain the USD:EGP rate at USD1:EGP3.4. However, pressure pushed it to eventually leave the EGP to depreciate very close to its real effective exchange rate at USD1:EGP6.1. Hence, with expectations of a further increase in demand of FX in the years to come, the real value of the EGP against the USD might only depreciate, forcing the government to eventually leave the EGP to free market forces and speculation. In that respect we believe that the government might only resort to appreciating the EGP as an immediate solution to help alleviate the bread problem, but more weight should be put on commercial banks hiking their interest rates and controlling local commodity prices. This in our opinion is the safest haven for the government to resort to. Persistent increases in subsidies and appreciating the EGP might have uncalled for repercussions on the medium and long term. Foreign Exchange Shadow Exchange Rate Given that the CBE helps maintain stability in the exchange market it should be asked whether or not the current price of USD/EGP reflect its fair value. The shadow exchange rate is one metric which can be used to determine whether or not a currency is trading at its fair value. The shadow exchange rate reflects an equilibrium between supply and demand for a currency.

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Table 8: (Demand and supply of FX table)

USD Million FX Demand Imports of Goods Imports of Services Capital Out Smuggling (20% of imports) Total FX Demand FX Supply Exports of goods Exports of services Capital In Total FX Supply Change in FX Demand and Supply**

FY03

FY04 18,286 5,663 42 3,657 27,648 10,452 12,981 4,159 27,592 1.0

FY05 24,192 7,187 1,635 4,838 37,852 13,833 15,029 10,160 39,022 0.97

FY06 30,441 9,247 1,446 6,088 47,221 18,455 17,438 19,397 55,290 0.85

FY07 37,834 8,957 1,153 7,567 55,511 22,018 20,408 17,177 59,603 0.93

FY08* 47,000 14,100 1,700 12,220 75,020 24,900 27,100 23,000 75,000 1.0

14,820 5,492 45 2,964 23,321 8,205 10,441 3,909 22,555 1.03

* HC estimates **If the change in supply and demand from year to year is close to, or equal to one, then a currency is priced appropriately. Source: CBE, HC Brokerage

Supply and demand for foreign currency for FY07 suggests that the Egyptian pound was undervalued, and the fair value for USD/EGP was actually around USD1/EGP5.2. This came as a result of strong exports performance and floods of FDI. This is expected to be taken forward in FY08 with the market actually reflecting the real value of the EGP to USD. The picture only gets murkier in FY09 with the expected widening of the trade deficit, which weakens the EGP strength against the USD.
Chart 8: Market Exchange Rate versus Shadow Exchange Rate

Market fx rate 6.3 6.5 6.1 6.1 5.7 Shadow exchange rate 6.1 5.52 5.43 5.43 Shadow exchange rate 4.5 Market fx rate FY03 FY04 FY05 FY06 FY07 FY08*

5.7 4.86

USD:EGP

5.5

5.62 5.23

Source: HC Brokerage

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V. Investments, the Name of the Game

Money? No problem. Pocket full of that now, but. Huge amounts of foreign direct investments (FDI) inflows and sales proceeds were among the drivers of Egypts economic growth in 2007. Sales proceeds (if it be licenses or stake sales), although helping the government to reduce its budget deficit, are an unsustainable source of revenue which the government cannot continue to rely on. In addition, FDI inflows, if not properly utilized, can lead Egypt to becoming over reliant on outside sources of financing instead of generating its own sustainable sources of revenue. However, it is clear that both sources of funds have significant effects on the economys growth, resulting in the Egyptian economys continued progress. Although privatization proceeds in FY07 came in 6.8% lower than in FY06, they still recorded an impressive figure of EGP13.6 billion, down from EGP14.6 billion in FY06. FDI on the other hand, surged dramatically in FY07 to USD11.1 billion (8.35% of GDP), up from USD6.1 billion (5.96% of GDP). As of 1H08, FDI stood at USD7.8 billion, growing by 8.3% from USD7.2 billion in 1H07. In FY08, we expect FDI inflows to exceed FY07s USD11.1 billion, on the back of growing interest in Egypt fuelled by economic development and growth, and the trend is expected to be sustained in FY09 with global investors diverting their funds away from the US due to global economic turmoil, and into emerging markets like Egypt. Potential opportunities lie in the possible sale of Egypts second fixed line license to a foreign investor, and Egypts real estate sector is attracting large amounts of investments from Arab countries, with the UAE becoming one of Egypt's largest investors. The Ministry of Finance expects privatization proceeds to come in at EGP10.0 billion, primarily on the back of the sale of Egypts third largest publicly owned bank, Banque Du Caire, and the sale of the remaining 20.0% stake of Bank of Alexandria. However, looking at 1Q08 figures, with privatization proceeds coming in at a minor EGP334.0 million, it seems that the trend is not expected to continue on the long term. This illustrates the unreliability of privatization proceeds as a sustainable source of government revenue.
Table 9: Asset Sales (number, value and percentage of GDP) FY01-1Q08
Year Companies, Lines Sales and Land Sales Joint Venture Sales Public Company Sales Total Sales GDP % of total sales to GDP

Number FY01 FY02 FY03 FY04 FY05 FY06 FY07 1Q08 Total* 12 7 6 9 16 41 45 5

Value Number Value Number EGP mn EGP mn 263 73 49 428 824 1,843 2,773 334 7 3 1 4 12 18 7 0 118 879 64 115 4,819 7,647 1,559 0 1 1 0 3

Value Number Value EGP mn EGP mn 5,122 9,274 0 14,410 19 10 7 13 28 60 53 5 381 952 113 543 5,643 14,612 13,606 334

LE bn 391 465 478 509 553 618 684 -0.10 0.20 0.02 0.11 1.02 2.36 2.00 --

308 22,450

53 15,215

363 52,075

*Cumulative total from 1991- 1Q08 Source: MOF, HC Brokerage

Sources of FDI The largest share of FDI came from the US (35.0%), followed by the EU (31.0%), the Arab region (26.0%) and other countries (8.0%). Investments coming from the Euro region and from Arab countries are expected to sustain high figures in FY08, with the UAE becoming Egypts foremost foreign investor after the US, with total investments worth USD3.0 billion in FY07 (23.3 % of FDI inflows), up from a meager USD63.0 million in FY06 (0.7% of FDI inflows). Investments from the UAE are pouring into Egypts real estate, hospitality, telecommunication, and maritime sectors, with real estate developer Emaar Properties investing EGP31.7 billion in real estate and tourism projects, Etisalat investing in creating a state of the art telecom infrastructure worth USD1.4 billion, and DP World, a Dubai based global marine terminal operator, investing USD1.3 billion in several maritime projects, among others. European investments experienced a substantial growth of 37.5% in FY07, reaching USD4.06 billion, up from USD2.95 billion in FY06. Investment inflows from China, though still small, but also witnessed growth following the agreement signed on September 20th, 2006, between the Egyptian and Chinese Governments regarding a ChineseEgyptian industrial zone in Ismailia. Chinese investments in FY07 amounted to USD8.4 million, compared to USD0.8 million in FY06. In 1H08 alone, investments from China recorded USD12.0 million, growing by 48.0% YoY.

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Chart 9: FDI by Country FY07

EU 31% Other Countries 8%

Arab Countries 26%

USA 35%

Source: CBE, HC Brokerage

The largest share of FDI inflows is directed towards the establishment of new entities, and the expansion of already existing ones (47.3% of total FDI in FY07 and 44.5% of total FDI in 1H07/08). Followed by that is the petroleum sector, attracting 27.3% of total FDI in FY07 and 37.6% in 1H08. The sale of assets to nonresidents came in third, booking 25.1% of total FDI inflows in FY07, and 17.5% in 1H08, while the real estate sector came in last, drawing a minor 0.35% of FDI in FY07 and 0.4% in 1H08.
Table 10: FDI Distribution by Sector (FY07-1H08)
Sector New Establishments and Expansions Sale of Assets to Non- residents Real Estate Petroleum Sector Total
Source: Ministry of Investment, HC Brokerage

FY07 5,227.2 2,772.2 39.0 3,014.8 11,053.2

1H08 3,455.6 1,358.0 32.6 2,923.3 7,769.5

We expect investors to divide their investment portfolios in Egypt FY09 between commodities such as fertilizers, petrochemicals, oil and gas and metals. The Ministry of Petroleum is working on a plan to attract foreign and local investors to excavate gold mines. Egypt has attractive amounts of gold reserves. Agriculture also grabs attention however, Egypt has some restrictions on foreign ownership of agricultural land. Local investors are thus encouraged to invest in agricultural land as well as opening gateways to foreign partnership.

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VI. Balance of Payments

Capital Account: The Sticker Egypts balance of payments (BoP) is one of the economys positive features this year, expanding from USD3.3 billion in FY06 to USD5.2 billion in FY07. As a result, this increased surplus has progressively enhanced Egypts foreign reserves, from USD26.2 billion in February 2007 to USD33.8 billion in April 2008. Foreign reserves are generated mainly through the export of oil and gas, FDI and tourism receipts. While oil and gas revenues remained somewhat unchanged with only a slight decrease, FDI inflows have increased dramatically in 2007 due to the governments reform efforts, and so have tourism receipts. This resulted in the strengthening of the position of Egypts foreign reserves.
Table 11: BoP Main Contributors as Percentage of GDP (FY07 & 1H07/08)
Item BoP Surplus Oil Exports Non-Oil Exports FDI in Egypt (net) FY07 0.7% 1.4% 1.6% 8.3%

1H07/08 0.8% 1.5% 1.8% 10.7%

Source: CBE, HC Brokerage

A) Current Account

A comparison between 1H07 and 1H08

In the first half of 2008 the current account generated a deficit of USD245.7 million due to: The trade balance deficit jumped from USD6.6 billion in 1H07 to USD11.3 billion in 1H08, mainly due to a dramatic increase in imports from USD17.3 billion in 1H07 to USD24.4 billion in 1H08 which is attributed to a 32.0% rise in non-hydrocarbon imports (USD15.2 billion in 1H07 to USD20.0 billion in 1H08) and a 108.8% increase in oil imports (USD2.1 billion in 1H07 against USD4.3 billion in 1H08), fuelled by a jump in oil prices. As of 1H08, investment and capital goods imports stood at 24.6% of total imports, down from 27.5% in 1H07. The services surplus expanded by 21.4% to stand at USD6.8 billion in 1H08, up from USD5.6 billion in 1H07, due to a 30.0% increase in tourism revenues from USD4.3 billion in 1H07 to USD5.6 billion in 1H08 and a 25.0% jump in Suez Canal receipts from USD2.0 billion in 1H07 to USD2.5 billion in 1H08 due to an increase in the number of ships and tonnage. According to statistics published by the CBE, 10,644 ships transited the Suez Canal in 1H08, up from 9,679 vessels in 1H07, while total tonnage reached 445.4 million tons versus 390.0 million tons in 1H07. However, there has been a large 60.0% increase in other payments from USD1.3 billion in 1H07 to USD2.1 billion in 1H08. Net unrequited transfers rose dramatically by 42.5% reaching USD4.2 billion in 1H08 as opposed to USD3.0 billion in 1H07, due to a surge in remittances of Egyptians working overseas. As of 1H08, remittances stood at USD4.0 billion, constituting about 95.1% of total transfers, as opposed to USD2.7 billion in 1H07 (91.8% of total transfers). Official transfers continue to contribute only a minority to total transfers.

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Table 12: Current Account (FY02-1H08)

USD Mil. Trade Balance Export Proceeds Petroleum Other Exports Import Payments (-) Petroleum Other Imports Services (net) Receipts Transportation, of which Suez Canal Dues Travel Investment Income Government Receipts Other Payments Transportation Travel Investment Income, of which Interest paid Government Expenditure Other Goods & Services Balance Transfers Private Transfers (net) Official Transfers (net) Current Account Balance FY02 (7,516) 7,120 2,381 4,739 14,637 (2,476) (12,160) 3,878 9,618 2,714 (1,819) 3,422 938 188 2,353 5,739 420 1,207 842 (688) 660 2,609 (3,638) 4,252 3,108 1,143 614 FY03 (6,614) 8,205 3,160 5,044 14,820 (2,313) (12,507) 4,948 10,441 2,964 (2,236) 3,796 641 252 2,786 5,492 392 1,372 748 (625) 455 2,524 (1,666) 3,609 2,945 663 1,943 FY04 (7,833) 10,452 3,910 6,542 18,286 (2,549) (15,736) 7,317 12,981 3,755 (2,848) 5,475 485 179 3,086 5,663 668 1,315 691 (585) 489 2,498 (516) 3,934 3,046 888 3,418 FY05 (10,359) 13,833 5,299 8,534 24,192 (3,975) (20,218) 7,842 15,030 4,260 (3,307) 6,430 911 157 3,272 7,187 902 1,438 1,164 (584) 657 3,026 (2,517) 5,427 4,371 1,056 2,910 FY06 (11,986) 18,455 10,222 8,233 30,441 (5,359) (25,082) 8,191 17,438 4,947 (3,559) 7,235 2,002 358 2,896 9,247 1,215 1,620 1,471 (587) 1,320 3,622 (3,795) 5,547 4,975 571 1,751 FY07 (15,816) 22,018 10,108 11,910 37,834 (4,128) (33,706) 11,451 20,408 6,371 (4,169) 8,012 3,045 254 2,727 8,957 1,273 1,918 1,857 (598) 1,196 2,714 (4,365) 7,061 6,261 800 2,696 1H07 (6,592) 10,666 5,057 5,609 17,258 (2,064) (15,194) 5,573 9,997 3,074 (2,016) 4,289 1,411 47 1,176 4,424 566 969 979 (300) 591 1,319 (1,018) 2,967 2,725 242 1,949 1H08 (11,269) 13,103 6,021 7,082 24,372 (4,308) (20,064) 6,795 12,841 3,653 (2,511) 5,580 1,675 77 1,856 6,046 835 1,497 954 (340) 650 2,110 (4,474) 4,228 4,022 206 (246)

A comparison between FY07 and FY06

During the past year, Egypts current account surplus has expanded, reaching USD2.7 billion in 2007 against 1.8 billion in 2006, and constituting about 2.2% of GDP as opposed to 1.6% in FY06. This expansion resulted from a 27% increase in transfers from USD5.5 billion in 2006 to USD7.1 billion in 2007. However, the trade deficit has widened reaching 3.4% of GDP in 2007 against 1.6% of GDP in 2006. This is because of a great 24% increase in merchandise imports, standing at USD37.8 billion in FY07 as opposed to USD30.4 billion in FY06, as a result of increasing non-oil imports from USD25.1 billion in FY06 to USD33.7 billion in FY07 (a 34% increase). Oil imports, on the other hand, have declined by 23%, from USD5.4 billion in FY06 to USD4.1 billion in FY07. Merchandise oil exports have remained more or less at a constant level, decreasing only slightly by 1.1% (from USD10.2 billion in FY06 to USD10.1 billion in FY07), while non-oil exports increased noticeably by 44.6% to reach USD11.9 billion in 2007 against USD8.2 billion in 2006. This is a great improvement compared to the 3.5% decline in non-oil exports during the period of 2005-2006, which illustrates that there has been progress in Egypts non-hydrocarbon sector, and that there is hope for a brighter future for Egypts industrial sector. As of 2007, the hydrocarbon sector constitutes 45.9% of Egypts external trade, as opposed to over 50% in 2006.

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Table 13: Oil Exports Breakdown

USD Million

Total Oil Exports Crude Petroleum Petroleum Products % GDP

Source: MOF, HC Brokerage

FY01 2,632 1,166 1,467 0.73%

FY02 2,381 686 1,695 0.61%

FY03 3,161 1,117 2,044 0.74%

FY04 3,910 1,414 2,497 0.80%

FY05 5,299 1,938 3,361 0.97%

FY06 10,223 3,214 7,009 1.62%

FY07 10,108 3,128 6,980 1.48%

Suez Canal receipts rose by 17% in FY07, reaching USD4.2 billion as opposed to USD3.3 billion in FY05 on the back of a continued increase in the number of transmitting ships passing through the canal, as well as an upsurge in net tonnage carried. Tourism revenues also increased from USD7.2 billion to USD8.0 billion due to an increase in the number of tourist arrivals from 8.6 million tourists in FY06 to 9.7 million in FY07 and a rise in the number of tourist nights from 85,113 nights in FY06 to 96,270 nights in FY07. The Egyptian government is hoping to attract 20 million tourists by the year 2015. The main contributor to the services account surplus, however, would have to be investment income receipts, which rose greatly by 52% amounting to USD3.0 billion in FY07 as opposed to USD2.0 billion in FY06. As a result, the services account surplus expanded remarkably by about 40%, standing at USD11.5 billion in FY07, up from USD8.2 billion in FY06.

Table 14: Tourism Indicators

Tourist Arrivals (000) Tourist Nights (000) Average Stay Per Tourist (nights)
Source: CBE, HC Brokerage

FY01 5,347 32,702 7.2

FY02 4,341 28,542 7.0

FY03 5,329 33,011 6.8

FY04 7,512 73,002 10.4

FY05 8,651 85,730 10.4

FY06 8,693 85,113 10.4

FY07 9,758 96,270 9.8

The inward transfer of funds by Egyptians working abroad grew by 26.0% (from USD4.9 billion in FY06 to USD6.2 billion in FY07), while official transfers inwards also rose by 40.0% (from USD0.57 billion in FY06 to USD0.8 billion in FY07). Both contributed to the expansion of the net unrequited transfers account by 27.0% to reach USD7.0 billion in FY07, up from USD5.5 billion in FY06.

World Trade Imports from the EU and USA amounted to 56.0% of Egypts total imports (34% from the EU and 22% from the USA), while 66% of its exports went to these markets (35% to the EU and 31% to the USA). In the event of supply and demand shocks from either of these markets, Egypts external trade balances would be at a rather unstable and troubled state. Moreover, any major variations in the value of the EGP against either the Euro or USD would have a recognizable effect on the Egyptian economy. However, the slight appreciation of the EGP against the USD over the past period has not dented Egypts exports to the USA. In fact, they have increased by about 21%, from USD5.6 billion in FY06 to USD6.8 billion in FY07.

Chart 10: Imports and Exports by Geographical Distribution (FY07)

Imports
Middle East 8%

Asia 16% Other 10%

Exports

Africa 1%

Asia 14%

Middle East 12% Other 2%

USA 22%

USA 31%

Russia 2%

EU 34% Other Europe 8% Other Europe 5%

EU 35%

Source: CBE, HC Brokerage

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Intermediate goods, investment goods, and raw materials continue to constitute the largest shares of Egypts imports respectively, which should, in the long run, have a positive impact on local productivity.
Chart 11: Imports and Exports by Category

100% 90% 80%

% of total imports

Imports
Undistributed Imports Consumer Goods Investments Goods Intermediate Goods Raw Materials Fuel and Oil

100% 90% 80%

% of total exports

Exports
Undistributed Exports Finished Goods Semi-finished Goods Raw Materials Cotton Fuel & Oils

70% 60% 50% 40% 30% 20% 10% 0% FY02 FY03 FY04

70% 60% 50% 40% 30% 20% 10% 0%

FY05

FY06

FY07

FY02

FY03

FY04

FY05

FY06

FY07

Source: CBE, HC Brokerage

B. Capital and Financial Account

A comparison between 1H07 and 1H08

FDI in Egypt has increased in 1H08 by 8.3% reaching USD7.8 billion compared to USD7.2 billion in 1H07, mainly due to a surge in foreign investment directed towards the oil sector, which recorded USD2.9 billion in 1H08, up by 141.7% from USD1.2 billion a year ago, and inflows directed towards incorporations and capital increases, which came in flat at USD3.5 billion in both 1H08, same as 1H07. Net portfolio investments in Egypt have fallen greatly to stand at a negative balance of USD1.7 billion in 1H08 as opposed to USD57 million in 1H07. Privatization proceeds also dropped year on year from USD2.6 billion in 1H07 to USD1.4 billion in 1H08. Finally, the capital and financial account as a whole increased remarkably, mainly due to the upsurge in FDI inflows into the economy. The capital account grew by 107.7% to record USD3 million in 1H08, up from a deficit of USD39 million in 1H07 while the financial account expanded to stand at USD3.1 billion in 1H08, up from a negative balance of USD401 million in 1H07.
Table 15: Capital and Financial Account (FY02-1Q08)
USD Million

Capital and Financial Account Capital Account Financial Account Direct Investment Abroad Direct Investment in Egypt (net) Portfolio Investment Abroad (net) Portfolio Investment in Egypt (net) Bonds Other Investments (net) Net Errors & Omissions Overall Balance Change in CBE reserve assets (increase=-)
Source: CBE, HC Brokerage

FY02 (963) 0 (963) (15.2) 428 (3) 998 953 (2,372) (106) (456) 456

FY03 (2,733) 0 (2,733) (30) 700 (15) (405) (218) (2,983) 1,336 546 (546)

FY04 (5,016) 0 (5,016) (155) 407 113 (225) (147) (5,155) 1,440 (158) 158

FY05 3,377 0 3,377 (39) 3,901 540 831 25 (1,856) (1,810) 4,477 4,477

FY06 3,511 (37) 3,548 (145) 6,111 (729) 2,764 2,690 (4,452) (2,009) 3,253 (3,253)

FY07 1,134 (39) 1,173 (536) 11,053 (558) (937) (551) (7,851) 1,453 5,282 (5,282)

1H07 (440) (39) (401) (68) 7,245 (322) (421) 1,396 2,906

1H08 3,150 3 3,147 (198) 7,770 (611) 919 182 3,087

57 (1,734) (7,313) (2,080)

(2,906) (3,087)

A comparison between FY07 and FY06

As of FY07, Egypts declining capital and financial account (from USD3.5 billion in FY06 to USD1.1 billion in FY07) resulted from a few disappointing capital and fiscal account figures. Net portfolio investment inflows experienced a huge drop from USD2.7 billion in FY06 to a negative balance of USD0.9 billion in FY07. Other investments have also worsened, from a negative balance of USD4.4 billion in FY06 to a negative USD7.8 billion in FY07. On the brighter side, FDI increased remarkably by a whooping 81% to reach USD11.1 billion in FY07, up from USD6.1 billion in FY06. This increase can be attributed to the governments reform efforts to attract FDI inflows into the economy.

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FDI, tourism and non-oil exports are regarded as the leading contributors to this years balance of payments. A great emphasis should be placed on the fact that non-oil exports have exceeded hydrocarbon exports, which was not the case in 2006. This is a good sign for the economys industrial future, as it indicates the potential for sustainable growth. However, oil exports as a percentage of GDP have increased greatly reaching 7.9% in FY07 as opposed to 1.62% in FY06, also boosted by escalating international energy prices. For now this should lure in huge amounts of FX as oil prices are skyrocketing and expected to continue the trend, but on the long-term, heavy reliance on depleting resources is not a solid plan to rely on. Increasing tourism receipts also had a great role in Egypts favorable balance of payments, and this trend is expected to continue with the government investing in developing the tourism sector and making it one of its top priorities. And as there lies the risk for terrorist attacks there also lies the huge potential for development, marketing Egypt as one of the top tourism destinations in the world. Finally, the huge upsurge in FDI inflows contributed a great deal to Egypts balance of payments, and a reduction would most certainly have a negative effect on the economy. However, this reliance on foreign sources of financing could pose large threats to the economys sustainability in the long run. To avoid such a situation, the government must utilize these FDI inflows in a way that would benefit the economy in the long-term, while taking into consideration that foreign funds are bound to be repatriated at some point in time. For Egypt to maintain high GDP growth rates, a positive balance of payments performance and continued FDI inflows, it needs to focus on developing its non-oil sector, direct its FDI inflows to sectors in which it has a competitive advantage, and reduce its reliance on sectors that are susceptible to external shocks.

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VII. US Sub-Prime Crisis and Egypt

The recent turmoil in the US caused by the sub-prime mortgage financing crisis is expected to have an impact on global growth rates. We, however, forecast growth rate for Egypt in FY08 to be at 7.1%. On the investment side, we expect the slowdown in the US coupled with the petrodollar bonanza to spur investments in Egypt yet stimulate inflation, which is Egypt's prevailing challenge. But since we expect the inflation rate to be above 12.0% in FY08, triggered by the recent diesel and kerosene price increases, and given the fact that the inflationary trend is on top of a one way upward ride hitting 16.4% in April 2008, we expect investments to be poured into primary sectors (where inflation benefits mostly the commodity sector) as opposed to value-added (tertiary sectors) given that investors would be able to export. Although instability in prices hampers investments, making the outlook seem murky as it creates unfavorable environment for investors, this in itself might stimulate investments in price driven sectors (which is a global trend). These sectors are basically oil, gas, metals, and agricultural products which Egypt is blessed to be endowed with. If Egypt manages to pull 8.8% of FDI to GDP in FY09 (USD16.0 billion) we thus expect GDP to grow at above 7.0%, making investments the prime engine for growth. On the other hand if only 5.5% of FDI to GDP (USD10.0 billion) are drawn in we thus expect GDP to grow at 6.7%. All the while, on the international trade facet after examining the impact of the US slowdown on trade, tourism and private transfers, an insignificant effect on the trade balance will be felt in FY08. On the other hand, we expect a current account deficit stemming from the increase in total imports and fuelled by rising domestic demand. Back to The Past and Into the Future Mimicking the impact of the US downturn on trade with Egypt, after September 11th, 2001 shocks we managed to draw the following conclusions: A) In trade, the impact was reflected in 2002 performance with exports to the US remaining almost flat in 2001 and dropping by 10.0% from 2000. Exports to the US represented a high of 45.3% of total exports during its peak time in the new millennium, however, the weight has been dropping ever since; especially since Egypt has managed to shift its exports to Europe, and recently increase trade with the Arab world and Asian countries. We therefore do not expect to see a clear negative setback in Egyptian exports to the US in 2008. In FY09, signs of contraction in exports are expected, yet insignificant to the trade balance deficit especially since in our assumptions, US imports from Egypt should also drop (see table 1). Egypt has a backlog of trade agreements with European, Arab and Asian countries which should enable it to channel exports destinations other than the US. B) In tourism, which is Egypt's main foreign currency earner, visitors coming from the US are minimal, standing at 2.4% of total tourists. A drop represents an insignificant portion of Egypt's tourism receipts. C) Although remittances flowing from the US represent the largest portion after Arab countries, a drop of which is not expected to make a considerable impact in total inflow of workers remittances. It constituted 33.0% of total workers remittances in FY07 and has maintained its average over the past five years. It dropped only 9.0% in 2002. (see table 16).
Table 16: Worse Case Scenario Estimates for Trade with the US (FY09**)
USD bn Exports Imports Trade balance Tourism Receipts Exports of goods and services Imports of goods and services Private transfers Current account surplus Net total loss of FX from the US
* HC estimates ** HC Forecasts Source: HC Brokerage

FY07 22.0 38.0 (16.0) 8.0

6.0 2.6

FY08* Impact from US 26.0 10.0% drop 47.0 (21.0) 9.5 2.4% drop 52.0 61.1 8.0 9.0% drop (1.1) 2.1

FY09**Total 29.1 53.2 (24.1) 10.3 58.4 70.2 9.3 (2.5)

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Impact of US Slowdown on Trade (Egypt and the EU) As Egypt is more exposed than before to the economy of the EU and since, "the economic fundamentals of the EU are still sound", according to the May 2008 report published by the ECB. Egypt's economy thus should be on safe ground in FY08.
Chart 12: Imports and Exports by Country (1H07/08)
Expor ts
Arab
Asia 16%Af rica 1% Ot her USA 35% 1%

Impor ts
Arab Count ries 10%

Asia 17% Ot her 5%

Count ries 11%

USA 21%

EU 32%

EU Russia 3% Ot her European 35%

Ot her European Count ries 5%

Count ries 8%

Source: CBE, HC Brokerage

Nevertheless, the downside risks coming from financial turmoil are still high. In turn, we examined the setback of the economic performance in the EU on trade and tourism. With regards to trade, we believe that exports to the EU will not be affected especially since the Euro is appreciating against the EGP.

After examining the a) aftershocks of the attacks of September 11th, 2001 and their affects on trade between the EU and Egypt and b) local sluggish growth rates which indicate lower productivity, and using them as a measure for a worse case scenario, we denote that the share of exports to the EU have actually increased from 28.4% in FY01 to 29.5% FY02 and to 33.8% in FY03. This can be attributed to the fact that EUR:EGP have strengthened by 16.9% from EUR1:EGP4.0360 to EUR1:EGP4.8310 and EUR1:EGP7.7451, respectively. The share of Egyptian exports to the European markets has been going up ever since to reach 37.6% of total exports in FY06 but it tripped to 33.8% in FY07 on the back of growth in trade with Arab and Asian economies. In tourism, a worse case scenario can be dated back to 2001 with a drop of 1.2 million tourists. This, however, was not only a repercussion to the slowdown of the EU growth rate but also a result of regional tension triggered by 9/11. European tourists amounted to 5.8 million of 8.9 million total tourists visiting Egypt in 2006 which affects 20.0%-25.0% of total tourism receipts.

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VIII. The Map to Investments

History repeats itself Today's world seems to be imitating the 1973 food crisis and oil and commodity price hikes, only now the situation may seem graver since the US is using corn to produce ethanol as a substitute for oil. US GDP growth rates are stumbling, and international food and oil prices are skyrocketing and feeding into the inflationary trend that has recently plagued the world. We thus expect investors to invest in commodities and oil. This makes us expect investments to head towards economies endowed with natural resources. Where should the money go? With the recent situation in the developed part of the world, we expect investments to cash heavily into (a) emerging markets that are rich in natural resources and are most focused on the primary sector for shortmedium terms gains; and (b) to a limited extent the US real estate market, for long term gains. Hence, in that respect we remain to expect investments to be highest in Asia Pacific with a shift from developed economies such as Canada and the US to emerging markets like Vietnam in East Asia, and Malaysia and Indonesia in Southeast Asia. This would also divert a huge sum of investments into emerging Europe, Africa/Middle East, and Latin America. When comparing emerging Europe and Latin America with Africa, the outlook for GDP growth rate (based on IMF statistics) in Bolivia, Chile, Poland, Ukraine, Mexico and Brazil is not as attractive as Egypt. Baring in mind that from the sample taken (see table 17) Egypt's macro economic data ranks far better than its African counterparts coupled with the fact that most of Egypt's exports are primary products which makes it sensible to expect investors favoring Egypt. Although this creates a huge potential for Egypt to attract FDI, Egypt has recently banned the exports of cement until October 2008 to stabilize local cement prices. Though the government is willing to revise the ban, the policy of market control in itself is discouraging. However, when weighing the risk of further market controls against potential profits, investors might still be interested in investing. We thus expect local and foreign investments in FY09 to be highest in petro-chemical industries (even with the government announcement in April 2008 that energy subsidies on chemical industries will be removed by the end of 2008, energy prices are still much lower than international prices). Natural gas will more than double reaching USD2.65 per MBTU, from a current USD1.25 per MBTU. All the while electricity prices will reach EGP0.178 kw per hour, 0.216 kw per hour and 0.295 kw per hour for the super high-voltage users, high voltage-users and medium-voltage users respectively, representing an increase of around 60%). Implemented investment in FY07 in the oil and agriculture sectors amounted to 20.0% of total implemented investments.

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Table 17: Egypt and Emerging Markets- Economic Indicators (FY08-FY13)

Egypt (%) Inflation GDP growth rate Current account to GDP Bolivia Inflation GDP growth rate Current account to GDP Brazil Inflation GDP growth rate Current account to GDP Chile Inflation GDP growth rate Current account to GDP Ghana Inflation GDP growth rate Current account to GDP Indonesia Inflation GDP growth rate Current account to GDP Mexico Inflation GDP growth rate Current account to GDP Poland Inflation GDP growth rate Current account to GDP Ukraine Inflation GDP growth rate Current account to GDP Vietnam Inflation GDP growth rate Current account to GDP Malaysia Inflation GDP growth rate Current account to GDP India Inflation GDP growth rate Current account to GDP KSA Inflation GDP growth rate Current account to GDP Kuwait Inflation GDP growth rate Current account to GDP Qatar Inflation GDP growth rate Current account to GDP UAE Inflation GDP growth rate Current account to GDP
Source: IMF, HC Brokerage

2008 8.8 6.9 0.8 15.1 4.7 12.3 4.7 4.7 -0.6 6.5 4.4 -0.5 8.9 6.8 -9.7 7.1 6.0 1.8 3.7 1.9 -0.9 4.1 4.9 -5.0 21.9 5.5 -7.5 16.0 7.3 -13.6 2.4 5.0 11.6 5.1 7.9 -3.0 4.7 4.7 31.2 6.4 6.0 45.2 11.9 14.1 44.6 6.3 9.0 27.4

2009 8.8 7.0 -0.5 14.3 5.0 8.5 4.3 3.6 -0.9 3.5 4.5 -1.3 7.8 7.4 -7.9 5.9 6.3 1.2 3.1 2.2 -1.6 3.8 4.4 -5.6 15.6 4.1 -9.7 10.0 7.3 -11.9 2.5 5.2 11.0 4.0 7.9 -3.3 5.6 5.6 23.9 5.5 6.2 42.3 9.9 13.1 40.7 6.3 5.3 26.0

2010 7.7 7.0 -1.2 14.0 5.1 6.9 4.5 4.4 -0.8 3.0 5.5 -2.1 6.7 7.4 -7.8 4.8 6.5 0.8 3.0 4.8 -1.9 3.4 4.8 -5.6 11.7 3.5 -10.4 7.8 7.5 -10.4 2.5 6.0 10.3 3.9 8.0 -3.2 5.7 5.7 19.0 4.9 6.2 44.6 7.9 14.4 45.0 6.7 4.6 26.9

2011 7.2 7.3 -1.6 13.3 6.0 4.9 4.5 4.0 -0.6 3.0 5.4 -2.7 5.4 7.4 -8.3 4.2 6.7 0.1 3.0 4.9 -2.0 2.8 4.9 -5.9 9.0 4.5 -10.5 7.9 6.5 -9.8 2.5 6.0 9.7 3.9 7.9 -3.0 5.6 5.6 14.0 4.4 6.2 42.6 5.9 10.0 44.5 7.0 4.0 26.1

2012 6.7 7.6 -2.0 13.6 5.4 5.3 4.5 4.0 -0.4 3.0 5.3 -3.1 4.4 7.2 -4.8 3.7 6.7 -0.4 3.0 4.3 -2.1 2.5 4.3 -6.0 8.3 5.3 -9.8 8.0 6.0 -9.9 2.5 6.0 9.1 3.9 7.9 -2.6 5.6 5.6 10.1 4.4 6.2 41.3 4.9 9.5 41.8 7.5 3.4 25.1

2013 6.7 7.7 -2.5 14.9 5.0 5.4 4.5 4.0 -0.3 3.0 5.0 -3.0 3.0 6.9 -9.7 3.2 6.7 -1.1 3.0 3.7 -2.1 2.5 3.7 -6.2 7.6 6.5 -9.2 8.0 6.0 -9.6 2.5 6.0 8.4 3.9 7.9 -2.1 5.7 5.7 6.9 4.4 6.0 40.2 4.4 7.9 39.1 7.6 3.0 23.5

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29

Table 18: Egypt's Main Exports by Commodity

Total Exports Petroleum products Crude petroleum Cast iron & semi-finished products & rolled iron Balance (USD billions) Iron& steel products Raw & manufactured tobacco Ready made clothes Miscellaneous edible preparations Miscellaneous articles of base metals Fertilizers Aluminum, unalloyed Organic & inorganic chemical products Cement
Source: CBE, HC Brokerage

10.6 2.9 1.7 0.3 0.4 0.02 0.2 0.2 0.2 0.2 0.1 0.1 0.08

Observing and Comparing Emerging Markets Closely Seeing how global inflation rates are on the rise, we anticipate that foreign investors may start shifting their funds toward investing in commodities, such as crops, oil, and natural gas, rather than in industrial sectors and services, due to the fact that commodity prices are on the rise, and are expected to continue rising over the short medium term. We selected certain emerging nations in Asia and the GCC region, which may have the potential to attract FDI inflows based on growth in their primary sectors. Starting with Egypt, agriculture contributes about 13.8% to total GDP, which may seem minor compared to industry accounting for 41.1% of total GDP, and services accounting for 45.1%. However, compared to other emerging markets, Egypts agriculture sector contribution to GDP is rather large. Egypt is a net exporter of both oil and natural gas, however, its proven oil and natural gas reserves are not very sizable compared to other countries. Malaysia's situation is similar to that of Egypt, as it is a net producer and exporter of oil and natural gas, with reserves similar to Egypts. However, agriculture contributes to 8.6% of national GDP, which is lower than Egypt, while industry and services account for 47.8% and 43.6%, respectively. Indonesia, on the other hand is a net importer of oil, and a net exporter of gas. Agriculture amounts to 12.4% of Indonesias GDP, while industry and services represent 47.7% and 39.9%, respectively. Poland might seem somehow less competitive in attracting funds that would be directed to commodity sectors. Its agriculture sector constitutes only 4.1% while the biggest percentage goes to services amounting to 64% and the remaining 31.9% falls in industry sector. It has the least amount of proven oil and natural gas reserves when compared to Egypt, Malaysia, Indonesia and, naturally the Gulf. Out of its total exports, 37.8% are machinery and transport equipment, 23.7% intermediate manufactured goods, 17.1% miscellaneous manufactured goods, and 7.6% food and live stock.
Table 19: Oil and Natural Gas Indicators in Selected Emerging Markets
Egypt Oil Oil production (million barrels/day) Oil consumption (million barrels/day) Oil imports (barrels/day) Oil exports (barrels/day) Proven oil reserves (billion barrels) Natural Gas Natural gas production (billion cu m) Natural gas consumption (billion cu m) Natural gas imports (billion cu m) Natural gas exports (billion cu m) Proven natural gas reserves (trillion cu m)
Source: CIA, HC Brokerage

Malaysi a 0.75 0.50 278,600 611,200 3.0 60.9 31.84 0.0 29.06 2.0

Indonesia

Kuwait

KSA

UAE

Qatar

Poland

0.69 0.64 69,860 152,600 3.7 40.8 32.8 0.0 8.0 1.6

1.07 1.10 500,000 470,000 4.3 74.0 37.5 0.0 29.6 2.6

2.67 0.33 2,611 104.0 11.8 11.8 0.0 0.0 1.5

11.00 2.00 0.0 266.8 68.3 68.3 0.0 0.0 6.6

2.54 0.37 137,200 97.8 45.1 39.6 1.3 6.8 5.8

1.11 0.95 0.0 960,600 15.2 43.9 17.9 0.0 26.0 25.8

0.03 0.46 0.48 0.05 0.09 5.8 15.6 10.0 0.04 0.15

2,200,000 8,900,000 2,540,000

Egypt - Economy

30

The GCC region may seem like a more attractive site when it comes to investing in oil, natural gas and metals, with Saudi Arabia heading the lot with the largest reserves, and Qatar having the largest natural gas reserves among the selected nations. The entire region is a net producer and exporter of oil and natural gas. With oil prices on the rise, foreign investors will find it profitable to invest in hydrocarbons, and so the GCC region will probably attract a huge amount of FDI inflows. When it comes to investing in agricultural products, especially with international food prices surging, Egypt, though limits foreign ownership of agricultural land, is a pretty attractive alternative for investors, which might encourage foreign partnership with local investors. The component of agriculture in GDP is larger in Egypt than that of the other selected emerging markets. Moreover, there still lies room for new comers where its agricultural sector has been growing at impressive rates of 8.6% in FY06, 15.9% in FY07, and 11.2% in 1H08, with the private sector contributing to 86.5% of agricultural production in FY07, signaling substantial potential in the sector. Also in January 2007, the Egyptian government announced investments worth EGP267.0 million in the cultivation of 1.0 million feddans of land in Toshka, Sinai, and other areas at an annual rate of 170,000 feddans over 6 years. Egypts sixth five year plan targets growth of 56.2% in agricultural production over the period FY08-FY12. During the period of 1981-2007, the Egyptian government was able to reclaim 2.4 million feddans of land at an annual rate of 96 feddans per year, and it aims to add another 1 million feddans by 2017 to the current 8.6 million feddans. On top of that, the Ministry of Agriculture announced in July 2007 that it will be offering a new package of services including extended lending through the Social Fund for Development, as part of its strategy to encourage agricultural investment. Indonesias agricultural sector has also been witnessing high growth rates of 10.6% in FY05 and 18.3% in FY06 (FY07 figures are not available), while investment in the agricultural sector grew from 3.8% of total government investments in 1H07 to 16.9% of total government investments in 1H08. Indonesia, however bans foreign ownership. On the other hand, when it comes to investing in oil and natural gas, we find that the Gulfs substantial reserves signal great potential for future growth, attracting a bulk of FDI inflows.
Table 20: Fitch and S&P sovereign ratings for Egypt and competitor countries
Fitch

Egypt BB+ Positive BB-

Country Ceiling Long term rating alert (outlook)

S&P

Malaysia A Positive A+

Indonesia Kuwait BB+ AA Stable Stable BB+ --

KSA AAPositive AA+

Rwanda BPositive --

Poland AAStable A+

India BBBStable BBB+

T&C Assessment

Source: Fitch and S&P, HC Brokerage Fitch Country Ceiling Ratings (information from http://www.fitchratings.com/corporate/fitchResources.cfm?detail=1) Country ceiling ratings are assigned internationally and reflect Fitch's judgment regarding the risk of capital and exchange controls being imposed by the sovereign authorities that would prevent or materially impede the private sector's ability to convert local currency into foreign currency and transfer to nonresident creditors - transfer and convertibility (T&C) risk. Given the close correlation between sovereign credit and T&C risks, where the country ceiling is above the sovereign rating, ratings at the country ceiling may exhibit a greater degree of volatility than would normally be associated with ratings at that level.

Grouping our hypothesis that huge sums of cash will be invested in the oil and commodity sector to benefit from rising prices, along with economic indicators and sovereign ratings comparisons, we realize that funds will first be poured into Malaysia, Indonesia and the Gulf before passing through Egypt. According to the UNCTAD Malaysia, Qatar, UAE and Poland have ''high FDI performance and potential.'' While Egypt is ranked in the ''low FDI potential but high FDI performance.''

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IX. The Egyptian Stock Market

Dont Stop Believing in Egypt An almost continuous rise was the story in Egypt's stock market in 2007. Several factors helped create a climate of increased trading, including: a reduction in tariffs, tax reforms, and a decrease in energy subsidies. This led to a flood of FDI, which totaled USD11.05 billion in FY07 compared to USD6.11 billion in FY06. Egypt saved the best for last however, as the end of the year saw a near continuous ascent. For the full year of 2007, Egypt saw a significant rise, increasing 41%.
Chart 13: HCMI Performance 2007
650 630 610 590 570 550 530 510 490 470 450 430 410 390 370 350 Apr-07 Jan-07 Jul-07 May-07 Aug-07 Mar-07 Jun-07 Sep-07 Feb-07 Oct-07

HCMI_Close

Source: HC Brokerage

The month of January onwards proved to be a little harsher on the Egyptian bourse, as turmoil in world markets made itself felt in Egypt. Although performing better than other regional bourses in this uncertain environment, inflation remains a constant fear.
Chart 14: HCMI Performance YTD
650 630 610 590 570 550 530 510 490 470 450 430 410 390 370 350

HCMI Performance

Jan-08

Nov-07

Source: HC Brokerage

Egypt - Economy

May-08

Mar-08

Feb-08

Apr-08

Dec-07

32

Looking Forward
Table 21: Egypt Stock Exchange in Comparison to MENA (2008e)
Mkt. Cap. (USD Bn) % of GDP Performance 2007 YTD Key 2008e Measures P/E ratio DY S. Arabia 211.0 204.0% 41.0% (13.7)% 17.0 2.8 UAE 225.0 108.0% 48.0% (0.55)% 13.4 1.4 Kuwait 473.0 125.0% 25.0% 17.0% 12.9 3.6 Qatar 119.0 172.0% 34.3% 21.3% 16.7 1.9 Egypt 120.8 89.0% 51.0% (1.27)% 13.09 6.5 Oman 26.0 61.0% 61.9% 2.5% 15.7 4.9 Bahrain 30.0 152.0% 24.2% 21.3% 10.4 5.5 Morocco 93.0 138.0% 25.2% 19.0% 19.0 1.6

Source: HC brokerage, NBK MENA in focus, SICO Capital, CASE monthly reports

Egypt's economic indicators look good in the short-to-medium term through 2008. Large influxes of FDI and expectations of economic growth of 7% if not more for FY07/08 underscore what should be a good year for the CASE. Although the HCMI P/E ratio is 15.26x for FY08e versus 18.20x in FY07, which seems still relatively expensive when compared to a MENA P/E ratio at 14.7x for FY08e, income growth for some blue chips is expected to be high which projects a positive outlook for Egypt's stock market.
Table 22: P/E and Net Income Growth for Selected Egyptian Companies
Company Trailing Construction & Housing Heliopolis Housing Nasr City Housing OCI SODIC Chemicals EFIC PACHIN Oil & Gas Sidi Krier AMOC Finance Egy. Kuwait Holding EFG-Hermes Holding Naeem Holding (USD) Textiles & Apparel Oriental Weavers Tourism & Leisure OHD 95.72x 75.03x 19.77x 15.73x 37.88x 13.86x 10.63x 7.46x 24.23x 15.05x 4.73x 8.35x 44.35x P/E Ratio T+1 61.19 71.05 27.63 55.13 15.31 12.84 9.14 7.69x 20.62x 13.75 12.47 8.17 30.98 T+2 36.27 64.60 33.79 38.72 13.92 11.76 8.79 6.67x 18.70x 11.67 11.11 7.39 22.75 Net Income Growth T+1 56.4% 5.6% -28.5% -71.5% 147.4% 7.9% 16.4% -3.0% 17.5% 9.5% -62.0 -64.9% 43.2% T+2 68.7% 10.0% -18.2% 42.4% 10.0% 9.2% 3.9% 15.2% 10.3% 17.8% 12.2% 12.1% 36.1%

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X. Appendix: Key Macroeconomic Indicators

FY03 Population & Employment Total Population Labor Force/ population (%) Employed Population Growth (%) Unemployment rate Domestic Prices (Period Average) CPI WPI Discount Rate T-bills Rate (91 days) 3-Months Deposits Overnight Interbank Rate Exchange Rate (EGP/USD) Monetary Sector Total Liquidity (EGP mn) Money Quasi Money Net Foreign Assets (%) Net Domestic Assets Credit to Private Sector Loans to Deposit Ratio Government Sector Non Government Sector Local Currency Foreign Currency Deposits Dollarization Investments & Financial Sector Domestic Investments as % of GDP FDI as % of GDP Capital Market Indicators (End of calendar year) CMA Index CMA Market Volatility Market Capitalization (% of GDP) Banking Sector Total Assets Total Loans & Discounts Capital Total Deposits Foreign Assets/ Foreign Liabilities Loans to Deposit Ratio Loans/ Assets Securities/Assets Deposits/Assets Equity/ Assets Provisions/ Assets 577,938 284,722 18,155 403,144 111.2 74.4 49.3 19.3 69.8 5.2 6.9 633,436 296,199 20,346 461,697 111.5 66.6 46.8 19.6 72.9 5.0 7.0 705,146 308,195 22,949 519,649 113.8 59.1 43.5 19.7 73.7 5.0 7.0 761,562 324,041 27,112 568,841 112.7 56.7 42.5 25.5 74.7 5.3 7.2 850,564 343,935 33,522 681,768 108.9 54.5 40.4 11.0 68.4 4.9 7.1 635 0.17 28.8 803 0.34 35.4 1221 0.49 43.4 2239 1.2 73.8 82.5 16.9 0.87 16.9 0.52 18.0 4.35 18.7 5.69 24.3 1.62 19.6 80.5 90.6 58.4 30.8 19.5 73.6 85.2 49.7 32.5 25.1 65.9 71.5 51.9 28.8 25.6 61.9 64.8 54.6 29.4 34.7 56.3 55.9 57.3 23.0 384,262 67,212 317,050 47.1 15.2 6.6 434,911 77,606 357,305 77.9 8.6 4.5 493,884 89,685 404,199 78.8 6.0 3.6 560,356 109,274 451,082 64.9 3.4 8.6 689,762 144,958 545,169 25.9 68.0 12.0 3.2 11.7 10.0 8.3 8.7 8.4 5.8 4.9 17.4 10.0 8.4 7.7 8.2 6.1 11.4 10.1 10.0 10.4 7.6 9.5 5.7 4.2 4.0 9.0 8.8 6.5 10.4 5.7 10.0 10.1 9.0 8.6 5.9 8.8 5.5 67.3 30.3 18.4 2.0 11.0 69.3 30.5 18.5 2.0 10.3 70.0 30.3 19.3 2.0 11.2 71.3 30.6 19.9 1.9 10.0 75.0 30.8 20.1 1.93 9.1 FY04 FY05 FY06 FY07

Egypt - Economy

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IX. Appendix: Main CBE Banking Regulations

CBE Regulation Old Regulation Banks comply with the Asset Classification & Solvency criteria on a unified basis in accordance with the Basel Committee recommendations. Banks are mandated to make provisions against non-performing loans (20%, 50% and 100% if over 90, 180 and 365 days, respectively). New Regulation Provisioning requirements account for varying degrees of risk within the standard loan category. General provisioning is required for standard loans, ranging from 0-5%, instead of a previously flat 1%. Standard (performing) loans are classified on a 1 to 7 credit risk rating. Specific provisioning is required for non-performing loans that fall under one of three categories: (i) Substandard (20% provisions required); (ii) Doubtful (50%); (iii) Loss (100%). Banks are required to maintain provisioning at a specified level depending on asset quality. If it is deemed that there is a decrease in provisions below the required level, the CBE may, within 15 days from receiving the auditors report, issue a decision to disapprove the distribution of profits to shareholders and other stakeholders with profit-sharing entitlements. CBE registered banks, with the exception of foreign bank branches, are obliged to maintain a ratio between their capital (both core and supplementary) and risk-weighted assets (including contingent liabilities) of a minimum 10%. Contingent liabilities and assets are calculated on a weighting system set by the CBE with risk weightings ranging from 0% to 100%. Core capital, which should constitute at least half of the capital adequacy standard, consists of: (i) paid-in capital; (ii) reserves; (iii) retained earnings. Supplementary capital consists of: (i) general risk provisions for loans and contingent liabilities; (ii) supplementary loans with maturities exceeding five years, provided that 20% of the value of these loans is amortized in each year of the last five years of their maturities; (iii) 45% of the increase in the fair value over book value of financial investments that are available for sale, held to maturity and/or used in subsidiaries & affiliates. Banks are not allowed to maintain currency positions (short/long) of more than 10% of equity for a single currency, and 20% of equity for all currencies. Credit exposure of a bank to a single client should not exceed 20% of the bank's book value. Credit exposure to a single client, including affiliates and subsidiaries, should not exceed 25% of the bank's book value. All banks operating in Egypt are required to maintain a minimum liquidity ratio of 20% and 25% for domestic and foreign currency deposits, respectively. Banks are required to maintain at the CBE a reserve ratio equal to 14% of its local-currency deposits (interest free), and 10% of foreign currency deposits (3-month LIBOR interest rate is earned on these balances).

Asset Classification & Provisioning Requirements

Capital Adequacy Banks are required to maintain Tier 1 capital at a minimum of 8% of total-risk weighted assets. Requirement

Foreign Exchange Banks are not allowed to maintain currency positions (short/long) of more than 10% of equity Exposure Legal Lending Limits

for a single currency, and 20% of equity for all currencies. Credit exposure of a bank to a single client should not exceed 30% of the bank's book value. A client is classified as the borrower and not a group of companies. All banks operating in Egypt are required to maintain a minimum liquidity ratio of 20% and 25% for domestic and foreign currency deposits, respectively. Banks are required to maintain at the CBE a reserve ratio equal to 15% of its local-currency deposits (interest free), and 10% of foreign currency deposits (3-month LIBOR interest rate is earned on these balances).

Liquidity Requirement Reserve Requirements

Source: CBE, HC Brokerage

Egypt - Economy

35

HC Brokerage Cairo, Egypt

HC Brokerage
Senior Management
Hussein El Sherbiny Chairman & Managing Director hsherbiny@hc-si.com hc-research@hc-si.com Co-Head of Reg. Research, VP Co-Head of Reg. Research, VP Financial Analyst Editor Financial Analyst Associate Senior Financial Analyst Associate Financial Analyst Financial Analyst Financial Analyst Vice President/Head of TA Desk Senior Technical Analyst nchoucri@hc-si.com whazem@hc-si.com aabdelnabi@hc-si.com jbertman@hc-si.com engy.eldishish@af-hc.com gbenyamin@hc-si.com halaa@hc-si.com rmansour@hc-si.com mkhamis@hc-si.com melhefnawy@hc-si.com sserrour@hc-si.com msaeed@hc-si.com Wael.atta@af-hc.com sales@hc-si.com Executive Director - Head of Sales Executive Director - Local Sales Vice President - GDR Desk V. President - Fixed Income Desk V. President - Local Sales V. President - Local & Gulf Sales V. President - Foreign Sales A. V. President - Local & Gulf A. V. President - Local & Gulf Associate - Local Sales Associate Analyst - Local Sales Analyst - Local Sales Analyst - Local Sales selmaraghy@hc-si.com msaad@hc-si.com aelhemely@hc-si.com anabil@hc-si.com ymansour@hc-si.com hwahid@hc-si.com mhelmy@hc-si.com ayounes@hc-si.com yseif@hc-si.com massran@hc-si.com amohamed@hc-si.com mfawzy@hc-si.com sshinnawi@hc-si.com nhany@hc-si.com Ext. 200/201 +202 3749 6008 Ext. 356 Ext. 353 Ext. 359 Ext. 367 +971 4 20 66 858 Ext. 355 Ext. 352 Ext. 368 Ext. 357 Ext. 363 Ext. 359 Ext. 175 +971 4 20 66 851 +202 3749 6008 Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. Ext. 210 213 222 218 217 206 207 208 319 215 205 223 205 219 HC Brokerage, among Egypts top ranking securities brokerages, offers services primarily for the Egyptian market to institutions and high net worth individuals HC Brokerages product offerings include equities listed on the Cairo and Alexandria Stock Exchange (CASE), global depositary receipts (GDRs) for Egyptian companies listed on the London Stock Exchange, domestic fixed income products, Eurobond issues, for both Egypt and other countries, intermediation services for transactions involving unlisted securities in the over-the-counter (OTC) market, and listing services for the CASE.

Research
Nemat Allah Choucri Walaa Hazem Abdelaziz Abdel Nabi Jonathan Bertman Engy El Dishish Germaine Benyamin Hatem Alaa Reem Mansour,MA ECID May Khamis Mennatallah El Hefnawy Sara Serour Mohamed El Saiid, MFTA Wael Atta

Sales
Shawkat El-Maraghy Mostafa Saad Amr El Hemely Ahmed Nabil Yasser Mansour Hossam Wahid Mohamed Helmy Abeer Younes Yasser Seif Moataz Assran Amr Mohamed Miral Fawzy Sherif El Shinnawy Nihal Hany

HC Securities & Investment Cairo, Egypt

HC Securities & Investment
Senior Management
Hussein Choucri Chairman and Managing Director hchoucri@hc-si.com Ext. 122 +202 37490380/4 Vice President welhatow@hc-si.com Ext. 112 +202 37490380/4 Managing Director Executive Director Vice President/Head of Fixed Executive Director Vice President Senior Analyst Financial Analyst nmoussa@hc-si.com akamel@hc-si.com wwagih@hc-si.com oradwan@hc-si.com hkortam@hc-si.com smaguid@hc-si.com selsokkary@hc-si.com Ext. 280 Ext. 270 Ext. 290/299 Ext. 260 Ext. 255 Ext. 275 Ext. 265 HC Securities & Investment, the holding company for HC group, owns HC Brokerage and AlFuttaim HC Securities. Investment banking is engaged in raising capital and providing advice in the areas of corporate finance, mergers and acquisitions, restructuring, divestitures and spin-offs, capital market services, project finance and real estate. Asset management offers portfolio and mutual fund services.

Investment Banking
Wael El-Hatow

Asset Management
Nabil Moussa Adel Kamel Wael Wagih Omar Radwan, CFA Hassem Kortam, MSc Seif Meguid Sara El Sokkary

Al-Futtaim HC Securities Dubai,

Al-Futtaim HC Securities
Senior Management
Hassan Aly Choucri General Manager hassan.choucri@af-hc.com

+971 4 20 66 888

+971 4 20 66 855

Al-Futtaim HC Securities is a full-service securities brokerage offering trading solutions for the UAE markets.

Sales
Mohamed Hegazy Sherif Abdelkhalek Anne Marie Browne Oubada Jawad Fadi Mansour Mo'taz Irshaid Mohamed Abdou Head of Sales Local Institutions Sales Manager Foreign Institutional Sales VIP Sales Manager Sales Trader Sales Trader Sales Trader mohamed.hegazy@af-hc.com sherif.khalek@af-hc.com annemarie.browne@af-hc.com Obada.jawad@af-hc.com fadi.mansour@af-hc.com moataz.irshaid@af-hc.com mohamed.salem@af-hc.com +971 +971 +971 +971 +971 +971 +971 4 4 4 4 4 4 4 20 20 20 20 20 20 20 66 66 66 66 66 66 66 864 862 866 860 868 856 853