EGYPT | ECONOMY Mona Mansour

Mona.Mansour@cicapital.com.eg

Alia Mamdouh
Alia.Mamdouh@cicapital.com.eg

2Q11/12 External sector Indicators (USD bn)

28 March 2012 | Economy

1Q11/12a Trade Balance Goods Exports Goods Imports Balance of Goods & Services Tourism Revenues Suez Canal Revenues Transfers Current Account FDI (7.8) 6.8 14.6 (6.2) 2.7 1.4 4.0 (2.2) 0.4

2Q11/12a (7.8) 6.8 14.6 (6.3) 2.4 1.3 4.4 (1.9) (0.9)

2Q11/12e (7.6) 7.1 14.7 (7.4) 1.6 1.4 4.6 (2.8) 0.4

Variance 2% -4% -1% -15% 51% -3% -5% -32% NM

Economy
Instability still weighs on BoP
2Q11/12 saw a widened Balance of Payment (BoP) deficit of USD5.6bn, up from a deficit of USD2.4bn last quarter and reversing a surplus of USD0.6bn in 2Q10/11. The shift from a capital and financial accounts surplus to a deficit of USD2.9bn created downward pressure on the BoP, which widened to USD5.6bn. Moreover, current account (C/A) deficit widened to USD1.9bn, up from USD1.3bn a year earlier, yet below our expectations of USD2.8bn. The main reason for the variance lies in our expectations for lower tourism revenues, at USD1.6bn, vs. the actual figure of USD2.4bn, which is owed to higher than expected per-night spending per-tourist. However, all other external indicators came in line with our expectations. In 3Q11/12, firm oil prices will continue backing both oil exports and remittances, but tourism receipts will remain weak due to local instability. Fuel shortages will create distribution disruptions and drive up prices. This will reflect negatively on spending levels, which will in turn depress imports. Despite the anticipated strong growth in transfers, the higher Balance of Goods and Services (BoGS) deficit should widen the C/A deficit to USD1.6bn in 3Q11/12 vs. USD1bn a year earlier. 2Q11/12 highlights Oil exports mitigated the drop in non-oil exports backed by strengthening oil prices. Firm oil prices acted as a key driver to the high double-digit YoY growth in transfers. Instability slashed tourist arrivals and dampened tourism receipts 28%YoY to USD2.4bn. Suez Canal revenues remained solid despite instability. Imports saw a depressed growth due to renewed tension which pressured spending levels. Despite the strong growth in transfers, C/A saw a wider deficit than last year as exports growth slowed and tourism revenues dropped. Net portfolio investments continued their outflow and FDI shifted to the negative territory. 3Q11/12 Preview Strengthened oil prices will drive up oil exports, which will support goods exports. Non-oil exports are expected to remain weak due to problems in Egypts key export markets. Yellow remittances received from Iraq and firm oil prices will bode well for transfers. Suez Canal revenues will maintain growth, but will drop QoQ, as there is a habitual slowdown in trading activities in the first quarter of every year. Instability will dampen tourism receipts on a quarterly basis, yet on a yearly basis it will see an increase as last years comparable period saw the start of the revolution when tourism was hard hit. Intensified fuel crisis which extended from solar and LPG to gasoline will lead to delays in supply and drive up prices (already February recorded a high inflation reading). This will weigh heavily on spending levels and hence on imports, which are set to drop QoQ; however, with the low base of last years comparable quarter, they will show a YoY growth. C/A deficit is to widen to USD1.6bn despite the strong growth in transfers. We expect nil net FDIs inflow an improvement from an outflow in the earlier quarter as Egypt showed solid movement towards a civil democratic rule.

2Q11/12 Indicators performance (USD bn)

Trade Balance Goods Exports Goods Imports Balance of Goods & Services Tourism Revenues Suez Canal Revenues Transfers Current Account FDI

2Q11/12 (7.8) 6.8 14.6 (6.3) 2.4 1.3 4.4 (1.9) (0.9)

YoY 5.8% 3.9% 4.9% 43.0% -28.3% 5.5% 40.3% 49.7% NM

QoQ -0.6% 0.9% 0.1% 1.2% -12.7% -2.7% 9.2% -13.6% NM

3Q11/12 External Indicators (USD bn)

Trade Balance Goods Exports Goods Imports Balance of Goods & Services Tourism Revenues Suez Canal Revenues Transfers Current Account FDI

1Q11/12 (7.8) 6.8 14.6 (6.2) 2.7 1.4 4.0 (2.2) 0.4

2Q11/12 3Q11/12F (7.4) (7.8) 6.7 6.8 14.1 14.6 (6.1) (6.3) 2.1 2.4 1.3 1.3 4.6 4.4 (1.6) (1.9) (0.9)

2011 External sector Indicators (USD bn)

2010 Trade Balance Goods Exports Goods Imports Balance of Goods & Services Tourism Revenues Suez Canal Revenues Transfers Current Account FDI (27.7) 25.0 52.7 (18.0) 12.5 4.7 12.4 (5.6) 6.9

2011a (24.9) 27.9 54.0 (19.5) 8.7 5.2 15.2 (4.3) (1.0)

2011e (25.9) 28.2 54.1 (21.8) 7.9 5.2 15.5 (6.3) 0.7

Variance -4% -1% 0% -11% 10% 0% -2% -33% NM

28-Mar-12 | Egypt | Economy

2Q11/12 review
Non-oil exports pressure exports growth to a single-digit: The slowed demand in our main export markets (EU GDP growth reached 0.7% in 2Q11/12 down from 1.3% a quarter earlier) reflected negatively on non-oil exports, which dropped 15.6% YoY. However, the 33%YoY increase in oil exports mitigated this impact. While exports still show YoY growth, they saw only a single-digit increase of 4% YoY compared to the double-digit growth seen over the last three quarters. 2Q11/12 goods exports reached USD6.8bn, nearly in line with our expectations of USD7.1bn. Imports slow as uncertainty rises: Goods imports reached USD14.6bn in line with our expectations marking a growth of 5%YoY. The slowed growth was driven by the lower spending level given the string of social unrest during the quarter coupled with the anticipated drop in investments. Given the maintained imports growth and slowed exports performance, trade deficit widened to USD7.8bn from USD7.3bn a year earlier, matching our estimates exactly. Resilient Suez Canal performance: Maintained canal tolls and higher oil prices drove up Suez Canal revenues 5.5%YoY, reaching USD1.3bn in 2Q11/12, exactly in line with CI Capital Research estimates. Renewed tension hit tourism: 2Q11/12 tourism revenues reached USD2.4bn, above our estimates of USD1.7bn, despite the drop in international tourist arrivals (ITA) to 1.9mn (exactly matching our expectations) down from 4.2mn in 2Q10/11 and 2.8mn a quarter earlier. This could be associated with a higher per night spending per tourist than expected. Still-widening C/A deficit, despite strong transfers: The C/A deficit widened to USD1.9bn in 2Q11/12, higher than 2Q10/11 of USD1.3bn, yet below our expectations of USD2.8bn. This is due to the drop in tourism, which outweighed the strong 40% YoY growth in transfers. FDIs shift to red: Aggravated political and social instability in the form of renewed tension in central Cairo has lead to multiple downgrades in Egypts credit rating, with a consequent blow to investment sentiment, particularly for foreigners. In 2Q11/12, FDI marked its second net outflow during 2011 reaching by which net FDI recorded -USD0.9bn against our estimates of an inflow of USD0.36bn. This resulted in a net outflow of USD0.4bn in 1H11/12 above GoE expectations of an inflow of USD1bn and our expectations of an inflow USD0.8bn. Net outflow of portfolio investment: Huge foreign selling in equities and bonds shifted portfolio investments to a net outflow of USD1.6bn vs. an outflow of USD1.3bn a year earlier. USD5.6bn deficit in BoP: The overall BoP registered a deficit of USD5.6bn in 2Q11/12, reversing a surplus of USD0.6bn a year earlier. The capital flight triggered by the unrest has added to the widened BoP deficit, as in 1H11/12 the BoP marked a deficit of USD8bn, compared to an overall surplus of USD0.6bn a year earlier. This shift resulted from the C/A running a higher deficit of USD4.1bn against USD2.6bn a year earlier, and from the capital and financial account shift to a net outflow of USD2.4bn vs. a net inflow of USD2.8bn in 1H10/11.

CI Capital Research

28-Mar-12 | Egypt | Economy

3Q11/12 preview
Moderate exports growth: The rise in oil prices to an average of 100.72USD/barrel in 3Q11/12 up from 93.9USD/barrel a quarter earlier should support oil exports, expected to increase to USD3.8bn. However, we still expect lower non-oil exports performance given the weakening global demand. Accordingly, we expect exports to reach USD6.7bn in 3Q11/12 up 8% YoY. Instability to impact imports, yet comparable years low base will reflect positively on YoY growth: The intensified fuel crisis - which extended form solar and LPG to gasoline will lead to delays in supply and drive up prices (already February recorded a high inflation reading). This will in turn weigh heavily on spending levels and hence on imports, which will drop QoQ, despite higher oil prices. However, the low base of imports in 3Q10/11 will lead to a YoY growth, and imports will reach USD14.1bn in 3Q11/12. We expect a higher trade deficit of USD7.4bn vs.USD5.1bn a year earlier, yet lower than USD7.8bn a quarter earlier. Solid Suez Canal revenues, yet tourism flow will remain weak: Given the resilient performance of the Suez Canal revenues along with increased canal tolls (up 3%) effective March 1, we expect canal revenues to reach USD1.26bn in 3Q11/12 up 2%YoY. However, revenues will drop QoQ, as the first quarter of every year normally experiences a slowdown in trading activities. Tourism flow will remain weak, dropping to USD2.1bn down from USD2.4bn a quarter earlier. However, if calculated on a YoY basis it will see an increase, since last years comparable quarter saw the start of the revolution and its heavy hit to tourism. Accordingly, we expect a widened BoGS deficit of USD6.1bn, up from USD3.4bn in 3Q10/11. Transfers will support current account: Despite the anticipated strong growth in transfers to USD4.6bn, we believe the current account deficit will widen to USD1.6bn, up from USD0.6bn in 3Q10/11. Nil net FDIs inflow: We expect nil net FDIs inflow an improvement from an outflow in the earlier quarter as Egypt showed solid movement towards a civil democratic rule. Parliamentary elections went smoothly and the presidential election is expected to be held on time, with the newly elected president coming into power by the end of June. This is expected to play a significant role in restoring investor confidence.

CI Capital Research

28-Mar-12 | Egypt | Economy

Trade balance

Current account balance

USDmn 25,000

Imports

Exports

BoGS

USDmn 0

USDmn 6,000 4,000 2,000 0

Trade Balance

Suez Canal

Tourism

Transfers

(1,000) 20,000 (2,000) 15,000

(3,000)

-2,000
10,000 (4,000)

1Q07/08 3Q07/08 1Q08/09 3Q08/09 1Q09/10 3Q09/10 1Q10/11 3Q10/11 1Q11/12

-4,000 -6,000 -8,000

(5,000) 5,000 (6,000)

-10,000
0 1Q07/083Q07/081Q08/093Q08/091Q09/103Q09/101Q10/113Q10/111Q11/12 (7,000)

Tourism revenues

Net FDI inflows/outflows

USD mn 4,000

Tourism Receipts

YoY GR

QoQ GR 60%

USDm n 6,000 5,000 4,000

40%

FDI

YoY GR 150% 100% 50% 0%

3,000 2,000 -50% 1,000 0 1Q07/08 -1,000 4Q07/08 3Q08/09 2Q09/10 1Q10/11 4Q10/11 -100% -150% -200%

3,000 20%

2,000

0%

-20% 1,000 -40%

-2,000

0 1Q07/083Q07/08 1Q08/09 3Q08/091Q09/10 3Q09/10 1Q10/113Q10/11 1Q11/12

-60%

Net international reserves and BoP

Reserves and currency

USDmn 3,000 2,000 1,000 0 -1,000 3Q08/09 -2,000 -3,000 -4,000 -5,000 -6,000 -7,000 1Q09/10 3Q09/10

BoP

NIR

USDmn 40,000 35,000 30,000

USDbn 40 35 30 25 20 15 10 5 0

Net Int'l Reserves

USD/EGP

EGP 6.10 6.00 5.90 5.80 5.70 5.60 5.50 5.40 5.30 5.20 5.10

1Q10/11

3Q10/11

1Q11/12

25,000 20,000 15,000 10,000 5,000 0

Jan-10Mar-10May-10 Jul-10 Sep-10Nov-10Jan-11Mar-11May-11 Jul-11 Sep-11Nov-11Jan-12

Sources: Central Bank of Egypt & Bloomberg

28-Mar-12 | Egypt | Economy

RESEARCH
Amr Hussein Elalfy, CFA | Co-Head of Research Amr.Elalfy@cicapital.com.eg Mona Mansour | Co-Head of Research Mona.Mansour@cicapital.com.eg

CI Capital Holding 8 Nadi El-Seid Street, 3rd Floor Dokki, Giza, Egypt Tel: +2(02) 3338 6259 Research@cicapital.com.eg www.cicapital.com.eg CI Capital US 19 West 44th Street New York, NY 10036 Tel: +646 454 8620

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