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AfricaJuly 2 2006

Egypt runs with the bulls

With reformers at the helm of a buoyant economy, Egypt is instilling confidence in rating agencies and markets with its new commercial spirit and changes in taxation, and banks are reaping the benefits. Nick Kochan reports from Sharm el Sheikh.
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Reformers are in the driving seat of Egypt’s economy. The government is listening to entrepreneurial businessmen and professionals rather than the bureaucrats, who have so long held sway, and the result is a mission to instil a new commercial spirit and implement change.

The confidence of the country’s ruling political elite is unmistakable. Youssef Boutros Ghali, the minister of finance, says: “We are drafting a new era of change. We are embarking on a period of radical fiscal and monetary changes and privatisation. We are opening up the country.”

The message was strongly reinforced at the recent meeting of the World Economic Forum at Sharm el Sheikh, where the Egyptian president and government ministers sought to drive home the country’s new commercial spirit.

Economic buoyancy

Their optimism was backed up by some strong economic figures. For example, capital inflows are at a record high, and local economists expect international reserves to stay strong for the rest of the decade. Surging foreign direct investment, now totalling $5.3bn annually, is another positive part of the Egypt story. Egypt’s net external debt has fallen from 60% of current external receipts in 2001 to just 8% in 2005.

While buoyancy in the oil and gas sectors, following oil price rises, is a part of this, money has gravitated to Egyptian privatisations and the healthy real estate market.

The country’s inflationary record has been sent into reverse as a result of strong internal growth. Double-digit inflation in 2004 has been replaced by single digits, with the current rate at about 7%.

Clouds of opacity

The cloud in the Egyptian sky is not so much the direction of the government or even the fundamentals of the economy, it is more the difficulty in measuring them. According to Paul Rawkins, an analyst at Fitch Ratings: “Uncertainty surrounds the exact inflation level, owing to opaque inflation data, which continues to hamper the conduct of monetary policy.”

All is not gloom for the rating agency, which states in a recent report on the country: “The monetary framework has continued to improve, with increased exchange rate flexibility and the ultimate goal is to move to inflation targeting.” A recent report from Fitch rated Egypt BB+.

Tourism revenues are also subject to some uncertainty as a result of Egypt’s vulnerability in terms of security. Recent bombings in Cairo and the Sinai Peninsula have hit both the international tourist market and perceptions of Egypt’s political stability.

Debut bond

Market perceptions remain bullish, however, and Egypt is expected shortly to enter the capital markets with a debut €500m bond, denominated in Egyptian pounds, but issued abroad. “This will be a sort of Egyptian pound Eurobond. We have been approached by investment banks. This will be taken very positively by the markets,” said Mahmoud Mohieldin, the minister of investment, speaking at the World Economic Forum.

“It will be priced at lower rates than the domestic market and will create good publicity for the reforms of the country. It also has the value associated with rarity, because we have never issued this sort of bond in the past. This bond has the advantage of dealing with foreign exchange risk,” he said.

In addition to a sovereign debt issuing programme, Dr Mohieldin said that a number of triple-A-rated agencies were interested in issuing bonds in the domestic market for project finance activity. These institutions are rumoured to include the World Bank, the European Investment Bank and the African Development Bank. “This is another sign of the soundness of the fixed interest market,” said Dr Mohieldin.

Tax measures

Structural measures in tax collection have been another key plank of the government’s recent reforms. Deep cuts in personal and corporate income tax rates, reductions in tariff rates and a phasing-out of tax exemptions and other loopholes have been complemented by a clampdown on tax evasion and corruption.

A new income tax law, passed in mid-2005, reduces corporate taxes to a maximum 20% from the previous 40%. It is retroactive from the beginning of the year. The new law also eliminates incentives given to tax inspectors for the collection of taxes. The high levels of taxation were impediments to enterprise and widely evaded by businessmen, who preferred to bribe a tax inspector rather than meet their full tax bill.

Further planned changes to the regime include a new property and land tax regime, new stamp taxes and the imposition of a value added tax (VAT). The IMF persuaded Egypt to introduce a 5%–10% sales tax on certain goods and services, but these taxes are now being extended to more items.

The government plans to have an explicit excise tax and an explicit sales tax. Only businesses turning over E£500,000 ($86,890) will be subject to VAT under the new law. However, Mr Ghali says that the country will impose a “compensatory sort of presumptive tax of 1% over turnover for anybody below the threshold”.

Positive feedback

The Fitch Ratings report on Egypt sets great store by the tax changes. “The overhaul of the tax authority, including greater automation that will lead to a less discretionary application of the rules, would be a notable achievement. By reducing endemic corruption and widespread evasion, the government stands to raise additional income, while simultaneously reducing the effective tax burden.

“A prime objective is to fundamentally alter the relationship between tax payers and collectors, making it less adversarial and prone to mutually advantageous bilateral settlement arrangements that result in lost public revenue,” it said.

Private sector banks have been among the greatest beneficiaries of the country’s more liberal economic regime. Arab African International Bank, for example, has expanded its turnover seven-fold in the past three years while its profitability has grown 10-fold. Its latest report shows total assets in 2004 of $1.77bn; the previous year assets totalled $1.15bn. Operating profits before tax in 2004 of $28.4m compare with almost $17m the previous year.

Hassan Abdalla, the vice-chairman and managing director of Arab African International Bank, says: “[The bank] is aggressively addressing retail. We are adding simple products for the consumer. The loan/deposit ratio in Egypt is small – no more than 50%, compared with most countries where it is 80%. We believe we have a niche among the biggest corporates for whom we can offer mergers and acquisitions advice.” The acquisition of another private bank has enabled Arab African to build its customer base.

International footprint

Egypt’s banks are also seeking to grow their international presence. The Cairo-based EFG-Hermes, for example, has recently acquired a licence to perform banking activities in Saudi Arabia. Yasser El-Mallawany, the bank’s chairman, says that it has set aside $120m for the investment. “Saudi is ripe for everything. It has a big private sector and it is ripe for mergers and acquisitions, equity capital markets and fixed interest products. We are on a journey to become the first truly regional and full service investment bank based in the Middle East.”

Mr El-Mallawany says the expansion, from the bank’s current positions in Egypt and the United Arab Emirates, will put the bank in pole position to increase greatly the fee-earning part of its business. “We currently address around 16% of the region’s fee wallet and the addition of Saudi Arabia will increase our footprint to over 85%,” he says.

Egypt’s role as a pivotal Middle East stock market has been enhanced by government reforms, says Mr El-Mallawany, who believes that the region’s financial activities will coalesce over the next 20 years around a single hub. “We presently have three financial centres: in Dubai, Riyadh and Cairo. But I see activities concentrating on a single centre, which could be Cairo or Riyadh.”

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