n 2005, the economy produced signs of life for a change, Niveen Wahish, Sherine Nasr and Sherine Abdel-Razek take a tour of an exciting fiscal year Egypt's economy was the best it has been in five years. The stabilisation of the exchange rate via a less stringent monetary policy, coupled with improved hard currency revenues and greater confidence in the economy, helped feed impressive growth of 5.3 per cent. Inflation dropped to 3.1 per cent, the lowest in almost 20 years. A serious liberalisation effort in the financial sector, and a faster, wider-based privatisation programme helped attract more foreign direct investments, and pushed portfolio investments to new all-time highs. Building upon the achievements of Prime Minister Ahmed Nazif's government since the last quarter of 2004, the economy in 2005 enjoyed a free market, reform-oriented atmosphere, featuring the beginnings of a more investor-friendly tax regime and the facilitation of investment procedures. Some sectors, mainly oil and gas, benefited the most from foreign investments and added value to exports. Egypt strengthened its presence as a natural gas exporter to Europe and the US, in addition to signing an agreement with Israel. One of Egypt's persistent problems, a burgeoning budget deficit, was not resolved. At 10 per cent of GDP, the budget deficit continued to drain a significant chunk of government revenues. Subsidies and state employees salaries and wages together cost the government around LE100 billion a year. The government's failure to address the problem was attributed to its reluctance to add to social unrest in a year featuring presidential and parliamentary elections, both of which were heated. UP MARKET: The stock market's performance mirrored all the positive developments in the local economy, and even outdid itself many times. The market's main index, CASE 30, which traces the movement of 30 of the most actively traded companies, witnessed consecutive leaps, hitting new records during the year to grow by more than 140 per cent, ranking second among the fastest growing markets worldwide. Just last week, US magazine Business Week selected it as one of the top 10 emerging markets in the world, having recorded a growth rate of 640 per cent in terms of US dollars during the past three years. During 2005, market capitalisation rose to 75 per cent of GDP, about three times its level three years ago. Compared to an average daily turnover of LE50 million during 2000-2003 when the economy was hit by recession, volume today has skyrocketed to more than LE300 million, even exceeding the LE1 billion a day mark twice in December following Telecom Egypt's IPO. The main market theme was a series of IPOs and new listings that started with Raya Holding, followed by the privatisation of a number of heavyweights, injecting new blood in the market. During the second half of the year, two companies from the petrochemical sector, Alexandria Mineral Oil Company (AMOC) and Sidi Krir Petrochemicals (SIDPEC), attracted much attention after paving the way for Egypt's largest ever IPO, that of communications giant Telecom Egypt. The IPOs attracted more than 200,000 new investors to the market, substantially enlarging the investment base. All three offers were heavily oversubscribed. The market's management also saw new but experienced faces like Maged Shawqi at the head of the Cairo and Alexandria Stock Exchanges, and Hani Sarieddin as chairman of CASE's supervisory body, the Capital Market Authority. The introduction of same-day trading, shortening the period needed to settle transactions, came just three months after their appointment. Margin trading was also given the go ahead after a number of local banks obtained licences to use the new technique. Short-selling activity will be given the green light in January 2006. TELECOM EGYPT RINGING: 2005 will go down in history as the year Telecom Egypt made the first divestiture of 20 per cent of its shares. Its stock was snatched off the market, to the extent that the demand for TE's shares was often beyond reason. People sold their gold, withdrew their savings and exchanged their hard currency savings to obtain the cash to pay for the much sought-after stock. This public offering was over 10.6 times oversubscribed, while institutional investors 60 times oversubscribed the company's private placement. The demand for TE stock illustrated that good investment opportunities were in demand. The publicity that accompanied TE's offering is also credited for increasing investor awareness. More than 200,000 individuals were newly registered to buy TE stocks. BANKING ON REFORM: This was an area where milestones were reached. The government moved steadily on plans to divest its ownership in joint venture banks. Its share in Misr International Bank was sold to National Société Général Bank (NSGB), and its shares in Egyptian American Bank and Commercial International Bank are being finalised. The decision to merge Banque du Caire and Banque Misr was a reminder of how serious the government is about reform. It is also on track to sell Bank of Alexandria by the first quarter of 2006. After having failed to meet the minimum capital required by the Central Bank of Egypt (CBE), a number of banks are in the process of merging. This will reduce the number of banks from 52 to around 20. Experts believe the consolidation of the banking sector will create bigger, stronger entities capable of meeting the country's growing funding requirements. It will enable banks to benefit from economies of scale and upgrade their technological infrastructure, a process that has been too expensive to undertake until now. The showdown between government shares in joint venture banks and the buyout of small banks is an indication of the voracious appetite investors have for the Egyptian banking sector. As the government continues selling its stakes in joint venture banks and the Bank of Alexandria, the influence of public sector banks on the system will diminish. Currently, public sector banks dominate the Egyptian banking sector, accounting for over 55 per cent of banking assets. This will provide a healthier environment where competition within the private sector will lead to a stronger banking sector. Equally important are efforts to establish a strong monetary policy and control inflation. The Monetary Policy Committee (MPC) of the CBE, formed this year, is to make monetary policy decisions that are implemented through a set of policy instruments and procedures. One of the committee's first decisions was to put in place a new policy instrument dubbed the "corridor", which sets a ceiling for overnight lending rates and overnight deposit rates. The committee decides these ceilings when it meets on the first Thursday of each month. According to the CBE, this mechanism enables the bank to meet its inflation objectives by "steering short- term interest rates while keeping in mind the development in credit and money supply as well as a host of other factors which may influence the underlying rate of inflation." Essentially, this system helps control inflation by withdrawing excess liquidity from the market. Such policies are used, according to the CBE, as a transitional phase until a formal inflation-targeting framework can be put in place to anchor monetary policy. EVERYTHING MUST GO: Not since the beginning of the privatisation programme in 1992 has there been such momentum. In 2005 hardly a week went by without at least one company being offered or prepared for offering. Mahmoud Mohieddin, minister of investment, seems to be taking the "everything must go" approach. New this year was the kind of companies divested. The "strategic industry" status, previously designated to certain industrial sectors deemed sensitive such as public banks, insurance companies, flourmills and tobacco, no longer applies. In 18 months, Egypt's privatisation proceeds reached LE16.5 billion. The sale receipts of state-owned assets amounted to LE10.9 billion over six months from July to December 2005, out of which LE5.1 billion represented proceeds from the selling of the 20 per cent stake in Telecom Egypt. The greatest hits also included the partial privatisation of two oil companies, Alexandria Mineral Oils (Amoc) and Sidi Krir Petrochemicals (Sidpec). The boldest move of the year was the announcement of the imminent privatisation of the state-owned Bank of Alexandria during the first quarter of 2006. The insurance sector will also soon be put on the block as well. The Ministry of Investment has selected an alliance comprising BNP Paribas and Commercial International Bank (CIB) as financial consultants to restructure state-owned insurers as a prerequisite for privatisation. Renaming the privatisation process to public asset management was accompanied by a change in the way the government dealt with loss- making companies during the year. The ministry injected LE105 million in investments in the Holding Company for Spinning and Weaving to technically restructure its affiliates and upgrade the machinery in order to be prepared for the fierce competition its products will face in the American market now that the Qualified Industrial Zones (QIZ) agreement has been signed. Furthermore, in an unprecedented move, Mohieddin decided to return four public works companies that had been privatised into government ownership. The companies were privatised in the mid-1990s by divesting them to the Employee Shareholder Association (ESA). They have since been accruing losses. HEALTHY BALANCE OF PAYMENTS: Egypt's economic transactions with the rest of the world, as reflected by its balance of payments, were never better. Central Bank of Egypt (CBE) figures show that the balance of payments surplus for the first quarter FY05/6 ending September witnessed a surplus of $1.81 billion versus a deficit of about $100 million in a comparable period last year. This follows news that the 2004/2005 fiscal year ending in June 2005 witnessed a surplus of $4.5 billion compared to $200 million of deficit for the whole fiscal year 2003/2004. During the three-month period ending September 2005, the difference between imports and exports increased by 41 per cent over the previous year, an expected deficit due to the ballooning bill of imports needed to feed economic growth. This was offset by a surplus of $2.2 billion in the services account due to a 12.5 per cent increase in Suez Canal revenues. 2005 witnessed an improvement in Suez Canal revenues due to an increase in the number of ships passing through, a revival in tourism income, and a noticeable increase in workers' remittances from Gulf countries mainly due to the increase in oil prices. Increasing foreign interest in various sectors of the economy, atop which is oil and gas and the privatisation of companies in promising sectors, helped in attracting direct foreign investments. Names like Société Générale, Ciments Français and Bloom Bank have been strengthening their presence in the local market by acquiring majority shareholdings in local based companies. This helped in pushing Foreign Direct Investments in the fiscal year 2004/2005 to $3.8 billion, compared to only LE407.2 million the previous year. A parallel revival in stock market investments, together with the stabilisation of the exchange rate, helped in feeding net foreign reserves until they once again hovered at $21 billion, the highest level since 1997. QIZ TO THE TEST: In its first year of implementation, the Qualified Industrial Zones (QIZ) protocol has not yet delivered on promises to boost Foreign Direct Investments to the tune of some $5 billion, as well as add 250,000 jobs in the textiles and clothing industry. Experts attribute this to the fact that actual implementation of the agreement began in February. Nonetheless, they believe that this has helped Egyptian textile and garment exporters maintain their niche in the US market against Chinese exports, following the lifting of all quota restrictions on textile and garment exports earlier this year. Although QIZ exports have not reached great heights, they grew from $61 million during the first quarter of the year, to $116 million in the second quarter. The agreement is further expected to takeoff after new areas were added. When the agreement was first signed in December 2004, only three areas were granted QIZ status: Greater Cairo, Greater Alexandria and the Suez Canal. These were expanded in October to include the Central Delta QIZ. Two existing zones, Greater Cairo and the Suez Canal, were expanded. These include important centres of textile and garment production such as Al-Mehalla and Ismailia. LIFTING THE BURDEN: Earlier this year, after months of debate, the People's Assembly ratified the income tax law. Major aspects of the new law include the 50 per cent tax reduction on almost every form of economic activity, and the raising of a tax exemption ceiling for low- income categories including civil workers. A 10 per cent income tax, rather than the previously imposed 20 per cent, is now the tax rate for civil workers with an annual income of up to LE20,000. A 15 to 20 per cent tax, instead of the exaggerated 40 per cent, is now imposed on categories with annual income ranging from LE20,000 to LE40,000. Moreover, individuals with an annual income of LE5,000 now have LE2,000 exempt of taxes. Another major advantage of the new law is unified tax treatment of joint venture and private sector companies. Thus, a 20 per cent tax on profit is now imposed instead of the 10 and 32 per cent taxes charged in the past. Moreover, all tax holidays have been removed, and the 10- year tax exemption enjoyed by private businesses established in the new industrial zones has been annulled. Joint venture companies listed on the stock market are no longer tax exempted, as was the case in the old law. The tax reductions stipulated by the new law are expected to cost the treasury some LE3.6 billion a year, but Finance Minister Youssef Boutros- Ghali believes these will be regained in three years thanks to an expected economic revival due to the major tax reductions in the present law. DRIVEN BY OIL AND GAS: The impact of spiralling international oil prices to more than $65 a barrel was a mixed blessing. The surge basically meant more hard currency gains for Egypt, whose net production of crude oil has reached 600,000bpd (barrel per day). But in the meantime, the cost for subsidising imported oil products such as gas oil and jet fuel constituted a heavier burden on the government. With an obvious decline in local oil reserves, the government is also giving natural gas more attention as the potential energy source of the future. The latest statistics show an estimated 1.9 trillion cubic metres of proven natural gas reserves. A World Energy Outlook Report released this month predicted a 2.6 per cent annual primary energy demand growth in Egypt, which will reach the equivalent of 109 million tonnes of oil by 2030. The report expects that gas exports will also grow over the first quarter of the century to reach 28 billion cubic metres (bcm), which has actually already occurred. Egypt made its first deliveries of natural gas to the US and Spain this year. 2005 also saw the signing of a $2.5 billion agreement under which Egypt will be supplying Israel with 1.7 billion cubic metres of natural gas for 15 years. Progress continued on the Arab gas pipeline. Work is under way to extend the pipeline from Aqaba in Jordan to the Syrian port of Banias and the Lebanese refinery of Zahrani. It is the second phase of a project initiated in 2001 sending Egyptian liquefied gas to Jordan, Syria and Lebanon. Later, the pipeline will be extended to Turkey, from where it will link with the European natural gas network. The first phase of the pipeline, which runs from Egypt to Aqaba, is already operative. Egypt's petrochemical industry also continued to thrive, backed by abundant natural gas resources and the privatisation of two main players: Sidpec and Amoc. The move may prove a good time to open the gates for more direct foreign investment in this vital sector. Egypt's investments in the petrochemical sector are estimated at $10 billion, which generate around $7 billion in annual revenues.
