Aspiration of recovery

Q1 2011

ASPIRATIONS OF

RECOVERY…A

QUESTION OF TIMING Egypt Q1 2011

Ahmed Said

ASPIRATIONS OF RECOVERY…A QUESTION OF TIMING Q1 2011

A MACRO VIEW

Recent updates:

Real GDP growth reached 5.5% in July-December 2010/2011, compared to 4.8%

in the first half of the previous fiscal year.

Budget deficit to GDP decreased by 0.2% during July-February 2010/2011 to 6% (EGP 82.3 billion), compared to 6.2% (EGP 74.7 billion) during July - February 2009/2010.

Domestic budget sector debt increased slightly to 64.5% of GDP as of end

December 2010 to record some EGP 889.2 billion.

CPI annual Urban Inflation almost stabilized during February 2011 at 10.7% compared to 10.8% during last month. Meanwhile annual core inflation increased during March 2011 to 9.7% compared to 9.5 % during February 2011.

Overnight deposit and lending rates remained unchanged for the twelfth time in

a row since September 2009- during the Monetary Policy Committee meeting on March 10th, 2011 and stand at 8.25% and 9.75 % respectively.

Balance of Payment surplus fell by 77% to US$ 0.6 billion in the first half of FY

2010/2011 compared to a higher surplus of US$ 2.7 billion during the same period last year.

The Central Bank of Egypt (CBE) announced that the stock of net international reserves plunged to USD 30.10 billion as of March 31st 2011, from USD 36 billion as of end of December 2010.


GDP

While it is early to assess the exact impact that the recent events would have on

economic growth, the pace of growth achieved in the first half of FY 2010/2011 will

likely decelerate, on the backdrop of slower consumption and investment spending in

addition to the temporary disruption in production activity during the third quarter.

This comes after the Egyptian economy had shown growth prospects on the back of the

notable improvement in economic activities during the first half of FY 2010/2011,

achieving a real growth rate of 5.5 %. GDP growth for July-December 2010/2011

continued to improve and increased to 5.5 %, compared to 4.8 % realized growth in the

first half of last year. Growth was driven mainly by strong total consumption, followed

by investment and a small contribution of exports. It is noteworthy that GDP figure in

constant prices for July-December 2010/2011 stands at EGP 458.6 billion (EGP 705.4

billion in current prices), in comparison to EGP 434.5 billion (EGP 604.5 billion in

current prices) in the first half of FY 2009/2010.

The buoyancy of private and public consumption growth- which comprise 85 % of total GDP figure and contribute 3.7 % to total growth- drove real GDP growth during July-December 2010/2011. Private and public consumption grew by 4.4 % and 3.6 % respectively, and total investment spending increased by 7.1 % (contributed 1.2 % to total growth). Additionally, both exports and imports of goods and services increased by 12.5 % and 9.2 %, respectively (net exports contributed 0.6 % to total growth). From a sectoral perspective growth was led by manufacturing (6.1 % growth; 15.6 % of GDP); wholesale and retail trade (6.3 % growth, 10.6 % of GDP); construction and building (12.6 % growth, 5.3 % of GDP); tourism (13.9 % growth; 4.7 % of GDP); transport and warehousing (6.3 % growth, 4.4 % of GDP), in addition to telecommunications (11 % growth, 4.1 % of GDP). Moreover, output from Suez Canal has increased by 11.1 % during July-December 2010/2011, a great improvement when compared to the decline of 14.2 % during the first half of the preceding fiscal year.

Inflation

Inflation in 2010 averaged an estimated 11.1%. However, rising food and fuel prices created inflationary pressures towards the end of 2010, and these factors will be exacerbated by the expected depreciation of the Egyptian pound as a result of the political ambiguity. The Economist Intelligence Unit (EIU) expects inflation to peak at 15.2% in 2011 before slowing gradually, averaging 10.1% over the following five years, as the exchange rate stabilizes and global commodities prices ease. Annual CPI inflation in urban areas slightly decreased to 10.7% during February 2011 compared to 10.8% during January, and compared to 12.6 % during February 2010. There was a limited decrease in the general figure for annual inflation despite the halt in internal trade and increase in food prices in the first week of February as a result of the political uprisings that caused production rates to decrease and created difficulties in transporting goods. The limited decrease in the general annual inflation figure comes as prices started to decrease during the latter weeks of February.


Exchange rates

The most recent announcement by the Central Bank of Egypt concerning the steep depletion of international reserves during Q3 2010/2011 will cause the depreciation of the Egyptian Pound versus the US$. On a more positive note the USD 6 billion drop will give a push for exporters specifically those operating in the European market.

The Egyptian Pound’s value is driven in large part by capital flows and developments with the US dollar. In recent years high interest rates in the Egyptian economy attracted substantial carry-trade inflows. The trend has now reversed and the Egyptian pound in early 2011 slipped below its five-year low against the dollar of EGP 5.740:US$ 1 to reach EGP 5.882:US$ during February 2011, responding first to political events in Tunisia and then to the domestic political crisis. In light of this the Economist Intelligence Unit (EIU) forecasts the pound to weaken further, averaging EGP 6.10 against the US$ in 2011.

The pound is expected to strengthen as the political situation stabilizes, but will remain weaker than in recent years, as the euro is forecast to fall gradually against the dollar. Capital inflows will decline compared with recent years as investor confidence is affected by political instability, exerting downward pressure on the value of the pound. The Central Bank of Egypt may resort to selling foreign reserves to prop up the currency. It is also likely to impose controls on access to foreign exchange, for example banning sales of hard currency for purposes other than financing imports.


THE GLOBAL SETTING In the beginning of 2011, the World Bank argued that the global economy might be passing through the same situations and constraints it faced during 2008 (the global financial crisis). Overall growth was foreseen to decline and prices of basic commodities to rise, indicating major slowdown in 2011 after a recession in 2009 and a recovery during 2010. The World Bank's last report about the global economic prospects mentioned that, the global economy will grow by a 3.3% in 2011 compared with a 3.9% in 2010. Developing countries' economic growth is expected to reach 6%, down from 7% in 2010, whereas developed countries will reach an economic growth of 2.4% in 2011, which is less than that achieved in 2010 of 2.8%. In 2012, the global economy is expected to reach a growth of 3.6%, developing countries are likely to reach 6.1% growth rate and developed countries are to reach a 2.7%. These figures are insufficient for economies worldwide to bring an end to unemployment and recession.

DROP IN MENA CAPITAL MARKETS (THE

TUNISIAN SPARK). On the 17th of December 2010, Tunisians began a revolution which led to the ousting of

the President Zin El Abedeen Ben Aly on the 14th of January 2011. Immediately after the

resignation of the Tunisian President, the top 4 Arab stock exchange markets -Egypt,

Saudi Arabia, Dubai and Qatar- lost a sum of US$ 8.41 billion in just 7 days. Hence, total

market capitalization in the 4 markets declined reaching US$ 621.1 billion (down from

US$ 629.68 billion), as a result of what happened in Tunisia. The market capitalization

for 16 Arab stock exchanges, valued at US $ 1002 billion on January 25, declined

reaching US$ 862 billion by March 4, losing US$ 140 billion (i.e. 22.24% decline).

Egypt's stock exchange market lost the most (- 6.9 %), whereby market capitalization

decreased reaching EGP 469.743 billion (US$ 80.654 billion) on the 19th of January,

compared to EGP 504.486 billion (US$ 86.6 billion) on the 13th of January.

Qatar’s loss of market capitalization came in second at a loss of 1.28% on the 19th of

January at QR 461.57 billion (US$ 126.7 billion) compared to QR 467.5 billion (US$

128.38 billion) on the 13th of January.

Dubai came in the third place, market capitalization lost 0.25% from AED 198.4 billion

(US$ 54.006 billion) to AED 197.908 billion (US$ 53.87 billion).

Saudi Arabia, total value of the stocks was SR 1352 billion (US$ 360.7 billion) which

declined –in a week- reaching SR 1349 billion (US$ 360.04 billion).


THE EGYPTIAN UPRISING...25TH OF

JANUARY The Day of Revolt, thousands of Egyptian protests raged throughout Egypt, gathering in

Cairo and other cities. Objecting on political and legal issues including police brutality,

state of emergency laws, and lack of free elections and freedom of speech.

Friday of Anger (28th of January)

Millions of Egyptians demonstrated in Cairo, Alexandria, Suez and other cities after the

Friday Prayer. Prisons and police stations were burnt and exploded, prisoners escaped

and the police forces all over Egypt withdrew completely. Shopping malls, street facing

stores, pharmacies and even hospitals were looted. Banks remained closed as a means

for securing these financial institutions, yet also acting as a major constraint to the

decision of re-opening the stock market. The Egyptian Stock Exchange, factories, offices,

shops, malls and hyper markets; practically all business concerns, remained closed for

10 days.

The Aftermath

When businesses and banks opened, the US$ exchange rate reached EGP 5.95. The

Central Bank intervened by supplying huge amount of US$ for banks, resulting in a drop

in the US$/ EGP by 10 piasters (EGP 5.85 rather than EGP 5.95). Not unexpectedly, it

later increased again reaching EGP 5.96 and the Euro reached EGP 8.4.

Despite opening banks to receiving clients, transfer restrictions were made. The opening

of the stock exchange took longer for concerns of revising authenticity of client accounts

for AML measures, and over margin trading in light of a significant drop in the markets.

The review of client account documents and setting in place a system that supported the

brokers and clients to avoid a dwindling of the markets, allowed the Egyptian Stock

Exchange to reopen on the 23rd of March. These measures were successful in

preventing a major drop in the market, and the first day of trading marked a less than

anticipated 8.9% drop.

The Business Scene

Listed companies lost millions and millions e.g. Asec Company for Mining, a huge drop in

the company's turnover as a consequence of the cessation of business with those who

supply and extract raw materials. Asec's carbonate factory in ElMenia shut its doors

given absence of heavy transport for raw materials or final product through this period.

In addition, a factory in Sadat city had to close. Hence, Asec's revenues dropped by EGP

12 million (in 16 days).

Egypt Air saw an 80% reduction in revenues, a few weeks after the 28th of January, and

occupancy rate decreased reaching 35% and losses of EGP 700 million.


65 Jewelry shops have been robbed due to the lack of police forces in the streets. EGP 1

billion worth of gold was stolen by thieves and thugs.

Factories in Port Said (e.g. Kapci Coatings, Egyptian Korean textile factory, El Safa & El

Marwa for cosmetics, Akai clothes factory, Pipe factories and others) lost EGP 50 million

collectively.

Car factories' sales revenues in February declined reaching EGP 1.7 billion, before the

turmoil each factory sold an average of 20,000 cars a month. Apic Vans, last February

sold 3130 vans vs. 10957 vans last January, a 71.4% drop in sales. Similarly, a 59.6%

drop in trucks sales occurred, from 2951 trucks last January to 1193 in February.

Mercedes Benz Egypt had absolutely no sales during February. Hyundai Egypt, GB Auto,

(operating a main factory in Abo Rawash) is now producing 50% of what it normally

produces. The factory's regular output was 30,000 cars a year, currently operating 1

shift on a daily output of 50 cars rather than 100.

Strikes in factories and companies were everywhere, demanding an increase in

employee salaries. These strikes caused production volumes to decrease by more than

50% (and others were 100%) of the normal rate, resulting in losses of around EGP 2.3

billion.

Turkish factories were also harmed, reducing production by 30%. Given the absence of

security and strikes/protests, Turkish companies called back all their employees who

worked in Egypt, however, pointing out that they are willing to resume their businesses

after they witness both economic and political stability in the country. It is expected that

trading volume between Egypt and Turkey will decrease through mid 2011 (which was

US$ 3.2 billion in 2010).

Egypt has lost an estimate of US$310 million a day due to anti-government

demonstrations that began on 25 January, mentioned Dr. Samir Radwan- Minister of

Finance, meaning that total losses from January 25 and 14th of February (3 days after

the resignation of President Mubarak) amounted to US$6.2 billion. He also warned that

if demonstrations and strikes continue the budget deficit is expected to reach 10%.


REAL ESTATE Prior to recent events, Egypt was increasingly emerging onto the radar screen of

regional and international real estate players as the government has progressively

opened the property sector to foreign investment over the past five years. Egypt was

one of the top destinations for investing in real estate in the MENA region, just behind

Saudi Arabia; it comes as number two after Saudi Arabia when it comes to investors’

confidence.

As a result of recent events, a state of ambiguity surrounded those who had anything

related with the real estate sector, as the real estate sector engages a major role in the

Egyptian socioeconomic development. Any upswing or a downswing in the economy

reflects on the sector. Developers stopped operating and cancelling any expansion plans

as huge amount of foreign capital invested in the sector fled (Arabs and foreigners) on

the back of the dismal events.

Developers put their businesses on hold. It was very hard to get the needed construction

materials, facing delivery and logistics problems (as some got robbed); meanwhile the

banks were closed to transactions (large checks and transfers).

Real estate companies’ revenues saw an 80% drop based on cessation of sales activity.

Experts are expecting prices to drop as there is no demand on any type of real estate

property (people are keeping money to themselves to get their necessities). Demand

and supply trends –in the real estate sector- before the revolution, were stable and any

slight change in prices were normal. But now due to the fog surrounding the sector the

image is unclear, and might lead prices to decrease further.

Masr EL Gedeeda for Real Estate, as a consequence of the turbulence in Egypt, witnessed

a rise in expenses to exceed its revenues by EGP 5.5 million and EGP 4.2 million worth of

investments were stalled.

EGYCO has EGP 4 billion worth of projects that are currently paused. El ABD lost EGP 10

million 2 weeks after January 25, 1200 residential units were abducted and they down

sized their business by EGP 200 million (from EGP 700 million to EGP 500 million).

Street real estate brokers are complaining "We're losing", they lost their main source of

income where they got it from Arab tourists (especially UAE, Kuwait and Bahrain)

renting and selling apartment are falling tremendously as a huge number of those

tourists have left the country because of the instability.

Apartments in busy areas such as Mohandessin and Maadi are rented at a third of their

price. Flats in Ahmed Oraby Street were rented to Arab and foreign tourists from EGP

15,000 - EGP 30,000 now if there is any client the same apartment is rented from EGP

5,000- EGP 10,000. In Gamaet El Dewal Street apartments were rented at EGP 500 per

day before the protests now it’s rented for EGP 150. In Maadi a proper number of

foreigners who lived there have left the country also because of the latest events and the

lack of security.


Sector Prospects

From my point of view the real-estate sector would witness a recovery, perhaps slower

than other sectors, based on the following:

1. Real estate was and is not impacted by mortgage finance securitization in Egypt.

2. It is a sector driven by socio-economic development, and hence, once stability

sets in, it will recover.

3. Demand is not largely driven by foreign residents, as the case with the UAE.

Local demand is currently directed to basic necessities (food & medication) on

the backdrop of fears of job-insecurity/income instability. The stability of the

political and economic scene would revive the sector immediately.


TOURISM Tourism in Egypt is one of the most important sectors in the Egyptian economy, which

contributes 11% of the GDP, employing about 12% of Egypt's workforce (2 million).

Egyptian protests caused a severe pain for the touristic sector; in the first 2 weeks after

the uprising the tourism sector lost US$ 600 million. In 2010, revenues reached US$ 12

billion (in FY 2008 were US$ 11 billion, FY 2009 were US$ 10 billion). Experts argued

that these losses will continue if there is lack of security, meanwhile demonstrations and

protests remain.

After the uprising tourism lost a total of US$ 15 billion (US$ 1.25 billion per month and

US$ 42 million a day), direct losses were US$ 2.6 billion and indirect were US$ 12.4

billion (as there are 70 different industries and services that are positively and strongly

related to such a sector), having over 1 million tourists leaving the country because of

lack of security. On Twitter an English woman wrote: "We cancelled our trip there. We

saw on TV army tanks, people are killing each other and a lot of robbery is going on.

Thanks, but no thanks. I hear Costa Rica is nice this time of year. It's a big planet with

many other wonderful places to see".

Understandably, countries all over the world banned their citizens from visiting Egypt

until there is political stability and a secure environment. Russian tourism authorities

for instance, on the 1st of February banned tourist flights to Egypt after viewing political

tensions, street violence and turbulence in Egypt.

0

2

4

6

8

10

12

14

FY 08 FY 09 FY 10 FY 11

Revenues (US$ billion)

Revenues (US$ billion)


Hotels and resorts were at the bottom, some of them having 0% as their occupancy rate.

Abdel Aziz, HOTAC (Holding Company for Tourism, Hotels and Cinemas) chairman,

mentioned that there were 90% drop in the company's revenues (2 weeks after the

protests). Revenues of tourism companies (hotels, resorts and car rentals) dropped

dramatically resulting from having low occupancy rates in hotels.

The table below shows some hotels comparing and their revenues and their occupancy

rate in 13th of February 2010 and 2011.

Hotel Revenues (EGP) Occupancy rate (%)

2010 2011 2010 2011

Marriott 1,196,231 656,652 96.1 33

Mina House Oberoi

567,069 1,004 92.86 0.24

Helnan Palestine

122,021 4,285 75.23 4.13

Winter Palace

140,970 3,470 71 0.03

Movenpick Aswan

131,032 8,185 77.4 5.7

Sofitel 59,575 7,334 97 7

Swiss Inn Arish

18,725 11,816 37.44 31.1

Meridien Dahab

62,492 15,011 46.2 8.2

Shepherd 169,400 21,700 88 7

Cosmopolitan 16,576 3,427 61.45 8.75

Total 2,484,091 732,884 74.26 10.52

A bright side:

In mid March things started to settle a little, Egypt at that time witnessed a gradual, yet

slight stability. Many European countries cancelled the ban of travelling to Egypt. People

from different countries started travelling to Sharm el Sheikh and Hurghada causing

hotel occupancy rates to increase.

Occupancy rate increased in Sharm el Sheikh reaching 15%, Ahmed Balbaa expected

rates to reach 30% by the end of March, and it will continue to increase as in mid March

it reached more than 20%, Dahab reached 32%, Noeibea 24%, Cairo 22.3%, Alexandria

29%, Luxor 21.7% and Aswan 16.8%. Experts expect that it will increase further when

tourists can feel assured of their safety.


Luxor Airport welcomed 1600 French and English tourists on the 13th and 16th of

March. And on Wednesday March 23 the PEACE BOAT arrived in Port Said having 1000

Japanese on board, who came to congratulate the Egyptians on their democratic

revolution and help promoting tourism in Egypt.

Russia is expected to cancel its ban in the beginning of April after officials in the Russian

embassy here in Egypt held a tour in Sharm el Sheikh and Hurghada, making sure that it

is safe for Russians to come back and enjoy the sunny Egypt. Russian tourists are very

important to Egypt, constituting the largest number of visitors. As in 2010, 2.8 million

Russian tourists visited Egypt, up from2 million in 2009, and 1.8 million in 2008,

representing an annual increase of 1 million visitors.

Russians helped and began a very funny demonstration against the Russian tourism

authorities holding signs written on them:

"I need to dive"

"The revolution is over its time to take a break"

"Save our kids' vacations"

"For God's sake, it's cold diving under ice"

How to overcome such a mess? 2 words, INCREASE SECURITY

Tourism Minister Monir Fakhry, said that there are some activities in order to promote

tourism in Egypt like, having world class performers in concerts in the Cairo stadium,

pyramids and the Egyptian opera.

Ahmed Balbaa, head of the Hotels Association of South Sinai and the chairman of the

touristic committee in the business men association, said there are two ways in order to

overcome this problem. First, to have a proper marketing scheme that will grab tourists

to come to their second home Egypt, e.g. those who have kids up to 12 years have will

have full accommodation and travelling tickets to Egypt for free. Second a strategic plan

which is divided into short term and long term plan. Thanking all countries who

cancelled any restrictions or bans on their citizens to visit Egypt (hoping Russia would

do the same), as a short term plan. And as for the long term plan, having a meeting (each

quarter) with the Tourism supreme council discussing the tourism status in Egypt and if

there is any inefficiency it is to be solved.

Conclusion, what is of utmost importance is to increase security levels all over Egypt

providing a safe and comfortable environment for tourists to enjoy.


OIL AND GAS Oil prices reached the ceiling, after what happened and the unrest that was progressing

in the Arab countries (especially Egypt and Libya) and the earthquake that happened in

Japan. Brent crude oil reached US$ 115 a barrel which is the highest price after it

reached US$ 147/barrel in 2008 (during the global financial crisis).

Günther Oettinger Member of the European Commission responsible for energy, argued

that the chaos that is occurring now in the MENA region will cause further increase in oil

process insanely, that the world hasn’t seen before. Nomura Holdings (Japan) expected

that if the unrest keeps going on in the MENA region (especially in Libya, being the 2nd

top oil exporter in the world, having 44 billion oil barrels as reserves) Brent crude oil is

expected to increase reaching US$ 220/barrel and the same was expected by IATA

airlines’ CEO Giovanni Bisignani.

In Egypt, after the protests by a couple of weeks, most exploration activities in

petroleum companies have stopped. This led to a huge decrease in the number of

workers in that field (increase in unemployment), delays in delivering some

components that are needed in the mining process, therefore revenues and investments

of these companies were greatly affected.

The effect of the great increase in price

Having an increase in oil prices will act as a challenge and a constraint for airlines

companies. Gas (used for fuelling air jets, which is 1/3 of any airline’s expenses)

increased by 5.2% reaching EUR 989 million. This will transfer the burden on the final

consumer (when buying an airline ticket, which will cost more), which will then affect

tourism and at the same time the real estate sector.

Increase in oil prices will increase the price of plastic products by at least 10%, since the

plastics industry depends on petroleum derivatives (polypropylene, polyethylene and

PVT). Any price increase in the ingredients used to produce plastic will increase its

production cost which will therefore increase the price of the final product.

Conclusion, if the unrest continues in the MENA region, the world is expected to

enter a new era of a huge financial crisis, which will remain for long. If oil prices increase

further, global inflationary pressure would set in and would reflect negatively on the

recovery of the global economy.

Although there is a sentiments to remove oil subsidies, the impact, if not done stage wise

and with caution, would affect all sectors and the population as a whole with the

transportation costs impacting not only the affluent.

In my opinion the removal of food subsidies might have a lesser impact if coupled with

minimum wage upgrades than the removal of the oil and gas subsidies.


FOREIGN DIRECT INVESTMENTS At the beginning of 2011 several foreign investments were planned into the country, e.g.

Nestle was planning to invest EGP 500 million in the coming 3 years in its factory

(already invested EGP 45 million) that is established in Egypt, creating new job

opportunities and build new production lines, bringing their total investments in Egypt

to EGP 2.4 billion.

Egypt and Korea signed a memorandum of understanding in sectors like; energy, human

and infra structure development. Turkey and Italy had potential to invest in Egypt,

investing in small and medium industries by establishing an industrial zone in Banha

and Meet Ghamr, building textiles and automotive factories.

ElKhorafay (Kuwait) planned to increase their investments in 2011 by EGP 350 million,

to increase their production lines and establishing new tourism and industrial projects.

EGP 200 million is to be allocated to the aluminum factory (to increase productivity and

specialize 20% for exports) and the remaining EGP 150 million to the electronics

company. The following charts compare the FDI inflows in the 2nd quarter of 2009/2010

and 2010/2011.


In Q2 2010/2011 the total inflows (FDI's) reached US$ 2.340 billion compared to US$

1.988 billion in Q2 2009/2010, 17.7% increase. Outflows in Q2 2010/2011 was US$

1.684 billion VS US$ 1.094 billion in Q2 2009/2010, 54% increase. Having the Net FDI to

be US$ 656 million in Q2 2010/2011 compared with US$ 894.8 million in Q2

2009/2010, -26.7%.

In US$ million Q2 2009/2010 Q2 2010/2011 % change

European Union 1324.6 1022.2 -23.8

USA 353.2 822.4 132.8

Arab Countries 168.5 293.6 74.24

Others 142.4 202.5 42.1

Total 1988.7 2340.7 17.7


After the Egyptian uprising, investment activity was hit badly. Some of the above

mentioned investments did not see the light, and others; for e.g. internationally owned

hypermarkets like Carrefour (French) and Makro (German) cancelled all their expansion

plans until they witness a stable climate to operate in. Makro’s managing director

François Oliver mentioned that although Makro lost EGP 120 million (due to political

turbulences and robbery) but Egypt is still a very important investment terminal for

them. They promised to open 20 new stores, investing EUR 400 million (EGP 3.2 billion),

when they feel that Egypt’s political situation is settled.

In addition to foreign investments from international banks, before the protests the

Egyptian Central Bank and few international banks -that operate in Egypt- had an

agreement to finance retailers and manufacturers(SME's) allocating 30% of their capital

to finance such groups. In return, the Central Bank will reduce the banks’ reserve ratio

from 15% to 10%, but after the latest events some banks like Barclays and Citi Bank

refused to reach out to that cause and rather remain in their regular business services.

So the question is will it recover?

Egypt has emerged as one of the leading markets in the Mena region over the past few

years. While it does not benefit from the same level of energy resources as KSA, Qatar

and Abu Dhabi, Egypt has by far the largest population of any market in the region. This

forms a major demand driver for business investment.

Along with Dubai, Cairo features as the MENA region’s favorite destination for major

global organizations. The large number of Fortune 500 companies present in the city

serves as an indicator of both the recent liberalization of the economy and potential of

the large and increasingly affluent local population. Also it ranks number two behind

Saudi in terms of investor confidence, according to a survey of investors in the region,

revealed Blair Hagkull, MENA chairman of Jones Lang LaSalle.

So the answer is yes, it will recover but it has to take its time. Foreign and domestic

investments have been severely affected by the latest events (which brutally affected the

economy as a whole), so for it to recover it has to be allocated in a place where it is

secure and there is political and economical stability (where Egypt lacks at the mean

time). What could help? The General Authority for Investments have to listen and put in

consideration business men and factories owners’ demands and needs, provide them

with liquidity when needed and erode any constraints that might come in their way and

delay their activities.


STOCK MARKET

Before and after the Uprising

The stock market suffered immensely before the 25th of January revolution and after.

The 2011 trading activity started off on a bad note after the terrorist attack on the Saints

Church in Alexandria on New Year’s Eve which sent a terrible signal to investors in the

EGX. Despite that the index showed some resilience and ended the second week of

January adding a mere 0.20% at 7,156 pts. The rise in tensions in Tunisia followed

peaking on January 14th with the deposition of the former Tunisian President Zein El-

Abdin Ben Ali. The EGX started to lose momentum and dropped in a single week 458 pts

reaching 6,698pts and losing 6.21% from the start of the year. The political climate in

Egypt started to get cloudier with calls for similar protests like those in Tunisia. The

following week saw the climax of events with protests erupting on the 25th of January

till the 28th. The market closed on January 27th at the 5,646.50 pts mark shedding

15.7% of over the week and plummeting 20.94% over the month of January. Market

capitalization lost EGP 55.040 billion (US$ 9.486 billion) and trading activity was halted

indefinitely.

Back to business

With the threat of being eliminated from the Morgan Stanley Capital International index

(MSCI) index for emerging markets the decision was made to resume trading after 37

sessions of closure (just 3 sessions shy of elimination). EGX30 was hammered for two

consecutive sessions (23rd and 24th of March) losing 12.65% of its value. The following

week saw EGX’s fortunes change and the index started to gain some momentum ending

in the green for four consecutive sessions to close the week at 5,463.72 pts regaining

10.35% of its value. The Cement sector had the best performance during these 7 trading

sessions adding 13.3%, followed by the Oil & Gas sector surging 12.7%. On the other

hand, the biggest loser was the Housing & Real Estate sector dipping 35.5%. As of March

31st EGX30 had lost 23.50% of its value since the year started and compared to March

2010 the index lost 19.72%.

4,000

6,000

8,000 EGX30

EGX30


Despite the huge losses that EGX incurred value of trading averaged EGP 990.56 million

and the average trading volume reached 118.89 million shares throughout the 7 trading

sessions in March 2011. Institutional investors started to grab a bigger market share

after trading resumed averaging 75.32% compared to 49.71% during January 2011.

Although it is too early to tell whether this trend will sustain, it is still a positive sign that

the market’s direction is set by the supposedly “long term” players.

0

50

100

150

200

250

0

900

1800

EGP million

no. of shares (million)

0%10%20%30%40%50%60%70%80%90%

100%

'2-J

an-1

1

3-J

an-1

1

4-J

an-1

1

5-J

an-1

1

6-J

an-1

1

10

-Jan

-11

11

-Jan

-11

12

-Jan

-11

13

-Jan

-11

16

-Jan

-11

17

-Jan

-11

18

-Jan

-11

19

-Jan

-11

20

-Jan

-11

23

-Jan

-11

24

-Jan

-11

26

-Jan

-11

23

-Mar

-11

24

-Mar

-11

27

-Mar

-11

28

-Mar

-11

29

-Mar

-11

30

-Mar

-11

31

-Mar

-11

Investors breakdown throughout Q1 2011

Institutions Retail

Volume & Value of trading, throughout Q1 2011


Sovereign rating

Rating Agency Moody's Fitch S&P

Rating Ba3 negative outlook BB BB+ negative outlook

Credit rating agencies have downgraded Egypt's foreign and local currency government

bond ratings since the recent political events unfolded. The outlook on these ratings

remains negative as they were prompted by:

The prolonged political uncertainty in Egypt since the latest rating action and concerns about whether a transition to an effective and stable government will be achieved.

The adverse impact this political uncertainty is having on the country's fiscal position and broader economic performance.

The deterioration of the political situation in Libya, which has negative implications for Egypt's economy and security.


EGYPT’S OUTLOOK The Economist Intelligence Unit (EIU) has revised down the GDP growth forecast for

2010/11 to 4.1% owing to the disruption caused by the political crisis. Relatively strong

official estimates put growth in the first quarter of the fiscal year (July-September) at

5.5% and this trend is likely to have continued into the second quarter, bringing

cumulative growth in the first half to 5.7%. The Ministry of Finance said that

preliminary indications showed year-on-year growth of 5.8% in the second quarter.

Political tensions will affect growth in the second half as private consumption and

exports, particularly of services, are affected. Tourism revenue will be hit and is likely to

nearly halve from 2009/10 levels. According to the Central Agency for Public

Mobilization And Statistics (CAPMAS) tourism sector losses during February 2011

reached US$ 440 million (EGP 2.6 billion), where the number of tourists visiting Egypt

reached 211,000 tourists in February 2011, marking a decline of 80% y-o-y as compared

to February 2010. Growth had been accelerating since the start of 2009, following the

sharp drop at the end of 2008. The official estimate put real GDP growth in 2009/10 at

5.1%, up slightly on the previous year. Although well down on rates recorded during the

recent boom, it was still a positive result against the background of a global recession in

which world GDP contracted by 0.8% in 2009 (at purchasing power parity rates). The

EIU expects growth in the first half of 2011/12 will be constrained owing to the base

effects of the strong performance in July-December 2010, and consequently it forecasts

only a modest increase in growth of 4.9% in 2011/12, although they expect a reasonably

robust recovery from 2012 onwards. Egypt’s exports were hit by the Global slowdown,

and although they were slightly recovering they will slow significantly in light of

political developments. Although external demand will improve as the recovery in the

EU and the US, Egypt’s largest export markets, picks up, this will be offset by the effects

of the domestic political crisis.


THE QUESTION IS NOW HOW TO RECOVER

AFTER ALL OF THE ABOVE MENTIONED

LOSSES? The Asian Tigers retained their strength in just 1 year, after the well known July 1997

Asian financial crisis. Malaysia -one of the major harmed countries- achieved the highest

growth rate in the region, by building a huge base distributing wealth on the poor and

started working to achieve 2 main goals; focusing on the production of high quality

products and exporting them to other countries. Brazil is another example, which a

couple of years ago was on the bankruptcy edge, after certain adjustments its now one

of the top economies in South America.

Egypt has unlimited natural and human resources, international experiences, perfect

geographical location and one of the strongest country in the region. But the questions

are how would the Egyptian economy regain its strength? Which mechanisms are

needed to be available within the next period? How to choose the officials that will help

transform Egypt (economically & politically)? What is the role of citizens, experts,

manufacturers and investors?

The upcoming phase needs experts and officials of a special kind, believing in freedom

and dedicated to work hard in order to have a new Egypt. Their major concerns must be

bringing to an end any kind of corruption and moving Egypt towards a successful phase.

The Egyptian economy lost an abundance amount of money, a plan must be there in

order to know what to do (steps to be followed). Trust between citizens and business

men should be rebuilt, we just can't stereotype that all business men are thieves and

corrupt, many of them are honest. These business men (manufacturers and investors)

grab potential foreign investors, destroy bureaucracy, corruption and decrease

unemployment rate.

Egypt to reach stability, civil disobedience and strikes must stop and security factor

must be found, for the businesses to resume and for growth to continue. The next phase

needs solidarity among people and putting great effort in order to build a stronger

economy, as the economy lost billions and billions, damaging sectors, unemployment

increased and became worse than before. Egyptian business men and investors are

ready to do whatever it takes for Egypt to raise and to make Egypt a secure stable

economical and political environment that domicile foreign and domestic investments.

Manufacturing and productivity are the optimum solution for achieving higher growth

rates, grabbing foreign investors (who are looking to invest in more stable economies, as

the Egyptian market lost its credibility), exporting products to other countries; creates

jobs and brings an end to unemployment which will automatically reduce the inflation

rate and increases the national income resources.


Helping SMEs and providing liquidity to them, which are one of the important factors

that will help the Egyptian economy to develop. Having the government helping by

reducing taxes imposed on them, which in return make them compete in the market,

produce more and reduce unemployment levels.

The Egyptian economy is able to face the current turbulences, but we have to make best

use of the past mistakes and apply new flexible policies believing in justice, freedom,

eroding corruption, eliminating any constraints that face investors and providing plans

to rebuild trust in the Egyptian economy in order to attract foreign investors.

Summarizing what’s written above us Egyptians we have to build a secure stable EGYPT

(politically and economically) because foreigners –tourists and investors- need to see a

proof not an illusion. Talking too much is easy, ACTION should be undertaken.


CONTACT INFO: Ahmed Said

[email protected]

Aspiration of recovery

Documents

Transcript of Aspiration of recovery