The report follows a top-down approach, starting with a brief on developed and emerging economies, then moving on to Egypt, covering Egypt’s political & macro-economic picture, stock market assessment, comparable analysis with other emerging markets, sectorial analysis, and ultimately our favorite picks from stocks trading on the Egyptian stock market.

1. JAZIRA SECURITIES BROKERAGE EGYPT
Monday, September 05, 2011
Equity Strategy Report
When politics means business
The US and most of the key European states are expected to see their economies begin to EGP/1US$ 5.96
accelerate by early 2013, while the remaining European states, although will have less
default risk, austerity measures, to come at par with the EU requirements, will keep them Population (mn) 80
from recovering at the same pace. Once both the US and EU economies start to pick-up,
we expect emerging economies will begin growing at a faster pace. Nominal GDP (US$ bn) FY11e 225
Egypt’s most critical challenge, since the toppling of Hosni Mubarak, in February 2011, GDP/Capita FY11 (US$) e 2,796
will be the parliamentary elections, which is expected to be held in November 2011.
Once the structure of the parliament is confirmed, the degree of uncertainty regarding the Real GDP Growth FY11e 1.6%
shape of Egypt’s political future, will start to subside, and with us putting the odds at 4:1, Annual Inflation (Jun. 2011) 11.8%
that it turn for the better, we expect the state of congestion in the economy and indi-
vidual spending will start to unwind, at an accelerative pace, by early 2012. Unemployment Rate (Jun. 2011) 12%
Egypt’s real GDP in 3Q FY11 ending March, declined by 4.2% on a yoy basis, as the Fiscal deficit % of GDP FY11e -10%
hotels & restaurants sector income fell by 1/3. The manufacturing, construction,
building materials, transport, wholesale & retail sectors, were also hit, but to a lesser Public Debt % of GDP FY11e 75%
extent, by the state of instability Egypt witnessed during February and March 2011. External Debt % of GDP FY11e 12%
We expect Egypt’s real GDP growth to culminate at 1.6% in FY11 ending June 2011,
Trade Balance FY11 (US$ bn) e -24
with expectations of GDP falling 1.2% yoy in 4Q. While we expect GDP to grow by
3.6% in FY12, essentially driven by public spending, while the private sector will start to Net Service FY11 (US$ bn) e 8.3
recover by end of 2011, once the parliamentary elections have been completed.
Transfers FY11 (US$ bn) e 11.9
BOP recorded a 3Q FY11 deficit of US$6.1 billion, against an 1H FY11 surplus of
US$572 mn. The deficit came on the back of a US$5.5 bn portfolio investments outflow Current Acc. FY11 (US$ bn) e -3.7
and tourism income falling 34% on a qoq basis. We expect the full year deficit to ex-
Capital Acc. FY11 (US$ bn) e -3.4
pand to US$8.6 bn, and FX reserves have already been reported to have dropped by
US$9.4 bn in 2H FY11, bringing Egypt’s FX - import coverage ratio to its lowest level BOP Balance FY11 (US$ bn) e -8.6
in over a decade. We expect a milder BOP deficit in FY12, supported by donors injec-
tions, while a pick-up in tourism and private capital inflows will begin by 2H FY12. FX reserves (US$ bn) Jul. 11 25.7
The government has set an ambitious budget for FY12, it will certainly assist in calming
down the level of discontent among Egypt’s large low-income public sector workforce, EGX Market Cap (US$ bn) 40
but we expect its impact on the economy will be undermined by private consumers’ EGX30 PER 2011 e 9.5x
spending contraction, which may start to unwind by the end of 2011. Furthermore, we
expect budget deficit in FY12 to reach 13.3% of GDP, while government expects an EGX30 DY 2011 e 4.9%
8.6%, on the back of both higher expenditure and lower income expectations.
EGX30 YTD Change -35%
The EGX30 fell 35% YTD, while a selected 19 peer emerging markets have dropped 9%
YTD. However, Egypt is only discounted by 19% compared to the peers’ 2011 PER. Im- EGX Avg. Daily Trading Value
780
plying that on an equity pricing level, most of the EGX correction, was to adjust for 2011 (EGP mn)
lower earnings and higher tax rates, rather than a straightforward political concern. 6.0 Exchange Rate (EGP/USD)
Our favorite sectors on the EGX, are still those of defensive nature, such as food, oil 5.9
and pharmaceuticals. However, some cyclical stocks have corrected to a degree, that 5.8
accumulating exposure in them, from now to end of year, can prove rewarding once the 5.7
market starts to pick-up, if all goes well. Our stock picks are: 5.6
The most Favorite of our Picks 5.5
5.4
Sidi Kerir
J-09
J-09
A-09
S-09
O-09
N-09
D-09
J-10
F-10
M-10
A-10
M-10
J-10
J-10
A-10
S-10
O-10
N-10
D-10
J-11
F-11
M-11
A-11
M-11
J-11
J-11
A-11
AMOC Juhayna NSGB OT
Petrochemicals 8000 EGX30 Index
Delta Sugar Maridive Aracemco CIB Telecom Egypt 7000
6000
National Maize OCI EIPICO EFIC TMG
5000
Abu kier
Glaxo Mobinil GB Auto Amer 4000
Fertilizers D-10 J-11 F-11 M-11A-11 A-11M-11 J-11 J-11 A-11
Alexandria Analyst: Mohamed Fahmy
Pachin Minapharm SODIC Palm Hills
Spinning Email : mfahmy@jaziracapital.com
The least Favorite of our Picks Mobile: +2012 2157312
1

2. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
Table of Content
Page 3-4 Global Economies
Page 5-6 Egyptian Politics
Page 7-11 Egyptian Economy
GDP p7
Inflation p8
BOP p8
Foreign Aid p9
Tourism p9
FX Reserves p10
State Budget p10-11
Page 12 Egyptian Stock Market
Page 13 Comparable Analysis
Page 14-22 Sectorial Analysis
Banks & Finance p15
Construction & Related p16
Durable Goods p17
Food & Fertilizers p18
Milling p19
Oil Related p19
Pharmaceutical p19
Real Estate p20
Telecom, Media & IT p21-22
Textiles & Related p22
Page 23 Jazira Capital Focus Companies Price & Multiples Sheet
Page 24 Disclosure
2

3. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
It seems the World won’t get out of the rat-hole until 2013
The developed world is stuck on first gear, there Real GDP Growth (%)
may be some better economic figures coming out Greece
Ireland
here and there, but not with enough momentum Spain
Italy
to shift the developed economies forward. Portugal
UK
France
US stuck until elections Denmark
Euro (17)
The US has been performing relatively well in Netherlands
Belg iu m
Republicans will give Obama economic terms compared to 2008, but the re- USA
Germany
hard time to do much for the publicans, with nearly half the seats on the con- Japan
economy, with a year left on gress, won’t give Obama an easy time, a year ‐5 ‐3 ‐1 1 3
the presidential elections ahead of the, upcoming November 2012, presi-
Public Debt % of GDP (2010)
dential elections, and the democrats just aren’t Japan
fierce enough to subdue the republicans intent. Greece
Ital y
USA
There are talks emerging in the US about con- Ireland
sumer debt forgiveness or “write-offs”. A similar France
Portugal
action was taken in the great recession back in
Consumers debt write-off may Germany
the 1930s. There is just so much consumer debt, UK
be US’ way-out of the rate- Net herlands
that it is choking any potential, for a real growth
hole Spain
in US consumer spending, which represents 0 50 100 150 200 250
around 71% of the US’ GDP and have grown by Source: WB, Eurostat & JC estimates
only 0.2% over the past 14 months. From our stand point, if there will be more quantitative eas-
ing measures, it would be better spent on consumers directly, by reducing their debt, rather than
more injections of funds into the debt market.
The US can’t really default on We disregard S&P’s US debt downgrade, the US will always be able to print more dollars, de-
its debt, but more dollars go- fault is not an issue. However, more dollars around can cause further US dollar devaluation and
ing around, can initiate a new hikes in US inflation.
wave of currency devaluation
EU & Merkel’s efforts to bring German efficiency to remaining states
Euro Zone issues are more significant, with a high contagion risk, as around half the debt of
Germany & France can’t af- states such as, Spain and Italy, are held by institutions from other countries.
ford that any EU country de-
fault on its debt, not for the The core issue with the EU debt enigma, is that although the Euro currency is the PIIGS’ nation-
sake of the EU community al currency, it isn’t really theirs to print more of,
health, but as not to expose and the large EU countries, Germany and B udget Def icit % of G DP
their own financial systems, so France, aren’t making them forget that. Ireland
Greece
eventually they must cave-in So, the only way out for the PIIGS, right now, is UK
USA
applying austerity measures, in hopes they prove Spain
to Merkel and Sarkozy, that they won’t get into Portugal
Japan
more trouble, if bailed-out. France
Euro (17)
Netherlands
EU countries default risk lies Japan’s public sector debt is very high. Howev- Italy
in the fact that all of these er, Japan has a high savings rate, which makes it Germany
Denmark
countries’ debt is effectively in easier for the government to finance the debt Sweden
a currency they can’t control with 90% of the Japanese debt is owned by Japa- 0 5 10 15 20 25 30 35
or print more of based on their nese institutions and individuals, while in the
Unemployment %
economies’ requirements case of the US savings rate is low and 25% of
US debt is owned by foreigners. Spain
Ireland
While in the case of Spain, nearly half the debt is Greece
We aren’t concerned that some owned by non-Spaniards, and with currency that Portugal
Euro (17)
EU states remain in recession, they can’t print more of on their own, com- France
as long as they don't drag the pounded by a negative GDP growth, a sizable USA
Italy
larger economies with them real estate inventory, tightened mortgage policies Belgium
UK
and a high unemployment levels, all of which Denmark
mean that austerity measures would be met by Germany
Japan
further public dismay, and may cause an extend- Netherlan…
ed economic recession. 0 5 10 15 20
Source: WB, Eurostat & JC estimates
3

4. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
It seems the World won’t get out of the rat-hole until 2013(Continued)
China: All the bases covered
Much of the Chinese government stimulus efforts, from 2008 to 2010, were left to the financial
China’s banks may have accu-
institutions, the banks lent over US$1.5 trillion to investment vehicles, which then directed the
mulated bad-debt of around
borrowed funds into infrastructure and real-estate ventures. But it is currently estimated that
US$450 bn from 2008 to 2011
US$450 bn of these loans have went bad, threatening the balance-sheets of the banks that grant-
ed the loans. However, it may all be resolved behind the red curtain, with China’s over US$3
trillion FX reserves, a central government public debt representing less than 20% GDP and since
most of the lent funds were in Yuan.
Commodity prices remain relatively high
Commodities have not correct-
Commodities have been correcting, but not at an enough rate, to release some of the pressures
ed enough to support a new
that are on both governments and individuals’ income, in order to create some much needed eco-
positive economic wave
nomic growth.
World economic growth is The fundamental issue with the world’s economy, isn’t really financial, but is that the world has
peaking at the current produc- reached some kind of a peak in its prevailing productivity line, and requires a major technologi-
tion technological level cal shift in the methods of production of commodities and energy, to create a new super econom-
ic growth cycle. Until then, the world’s economic cycles will suffer longer and sharper reces-
sions.
Next expansionary cycle may start in early 2013
2010a 2011e 2012e
Our analysis of the US, goes inline with the US
World GDP Growth 3.8% 4.0% 3.6%
Fed’s announcement in early August, that it
High Income Countries 2.7% 2.2% 1.9%
will keep key lending rates at zero percent to
Developing Countries 7.3% 6.3% 6.0%
mid 2013, implying the current economic slow-
down may take longer than it had previously World GDP (US$ bn) 63,049 67,778 72,590
We expect the developed expected. World GDP per Capita (US$) 9,197 9,789 10,380
countries to clear their troubles Middle Income 3,980 4,338 4,663
in 2012, and initiate a new So, with our expectations of the US will start
Lower Middle Income 1,748 1,906 2,020
expansionary economic cycle recovering by early 2013, and EU mainly bail-
by early 2013 ing out Italy and Spain during 2012, we can see Source: WB & JC estimates
headline risk decreasing in 2013, thereby infusing more confidence into producers and consum-
ers’ spending on both sides of the Atlantic and gradually bringing the world out of its current
slowdown toward a new expansionary economic cycle by mid 2013.
Some developing countries are still delivering healthy economic growth
Turkey’s recent robust eco-
nomic growth is expected to Some countries are still performing well, such as Turkey, which delivered an 11% real GDP
normalize at between 5-6% growth in 1Q 11, although there are worries of the Turkish economy is overheating with a wid-
ening trade deficit, low interest rates, and over 30% annual loans growth.
China has delivered a 9.5% real GDP in 2Q 11. This was China’s lowest quarterly GDP growth
since Q3 09. In addition to world economic slowdown, China has raised interest rates and
clamped down on bank lending to ease inflation, which has certainly reduced domestic spending.
Other emerging countries are, as seen in 12.0% Real GDP Growth 2011
the corresponding chart, still delivering
some good economic growth figures. 10.0%
However, the conditions in the US and 8.0%
Europe are certainly holding back the po- 6.0%
tential growth of emerging markets in gen-
4.0%
eral.
2.0%
On the medium term, following Europe
EU austerity measures can bailing its ailing economies over the com- 0.0%
Indonesia
China
Hungary
Poland
Morocco
Thailand
Brazil
Mexico
Taiwan
Peru
Turkey
South Africa
Russia
Korea
Malaysia
Chile
India
Philippines
Czech
actually benefit emerging mar- ing year, it will need to go into further
kets to a degree austerity measures in order to curb future
hikes in budgetary deficits, which is ex- Source: Reuters & JC estimates
pected to bring the EU’s consumers’ dis-
posable income lower, and can increase the demand on the cheaper emerging markets goods.
4

5. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
Through the looking glass at Egypt’s Political Future
SCAF acting like a Zen master The Supreme Council of Armed Force - SCAF has been in command of Egypt since the toppling
to control a fluid situation of former president, Mohamed Hosni Mubarak, in February 2011. SCAF has been acting like a
Zen master since then, exerting a minimum level of action, in order to control the country’s in-
ternal and external issues, considering the delicacy required in these troubled times. The SCAF
wishes to bring an end to the current turbulent situation, and needs to remain aloof from every-
one, since there are so many conflicting notions on the Egyptian political arena and street.
Prime Minister, Essam Sharaf has been at the helm of the government since early March 2011,
and had a cabinet reshuffle in July that introduced 12 new ministers to the cabinet’s lineup, in-
cluding the replacement of finance minister Samir Radwan with Hazem El-Beblawi.
Sharaf’s cabinet is operating Sharaf’s cabinet is essentially operating at a “damage control” mode, which is what is expected
on damage control mode from this cabinet, given the size of task at hand and the fact that it isn’t backed by any elected
political structure that can give it the vindication, to apply proper reform.
SCAF goal is to have a firm The goal of the SCAF, in our opinion, is to sterilize the heightened emotional state on the Egyp-
security grip at the time of the tian street prior to the parliamentary elections. For the elections to go smoothly, it requires a high
elections in order to avoid degree of restraint and security level, in order to avoid friction between opposing parties.
friction between opposing
parties At any rate, the real challenges for Egypt are yet to come, in what is promising to be a very
stormy winter. The parliamentary elections are expected to be held in November, although as we
mentioned, it will be very hard for the SCAF to give a go ahead for the elections, unless it feels
the street will deal with it maturely.
The real challenge for Egypt is The challenges in the elections, will include the campaigning phase, the elections itself, which
to cross the parliamentary will take around 45 day, as the SCAF proclaimed that the election for both the People's Assem-
elections smoothly bly and the Shura Council will be held at the same time, on three rounds, with a 15-day intervals
in-between each. But the real challenge is how the losers will accept the results.
The SCAF has said, it will not permit foreign monitoring of the elections, since this would fringe
the sovereignty of the Egyptian state. Although the argument is valid, foreign monitoring can
provide a support against those whom will later claim the elections were rigged.
There are nearly 35 parties The Egyptian citizens have been in a state of confusion since January 11, with so many variables
planning to compete in the are in motion, in a pace, that they are not accustomed with. And will get even more confused
upcoming parliamentary elec- with around 35 parties are either registered or attempting to register, in time for the elections.
tion Out of these parties at least 10 are non-secular parties.
We think that Islamic based political parties will win in total a significant portion of the parlia-
We expect non-secular parties ment's seats, given their reach into the Egyptian community, the dismantling of the National
to capture a significant yet not Democratic Party, which was the sole Egyptian political group with more connections and ties
controlling chunk of the up- specially in the communities outside the major cities than those of parties that branched out from
coming parliament’s seats the Muslim Brotherhood.
Furthermore, if parties programs fail to grab the interest of the non-politically oriented Egyp-
tians, their options will be not to vote, seek the highest bidder on their voice, tribal connections
or simply identify with those parties which are identified with similar religion.
Islamic based parties are currently fragmented between at least around 5 parties that spun-off the
Muslim Brotherhood, and nearly the same number out the more radical Salafi movement. What
will happen during or after the elections? Would these parties align their goals or fail and drift
further from each others? It can go either way...
How the Egyptian public will vote in the first free parliamentary elections, is yet unknown. Even
the level of participation may not fair well, given that in the constitutional amendments referen-
dum, that were held in March, less than two months after the toppling of Mubarak, had a show
rate of less than 41% of the eligible 45 million voters.
Gallup’s survey tells that 38% Gallup’s, Abu Dhabi Center issued, in June 2011, the correspond- Egypt’s parliament 2011 outcome
of decided voters are leaning ing survey results, on the expected outcome of the 2011 parlia- survey by Gallup
toward voting for MB’s FJP mentary elections. It does give a hint that Islamic parties are some- FJP (MB) 15%
party how ahead of the other parties, since if we disregard those unde- Wasat 5%
cided, Freedom & Justice Party has garnered 38% of those whom Wafd 9%
have already decided on which party they will vote for. NDP 10%
Undecided 61%
Source: Gallup, Abu Dhabi Center
5

6. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
Through the looking glass at Egypt’s political future (Continued)
More importantly, what will be the reaction of the secular parties, out of which the Tahrir Square
youth are? Will their be more riots if Islamic groups do have a significant representation in par-
liament? We expect that the SCAF and security forces will show heightened resolve with any-
one, who would object to the elections outcome in any manner that will disrupt the peace.
Secular parties may need to Another issue, is the fragmentation among secular parties, will they have a joint front that would
work better together to have an bring balance to the parliament against the Islamic parties? or will they have separate agendas
impact in the coming parlia- that would weaken their impact?
ment The second hurdle is the drafting of the new constitution, which is expected to start following the
formation of parliament and to take from three to six months to be finalized.
The SCAF has issued its declaration of basic principles to guide the drafting of the upcoming
The basic principles can’t be constitution, in a bid to answer liberals’ requests for some binding statement of rights to protect
enforced by the SCAF without them against the possibility of an Islamist takeover. The Turkish military assigned itself a similar
having powers superseding supervisory role after its 1980 coup. However, without a public referendum on accepting these
those of parliament principles and explicitly giving the Army the upper hand over the parliament, when it comes to
fringing any of these principles, this declaration constitutes little value in itself.
There is an 80% chance that Freedom & Justice Party, the flagship party that spun-off the MBs, has said that it will endorse a
the coming constitution will be constitution that doesn’t fringe on individuals private lives and wouldn’t go to drafting laws
secular with the guidance from based on applying Islamic Shariaa. If the FJP align with other parties that agree with this ap-
Islamic Shariaa, not far from proach, there is a good chance that Egypt’s coming constitution will provide an actual reform
the previous one in this respect from the previous one, but will not change the loosely secular nature of the country.
The other alternative, which is an Islamic shariaa based constitution and what would this have on
creating laws that would fringe on individuals lives provides an enigma, from an economic
standpoint. Both since there are indefinite levels and interpretations of what is Shariaa, and each
level will have its implications on tourism, foreign investment and even the migration of some of
Egypt’s capital and talented workforce.
The third hurdle is the presidential elections, which if the parliamentary and constitution are
completed in time, is expected to be held sometime between May and July 2012. However, once
the parliament and constitution are in place, this step is not expected to be as challenging.
The future Egyptian political So from now, to the end of year, heightened uncertainty prevails, and an apparent political struc-
structure will start to take ture will not formulate at least until the second half of 2012. There is good possibility that mat-
shape by the end of the year ters will develop in a manner that wouldn’t deter economic growth or foreign investment. How-
ever, it will remain a speculative environment until at least the end of the current year, and from
there on, the level of uncertainty will start to gradually reside.
Egypt’s finance minster, at the time, Samir Radwan, said in July 11, that Egypt will not draw-
Egypt attempts to remain inde- down on the US$3 bn loans offered by the World Bank and IMF. This came at the request of
pendent in its path toward de- SCAF, on the basis that it doesn’t wish to increase Egypt’s foreign debt levels. However, the
mocracy may upset foreign WB may have tagged, as usual, a batch of demands that the SCAF didn't see in favor of Egypt or
funding gatekeepers won’t be taken well by the public. In August, the newly appointed finance minister, Hazem El-
Beblawi, said Egypt may do draw-down on the aforementioned loans.
Anyway, if our assumptions are true that the reasons for SCAF refusal, are due to a political dif-
ferences in opinion, then Egypt may have upset the gatekeeper to foreign funding, and would
have also shown adrift of what the US wishes. This may create a shortage of foreign funding for
the period until matters are resolved one way or another.
Following the death of 5 Egyptian army and security force personal, in fights that included Israe-
li military forces, whom have crossed the boarders into Egypt on August 18th, to follow Palestin-
Anti-Israeli sentiment rise on ian assailants, whom have killed 7 Israelis on the same day, in the close to the border, Eilat town,
the Egyptian street have caused the level of tension between the two countries to escalate. Talks about withdrawing
the Egyptian ambassador to Israel were rumored. In response, Israel’s defense minister, Ehud
Barak, said two days later, that Israel deeply regrets the death of the Egyptian soldier, and
launched an investigation into the matter. It isn’t in the benefit of neither Egypt nor Israel to es-
calate the situation. However, the level of hostility to Israel has spiked on the Egyptian street,
and will take sometime and a more formal type of apology from Israel to neutralize the situation.
Egyptian Army launches oper- However, the real issue is the increased lack of security specially in Sinai (detailed in page 9)
ation “Eagle” to eradicate mil- and the resurgence of militant groups in the peninsula, which can, until resolved, have a negative
itant group from Sinai impact on tourism, in areas such as Sharm El-Sheikh, which has been already suffering.
6

7. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
The Egyptian Economy Quarterly Real GDP Growth (yoy)
8.0%
The Egyptian GDP dropped 4.2% in real terms, 6.0%
Egypt’s GDP falls 4.2% yoy in over the quarter from January to March 2011 com- 4.0%
3Q FY11 pared to the same quarter in 2010, as economic ac- 2.0%
tivity nearly froze from January 28th to February 0.0%
11th, in addition to the ensuing workers strikes, -2.0%
1Q 2Q 3Q 4Q
which reduced productivity, as well as the elevated -4.0%
FY10 FY11
lack of security, and capital and consumers’ spend- -6.0%
Source: MoF & JC estimates
ing contraction.
Hotel and restaurants sector The section of the economy that was hit the most during that quarter, was the restaurants & ho-
take the hardest hit during the tels sector, which witnessed a 33% yoy drop in its income to EGP6 billion in 3Q FY11 down
quarter from EGP9.0 billion in the same period of 2010. Furthermore, its contribution to the private sec-
tor portion of GDP dropped from 6.9% in 3Q FY10 to 5.0% in the last reported quarter.
FY ending June 2010a 2011e 2012e
The tourism sector employs over 1.4
Tourism employs 6% of Population (mn) 79 80 82
million person, representing around 6%
Egypt’s workforce and have a Workforce (mn) 26.2 26.4 26.6
of the Egypt’s 26 million workforce and
full impact representing 13% Unemployment 9.7% 11.9% 12.1%
has an indirect impact on the economy,
of GDP which have been estimated in FY10 to
bring the full impact of the sector to Inflation (CPI) 12% 11% 10%
about EGP155 bn, or 13% of GDP. Inflation (PPI) 5% 20% 12%
Unemployment rise to 11.9% The drop in tourism, was essentially the Real GDP Growth 5.1% 1.6% 3.6%
at the end of June 2011 com- main attribute to the surge in unemploy- Public 3.1% 3.2% 4.7%
pared to 9.7% a year before ment rate to 11.9%, at the end of June
Private 6.4% 0.6% 2.9%
2011, compared to 9.7% a year before.
Other sectors that were hit in 3Q FY11, GDP Breakdown
included the manufacturing, construc- Public 37.0% 37.6% 38.0%
tion & building materials, transport and Private 63.0% 62.4% 62.0%
the wholesale & retail sectors, the drops
in these respective sectors were 11.4%, Nominal GDP (EGP bn) 1,151 1,306 1,490
9.1%, 9.7% and 7.9%, respectively. Nominal GDP (US$ bn) 209 225 246
On the other hand, Suez Canal income GDP per Capita (EGP) 14,620 16,242 18,136
Suez Canal robust revenue
growth was supported by the showed a robust 11% yoy growth dur- GDP per Capita (US$) 2,653 2,796 2,998
minor Egyptian pound devalu- ing the quarter to EGP6.8 billion, which EGP/USD 5.51 5.81 6.05
ation was partially supported by the minor devaluation of the Egyptian Source: CBE, MoF & JC estimates
pound by 4% during the quarter vs. a year before.
We expect 4Q FY11 real GDP We project a milder GDP drop in 4Q FY11 ending June 2011, than the 3Q FY11 drop, with real
to show a yoy drop of 1.2% GDP estimated to have declined in 4Q by 1.2% compared to the same quarter the past year.
The 4Q drop is expected to come essentially from the private sector GDP contribution, which we
We project FY11 GDP to predict will drop on a yoy basis by 2.4%, while have dropped 7.0% in 3Q FY11.
grow by 1.6%, lifted-up by a
robust 1st and 2nd quarters’ of Based on our 4Q FY11 GDP expectations, we estimate that FY11 will close, with an annual
the year performance GDP growth of 1.6%, driven by 5.5% and 5.6% growth recorded in the year’s first two quarters.
Over FY12, we expect a 3.6% real growth in the Egyptian economy. The growth will be essen-
We expect FY12 GDP to grow tially driven by the public contribution to GDP. The private sector is estimated to grow by 2.9%
by 3.6% supported by higher over the fiscal year, but the bulk of this growth is expected to be delayed to the second half of
public spending the year, following the completion of the parliamentary elections and some kind of vision starts
to materialize with regards to Egypt’s political direction for the coming period. Furthermore, 2H
FY12 will be compared to an already weak 2H FY11, which will boost its growth rate levels.
We expect that if parliamentary elections pass smoothly and in the right direction, the Egyptian
economy will enjoy attractive growth levels over the period of the coming global economic ex-
pansionary cycle, which we predict will kick-off by early 2013.
With corruption more contained, a continuity of leadership policies in place, and less politically
frustrated population, all together will encourage foreign and local investment as well as spend-
ing.
7

8. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
PPI by Year to June
Producers endure lower margins Processing Classification 2011
Egypt’s producer price index - PPI, has shown an inflation Fuel 35.2%
Cotton 89.5%
PPI rise 70% over CPI in the level of over 20% in the year ending June 2011, while the
Raw Materials 25.8%
year ending June 11 consumer price index has shown cost of living has inflated
Semi-Finished Goods 6.2%
by 11.8% over the same period.
Finished Goods 9.4%
The intriguing point here, is that the PPI components, Overall PPI 20.1%
Both raw materials & energy which shown the highest inflation, were those of basic in- CPI Inflation
witnessed significant spikes in put components of production, while the finished goods Overall CPI 11.8%
prices price increase was even below the CPI overall annual Food & Beverages 19.0%
growth. This implies that somewhere down the chain, pro- Tobacco 69.9%
ducers were not able to pass the increased cost to the end Clothing 2.2%
consumer, i.e, producers margins have been shrinking. Housing & Utilities 1.1%
Furniture 2.5%
Food & beverages, tobacco Looking at the cost of living, tobacco, food & beverages
Medical Care 1.9%
and education were the 3 and education were the three sections that witnessed the
Transportation 1.1%
spending criteria of the Egyp- highest inflation in the year ending June 2011, and we be-
Communication 0.1%
tian cost of living that wit- lieve their inflation would impact the general population in
Entertainment 5.9%
nessed the highest inflation in a manner that can well make consumers less able or at least Education 24.3%
FY11 less willing to spend over the coming period on more non- Hotels & Restaurants 12.1%
essential types of spending. Source: Ministry of Finance
External account witness huge deficit
4 BO P Balance (US$ bn)
Egypt recorded its largest BOP quarterly deficit
Egypt reports a US$6.1 bn in over a decade, in 3Q FY11 ending March. A 2
BOP deficit in 3Q FY11 whopping US$6.1 billion deficit was reported
in the quarter vs. a BOP surplus of US$555 mn 0
1Q 2Q 3Q 4Q
in 3Q FY10. (2)
The major reasons for the defi- The deficit came essentially on the back of
(4)
cit are capital flight... portfolio investment recording outflows of
FY10 FY11
funds of US$5.5 billion during the quarter com- (6)
pared to US$5.6 billion inflows during 3Q
FY10. FY Ending June (US$ bn) 2010a 2011e 2012e
Trade balance (25.1) (23.9) (22.6)
FDIs also shown a negative figure in the latest Export Proceeds 23.9 25.4 27.6
...FDIs shifting to a negative reported quarter of US$164 million, not a big Import Payments (49.0) (49.3) (50.2)
figure,... figure, but its comparable figure in 3Q FY10 Services (Net) 10.3 8.3 8.5
was a net inflow of US$1.7 billion. Service Receipts 23.6 21.8 21.6
Transportation 7.2 8.0 8.9
...& tourism revenues 15% yoy Tourism related revenues, also witnessed a 15%
Travel 11.6 10.7 9.2
fall in 3Q FY11 and 34% yoy and qoq respective drop during
Payments (13.2) (13.5) (13.1)
3Q FY11 to US$392 million.
Goods & Services (14.8) (15.6) (11.6)
We expect a deficit of US$2.9 We predict the BOP will report a deficit of Transfers 10.5 11.9 12.2
bn in 4Q FY11, on the back of US$2.9 billion in 4Q FY11, as a result of a Current Account (4.3) (3.7) (2.9)
lower tourism revenue, expat 25% yoy drop in travel income, although it Capital Account 8.3 (3.4) 2.1
transfers and further portfolio would be a 5% rise on a quarterly basis. also, Net errors & omissions (0.7) (1.6) (0.6)
investment outflows transfers will be impacted by the turbulent situ- Overall Balance 3.4 (8.6) (1.4)
ation in Lybia, and Yamen and some expats FX Reserve 35.2 26.6 25.2
may see no sense into transferring money to FX Reserve/Imports (months) 8.6 6.5 6.0
Egypt until the picture becomes more clear. Source: CBE, MoF & JC estimates
Furthermore, we expect the capital account to record a deficit of US$1.6 bn in 4Q FY11, as a
continuation of portfolio investment outflow.
A lower deficit in FY12 on We expect a smaller deficit in 2012, as a result of hopes that the promises of regional and inter-
expectations of capital account national loans start to materialize, while we expect real FDI and portfolio investment inflows to
turning positive on hopes of recover by 2H FY12, with its influx pace depending on the political situation at that time.
donors promises materializing
and private funds turning to Egypt Refinery Company - ERC, which is currently being established, at an investment cost of
inflows by 2H FY12 US$3.7 bn, will produce once operational, 4 mn tons of refined petroleum products per annum,
including 1.5 mn tons of diesel. This will reduce Egypt refined petroleum products import bill
significantly, which currently represent around 11% of Egypt’s imports value.
8

9. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
Promised funds US$ bn
Donors Promises Saudi Arabia 4
Arab states promised over The United Arab Emirates promised that it would give Egypt Qatar 10
US$3 billion in financial assistance, which includes a US$1.5 UAE 3
US$17 bn to support Egypt’s
billion fund for small to medium businesses, US$750 million in IMF 3
economy
loans, and a US$750 million grant. USA 2
Total Promised Funds 22
Saudi Arabia pledged US$4 billion, out of which US$500 mil- JC Database
lion are a grant to help finance the budget deficit, US$500 mil-
lion in loans, and US$500 million in Egyptian bond purchases.
Qatar promised Egypt a ballpark figure of US$10 billion, which probably will be mostly invest-
ments, but the country has also given some grants. In the weeks that Egypt was revising its budg-
et, so not to take on IMF loan, Qatar provided US$500 million grant to help the budget.
Indecision on whether to ac- However, Hazem El-Biblawy, Egypt’s newly appointed finance minister and deputy PM, said
cept or reject IMF loans that he has not fully ruled out that Egypt may tape into the US$3 billion offered by the IMF.
The US promised to offer US$1 billion in debt forgiveness and another US$1 billion in loan
guarantees as support to nurture and advance the democratic strivings. The last part has steered
some controversy among the Egyptian community and even in the government, since it had the
implication of supporting groups that the US favor or have connections with.
The sum of the aforementioned funds will be injected over a long period, of more than a year,
not all will materialize, and some will not impact the BOP in the way it should.
Tourism woes under security concerns
Tourist arrivals drop 45% yoy Tourists arrivals fell 45% in 3Q FY11, following the outbreak of violence on the backdrop of the
in 3Q FY11 January and February 2011 demonstrations.
Security is still weak all over Egypt in general, and Sinai’s lack of security is now capturing
Lack of security and militant world’s headlines, with gunmen, in late July 2011, have attacked Northern Sinai capital, Arish,
groups in Sinai have relatively police station in a shootout that continued for 9 hours and with an outcome of five killed, includ-
turned-off tourists for now... ing one police and one army officers. The injured were estimated to be 21 in total. Not far away
from Arish, saboteurs have blew-up Egypt’s gas supply pipeline to Israel and Jordan over 4
times since last February.
In response the army launched No attacks have targeted tourists, but the feel of insecurity has rippled to potential visitors. The
operation “Eagle” to restore Egyptian army and security forces initiated in early August, operation “Eagle” to flush out the
security to the Sinai peninsula Sinai militant groups, but it will take time to bring peace to the Sinai peninsula, and all this was
compounded by a rise in the tension, over the last couple of weeks, on the borders between
Egypt and Israel.
We expect hotel occupancy in All this have and will continue to have an impact on Egypt’s hotels occupancy rate, which fell
FY11 to stand at 70% support- from 94.3% in 1H FY11, to less than 49% from January to May 2011.
ed with 1H’s 94% high occu-
pancy levels 1H FY11 witnessed a 14% and 16% increase in tourist arrivals and revenues, while we expect
the drop in both items in 2H FY11, will cause a whole FY11 drop in both indicators to culminate
to 12% and 8% respectively. FY ending June 2010a 2011e 2012e
In FY12, occupancy will fall Number of Tourist Arrivals (k) 13,758 12,146 11,055
A more significant drop in tourism arri- Growth 12% -12% -9%
to 62%, however, still much
vals, revenue and occupancy rates in Average Tourists per Month (k) 1,147 1,012 921
better than 2H FY11 estimated
FY12, compared to FY11, although Number of Tourist Nights (k) 136,370 123,838 109,578
rate of 48.7% Tourism Related Income (US$ mn) 11,591 10,688 9,242
FY12 tourism activity is expected to be
better than that of 2H FY11 estimates. Growth 11% -8% -14%
Income/Tourist (US$) 842 880 836
Hotel Rooms (k) 215 219 219
Occupancy Rate (e. 2.2 tourist per room) 79% 70% 62%
1H (Jul. - Dec.) 3Q (Jan. - Mar.) Apr.-May 2H (Jan. - Jun.)
2010a 2011a 2010a 2011a 2011a 2010a 2011e
Number of Tourist Arrivals (k) 6,824 7,796 3,464 1,894 1,509 6,934 4,350
Growth 13% 14% 0% -45% n/a 11% -37%
Average Tourists per Month 1,137 1,299 1,155 631 754.5 1,156 725
Number of Tourist Nights (k) 70,666 81,680 31,958 21,083 14,050 65,704 42,158
Tourism Related Income (US$ k) 6,007 6,943 2,716 1,792 n/a 5,584 3,745
Growth 5% 16% 24% -34% n/a 18% -33%
Income/Tourist (US$) 880 891 784 946 n/a 805 861
Occupancy Rate (e. 2.2 tourist per room) 83.2% 94.3% 75.2% 48.7% 48.6% 77.4% 48.7%
Source: MoF, CAPMAS & JC estimates
9

10. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
BOP deficit weighed heavily on FX reserves
The BOP’s high deficit level in 3Q FY11 and the estimat- FX Reserve Monthly Change (US$ bn)
Jan‐11 Feb‐11 Mar‐11 Apr‐11 May ‐11 Jun‐11 Jul‐11
FX reserves drop by US$10.3 ed one for 4Q FY11, have resulted in a net drop of over 0
billion from the beginning of US$9.4 billion in Egypt’s official FX reserves from the ‐0.5
the year to the end of July end of December 10 to end of June 11. July FX reserves ‐1
‐1.5
figure showed a further US$860 million drop to US$25.71 ‐2
bn, or a US$10.3 billion YTD drop in Egypt’s FX re- ‐2.5
serves . ‐3
‐3.5
Based on our projections for the BOP in FY12, we expect Source: CBE
a minor drop in reserves to 25.2. Not a big drop, but this assumption depend largely on donors
fulfilling at least a portion of their promises.
We don’t expect real FDIs or portfolio investments influx, prior to the beginning of 2012.
FY ending Net Int’l Net Int’l Imports Trade Deficit
Imports Trade Deficit
June Reserves Reserves Coverage Coverage
In USD bn USD/€ In € bn In USD bn In USD bn Months Months
2000 15.1 0.93 16.4 17.9 11.5 10.1 15.8
2001 14.2 0.90 15.9 16.4 9.4 10.4 18.3
The FY11 end of year FX re- 2002 14.1 0.95 15.0 14.7 7.5 11.6 22.6
serve level, translates to 2003 14.8 1.13 13.1 14.8 6.6 12.0 26.9
2004 14.8 1.24 11.9 18.3 7.8 9.7 22.7
Egypt’s lowest Import and 2005 19.3 1.25 15.5 24.2 10.4 9.6 22.4
trade deficit coverage ratios in 2006 22.9 1.26 18.3 30.4 12.0 9.0 23.0
over a decade. 2007 28.6 1.37 20.8 38.3 16.3 8.9 21.0
2008 34.6 1.47 23.5 52.8 23.4 7.9 17.7
2009 31.3 1.39 22.5 50.3 25.2 7.5 14.9
2010 35.2 1.33 26.5 49.0 25.1 8.6 16.8
2011 26.6 1.39 19.1 49.3 23.9 6.5 13.3
Source: MoF & JC calculations
Government formulates a generous budget for FY12
Egypt had to go for easing With the government stuck between managing a healthy budget, on one side, and on the other
policies through higher deficit side, needed to adhere to popular demands to see the impact of the Egyptian revolution rippling
to reduce public’s discontent through higher wages and benefits right away, have chosen to cave-in to the latter. Thereby for-
with government mulating a budget, which underlined a 22% spike in the government’s annual payroll bill and
increasing healthcare and educa-
tion budget by 17% and 10%, re- FY ending June (EGP bn) 2010a 2011e 2012b 2012e
The main theme of the FY12 spectively compared to FY11 Tax Revenues 171 200 232 212
budget is a 22% spike in pub- out of which:
budget figures. Income & Capital Tax 77 93 110 97
lic employees’ compensations Taxes on Goods & Services 67 77 85 80
to represent 36% of the gov- The budget underline some as- Grants 4 5 10 10
ernment's revenues sumptions, which we are not sure Other Revenues 93 90 107 103
it can achieve. Total Revenues 268 294 350 325
Although government spending Employees Compensations (85) (96) (117) (117)
will spike, general sentiment isn’t Purchase of Goods & Services (28) (29) (30) (30)
Interest Expense (72) (87) (106) (130)
that strong, government expansion- Subsidies & Social Benefits (103) (140) (158) (167)
Even with the new budget’s ary budget will most probably im- out of which:: - - - -
5% increase in income tax pact the basic goods segments of Food Commodities (17) (28) (19) (26)
bracket for corporates taxable the economy, causing increase in Petroleum (67) (82) (96) (96)
income over the EGP10 mn demand and inflation in these seg-
Electricity n/a (1) (5) (5)
threshold, which the govern- Export Incentives (3) (3) (3) (3)
ments, but we don’t expect it to Other Expenses (29) (37) (32) (32)
ment estimates will generate have much impact on the other Investments (48) (41) (47) (47)
around an extra EGP4.8 bn. of segments of the economy. Total Expenditures (366) (428) (491) (523)
income tax revenues, we as-
sumed lower than the FY12 Furthermore, output may grow, but Budget Surplus (deficit) (98) (133) (141) (198)
% of GDP -8.5% -10.2% -8.6% -13.3%
budgeted income tax revenues, cost has increased too, partially
on lower overall taxable in- due to higher wages, which will Gross Domestic Budget Debt 808 979 1,109 1,183
come expectations yield a lower return on sales, and External Debt 149 160 165 175
consequently taxable income Gross Budget Debt 957 1,140 1,274 1,359
Budget Sector Deposits 145 153 156 154
would grow at a lower rate than Net Debt 813 987 1,118 1,205
nominal GDP.
Gross Debt % of GDP 83% 87% 82% 91%
Net Debt % of GDP 71% 76% 74% 81%
b: government budget figures Source: MoF & JC estimates
10

11. JAZIRA SECURITIES BROKERAGE EGYPT
September 5, 2011
Equity Strategy Report
Government formulate a generous budget for FY12 (Continued)
We believe the government Also, the budgeted food commodities subsidy plan of EGP19 billion for FY12, compared to an
has underestimated food com- estimate of EGP28 billion to have been spent on food subsidies through FY11, seems very low.
modity subsidy value in FY12 We assume that this budgeted 32% drop in food subsidy, is based on the government’s expecta-
budget tions of a drop in commodities prices and increased local output. But those two assumptions
won’t bring subsidies that low. 400
Wheat & Corn Prices (US$/ton)
350
Prices of wheat and corn, two of Egypt’s most essen-
Both wheat & corn prices up- tial imported food commodities for instance, have
300
ward trend has not been dropped 14% and 6% respectively during the two
250
thwarted yet months to July 2011. However, have shown another
200 Wheat
150 Corn
upward movement in August 11, and now wheat and 100
corn prices are 14% and 24% higher than their 12
Jan-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Oct-10
Nov-10
Dec-10
Jan-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Feb-10
Sep-10
Feb-11
month average price in the period of the Egyptian
Source: USDA
government’s FY11, ending June 2011.
13% 91 day TB Interest Rate
Another expense item, which we expect to record 12%
We expect higher than budget- higher than the government’s FY12 budget figure, is 11%
ed debt service given the spike debt service. Interest rates on 91 TBs, as an example,
10%
in the government’s notes in- have spiked 26% since end of January 2011. We as-
terest rates since the revolution sumed that the all interest rates will continue at their 9%
current levels for the FY12, and concluded that it will 8%
cost the government around an extra EGP24 billion 7%
N-10
J-10
M-10
M-10
J-10
S-10
J-11
M-11
M-11
J-11
of interest expense in FY12, than it had budgeted.
Source: Reuters
We believe the FY12 budget, is the most appropriate for Egypt’s
The interim government has current political and social conditions. The SCAF and government need to deflate the Egyptian
emphasized in its FY12 budget street’s heightened emotional state, that it has been experiencing since late January, in order to
on focusing on low income be able to go through the upcoming parliamentary elections in the best manner possible.
segment of the Egyptian com-
munity, a pattern we expect to The government may for the coming couple of years, as it highlighted in the FY12 budget press
continue, although a balance release, will put a priority on improving the wellbeing of the low income segments of the com-
will be needed between im- munity. There is a wide gap between the low income and the middle income segments of the
proving the wellbeing of low population and actually narrowing it down, would on the long-term support Egypt’s economic
income citizens and in the appeal. However, this may to a degree come at the account of the business community. The de-
same time, not chocking the gree this will have on the business community and how the current interim government and the
business community future governments, will strike a balance between improving low-income citizens wellbeing,
while not dampening the business environment, will be the main determinate for their success.
The government is studying to Finance minister, Dr. Hazem El-Beblawi, said in early August 11, that the government is as-
eliminate subsidies on indus- sessing methods to rationalize petroleum products consumption, with one of the options on the
tries that are energy intensive, table is to remove all energy subsidies from industries such as cement, steel, fertilizers and ce-
which represent around 20% ramics.
of Egypt’s energy subsidy cost
Energy subsidies alone consume 28% of the governments revenues and if the energy intensive
Energy subsidy represent 28% industry energy subsidy is removed, it would reduce budgetary pressure by EGP19 bn, implying
of the budget revenues a 4% reduction in the budget’s expenditures. It is estimated that energy intensive industries,
which include fertilizers, cement, chemicals, iron & steel, aluminum, and other industries, cap-
ture around 20% of Egypt’s government energy subsidies.
A major adjustment in diesel and petrol prices, would provide a more significant reduction in
deficit, but will be met by fierce resistance by the Egyptian community at the time being.
Egypt’s crude oil R/P stands at Egypt has a crude oil reserves to production - R/P ratio of 16 years, versus an African and Global
16 years ratios of 36 and 46 years respectively. Even natural gas, which Egypt is said to have an abun-
dance of, has its R/P ratio at 35 years, while Africa and World ratios stand at 77 and 46 years,
respectively.
Egypt depends on oil and natural gas for 44% and 50% of its energy needs, respectively. The
Egypt is currently a net export-
negative impact of energy subsidies is somehow subdued, since Egypt is a net exporter of crude
er of crude oil by a ratio of 2:1
oil by a ratio of 2:1 to its imports of petroleum products, so for the time being, it is hedged from
to its petroleum products im-
global oil price volatility. However, the fiscal budget can’t withstand indefinite deficit levels,
ports
and more hikes in public debt levels, can get interest rates and inflation spiraling and further
currency devaluation can ensue.
11