Egypt Economic Outlook

Prime Research 1
Egypt Economic Outlook
December 02, 2013
The political and economic environment, and consequently outlook, has changed
once again following the regime change that took place at the beginning of the cur-
rent fiscal year. The change in leadership has brought along with it a change in eco-
nomic priorities, policies and dynamics. The Gulf backing of the new environment in
Egypt with billions of free dollars in aid has played a significant role in changing that
outlook and making more options available. At the same time, several structural
deformities continue to ail the Egyptian economy, regardless of the political leader-
ship in place; the government’s chronic budget deficit and the ever growing public
debt is a good example.
In this report, we present an economic outlook for Egypt during the current fiscal
year, ending June 2014. Unfortunately, the transitory nature of the current period
creates a lot of uncertainty regarding the future and makes any attempt at longer
term projections merely a speculation.
With little options for short term relief, the new government embarked on vast fiscal
loosening, accompanied by monetary loosening. The government announced an
LE29.7 billion stimulus package sponsored by the US$12 billion aid package
from the Gulf. In addition to the package, several other policy actions have been
taken under the theme of “social justice” that will be directing funds to the consum-
ers in the lower income brackets.
The expansionary fiscal policy is also coupled with expansionary monetary policy.
The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has fi-
nally changed course since it hiked rates by 100bps in late 2011 and a further 50bps
in early 2013. The MPC has already cut rates by a 100bps in two consecutive
meetings in August and September.
We see GDP growth this year at around 2.7%, on the back of the stimulus
package that should lubricate private and government spending and motivate in-
vestments. However, private consumption will remain subdued and unlikely
to recover before the second half of the year, due to a quarter of dusk-dawn-
curfew and unemployment that continue to be alarmingly elevated. Investment
spending should respond positively to the stimulus, the CBE rate cut and the
easing of regulations by the Egyptian Financial Supervisory Authority (EFSA). Ex-
ports and imports will most likely remain anchored by their fundamentals
close to their historical levels.
The government embraced the budget prepared under the previous government
and approved by the dissolved Shura Council and committed to its deficit target.
We view the government’s deficit target not to exceed 10% of GDP as
unrealistic. We estimate deficit to GDP at around 13.9% due to:
• The eruption of street violence and the application of a dusk-dawn curfew seri-
ously harmed business activity and consumption in the first quarter lowering
tax revenues than previously forecasted by the budget.
• The government has taken several policy measures that would up the govern-
ment’s expenditure bill, namely, the minimum wage law, the increase in pen-
sions and raising the income tax exemption bar.
On the external front, fundamentals for the Balance of Payment, albeit
slightly better, remain weak in our opinion. Sources of currency inflows re-
main limited while currency outflows prove resilient. The dynamics will leave Egypt
in need of further US$3-5 billion in aid or in risk of further depreciation of
the currency towards the end of the fiscal year. However, we believe that the ad-
ditional aid will most likely be supplied by the Gulf.
With regard to the monetary outlook, We believe that the CBE still wants to
lower rates further as it outweighs growth over inflation. However, we do not
expect the CBE to cut rates again before late February 2014 until inflation-
ary and balance of payment pressures subside.
Needless to say, progress on the political front which entails putting down a consti-
tution and going forward with the legislative and presidential elections would re-
markably improve the outlook, while, any delay in the political process would not
turn out in Egypt’s favor.
Analyst Moheb Malak
Phone (+202) 33 005 716
Email mmalak@egy.primegroup.org
FY14fFY13aGrowth Outlook
20251753Nominal GDP at market
prices (LE billion)
2.82.1Real GDP Growth (%)
2.52.8Household Consumption
Growth (%)
4.83.5Government Consumption
Growth (%)
2.3(9.6)Investment Growth (%)
(1.5)4.1Exports Growth (%)
(0.8)(1.1)Imports Growth (%)
FY14fFY13aFiscal Outlook
456345Government Revenues (LE
Billions)
735583Government Expenditure (LE
Billions)
279238Cash Deficit (LE Billions)
13.913.6Deficit/GDP (%)
FY14f*FY13aExternal Outlook
(4.7)(5.6)Current Account Balance
6.79.8Financial Account Balance
1.20.2Balance of Payments
16.214.9End of period Reserves
All figures in billions of US$
* The forecast does not take into account any additional aid
that Egypt may receive post the date of this report.
FY14fFY13aMonetary Outlook
10.96.9Average CPI Inflation
(%)
8.259.75Overnight deposit rate (end
of period) (%)
9.2510.75Overnight lending rate (end
of period) (%)
46.243.2External Debt
Sources: MOP, MOF, CBE & Prime estimates

Prime Research 2
Egypt Economic Outlook December 02, 2013
Growth Outlook
Weak Fundamentals
After three years of political turbulence and sluggish
growth the Egyptian economy has reached an alarming
point. Fundamentals are weak across all expenditure
items. Even the engine that has pushed growth for years
fueled by a large population base, namely private con-
sumption, has eventually slowed down burdened by stag-
nant real incomes, staggering unemployment (which
reached 13.4% in Q3 FY13), soaring inflation as well as
street violence. Investment spending crippled since 2011
under the weight of heightened political risk, rocketing
interest rates, looming currency depreciation and currency
controls.
Exports did not come to the rescue even with the cur-
rency depreciation as many exporting industries either are
capacity constrained or are energy intensive, amid an
energy crisis in the country. Exports of services did not
help either as tourism weakened further amid fragile se-
curity conditions. On the other hand, imports proved resil-
ient, as a lot of necessities and raw materials are im-
ported.
Expansionary Policy
With little options for short term relief, the new govern-
ment embarked on vast fiscal loosening, accompanied by
monetary loosening. The government announced an
LE29.7 billion stimulus package sponsored by the US$12
billion aid package from the Gulf (more on the package in
the fiscal outlook). In addition to the package, several
other policy actions have been taken under the theme of
“social justice” that will be directing funds to the consum-
ers in the lower income brackets. Examples of such poli-
cies are, an LE1,200 minimum wage in the public sector, a
10% increase in pensions with a minimum increase of
LE50 and raising the income tax exemption bar to
LE12,000 annually.
The expansionary fiscal policy is also coupled with expansionary monetary policy. The Monetary Policy Committee
(MPC) of the Central Bank of Egypt (CBE) has finally changed course since it hiked rates by 100bps in late 2011 and
a further 50bps in early 2013. The MPC has already cut rates by a 100bps in two consecutive meetings in August
and September.
It is worth mentioning that the government is mulling a second stimulus package. However, the timing, the size or
the source of financing of the package remains unclear. Hence, we exclude the scenario of a second stimulus pack-
age from the current estimates. Either way, we do not expect the second stimulus package to have a significant
effect on this year’s economic performance since it will not be finalized before the third quarter with the first stimu-
lus package yet to be completed.
Growth Forecast
The government aims at accelerating GDP growth this year targeting a real growth rate of 3.5%, hoping for a re-
covery in tourism and investments, both domestic and FDI. On the other hand, the World Economic Outlook (WEO)
for October 2013 seems overly pessimistic regarding Egypt’s growth rate this year forecasting a 1.8% real growth in
output.
We see GDP growth this year at around 2.7%, missing the government target, though still much better than the
WEO forecast. Nominal GDP will culminate at LE2,025 billion. Our forecast is based on the below dynamics.
FY14fFY13aFY12aFY11aFY10aLE billion
20251753157613711207GDP at market prices
2.82.12.21.85.1Real GDP Growth (%)
1637142312711036900Household Consump-
tion
2.52.86.55.54.1Real Growth (%)
247205179157135Government Con-
sumption
4.83.53.13.84.5Real Growth (%)
272249258235235Investment
2.3(9.6)5.8(2.2)8.0Real Growth (%)
306309275282258Exports
(1.5)4.1(2.3)1.2(3.0)Real Growth (%)
436432407339321Imports
(0.8)(1.1)10.88.4(3.2)Real Growth (%)
142125125178172Gross Domestic Sav-
ings
(130)(123)(133)(57)(63)Domestic Resource
Gap
Figures are nominal and in billions of Egyptian pounds, growth rates are real.
Source: Ministry of Planning & Prime Estimates
GDP Breakdown by expenditure
Fundamentals are
weak across all
expenditure items
Private consump-
tion, has eventually
slowed down
Investment spend-
ing crippled since
2011
Exports did not
come to the rescue,
while imports
proved resilient
LE29.7 billion
stimulus package
LE1,200 minimum
wage
10% increase in
pensions
Raising the income
tax exemption bar
MPC has already
cut rates by a
100bps
We exclude the
scenario of a sec-
ond stimulus pack-
age from the cur-
rent estimates
Government targets
a real growth rate
of 3.5%
We see GDP
growth this year at
around 2.7%

Prime Research 3
Growth Outlook
Private Consumption
For years, the Egyptian economy have relied on its huge population base and its rapid population growth to fuel the
private consumption engine, which represents north of 80% of GDP. However, under the weight of stagnant real
incomes, staggering unemployment (which reached 13.4% in Q3 FY13), soaring inflation as well as street violence,
private consumption spending slew down to 2.8% in FY13 down from a resilient 6.5% in FY12.
As mentioned above, the government’s “social justice” measures will be channeling funds to the consumers in the
lowest income brackets through the minimum wage, rise in pensions and tax exemptions which should lead to a
rise in consumption.
However, we believe that consumption will remain subdued and unlikely to recover before the second half of the
year for the following reasons:
• While not much data is available regarding the first
quarter yet, the dusk-to-dawn curfew must have weighed
heavily on consumption.
• Almost all of the social justice measures taken are
exclusive for government employees. For example, the
minimum wage will only apply to 4.8 million government
employees, disregarding the remaining 18.8 million pri-
vate sector employees.
• Unemployment remains alarmingly high, registering
13.4% in the first quarter of the fiscal year, putting a cap
on consumption spending.
• Unchecked inflation, especially food inflation which
represents roughly 40% of consumption spending, could
eat away most of the nominal growth in consumption.
Hence, we expect real private consumption growth around
2.5% in the current fiscal year.
Government Consumption
We predict that government consumption growth would accelerate in FY14 to 4.8%, up from 3.5% last year due to:
• Aggressive spending by the government will continue amid a continued slowdown in the private sector to ap-
pease the people and sustain the economy
• The higher salary bill caused by the minimum wage law, which adds LE11 billion to salaries. In addition, we
expect more hiring of temporary workers by the government for the projects planned in the stimulus package.
• An LE3.4 billion in additional spending on salaries and purchases of goods and services allocated from the
stimulus package.
However, it is necessary to highlight that the aggressive spending by the government will take place at the cost of a
continued high budget deficit and a ballooning public debt, but more on the deficit and the debt in the fiscal out-
look.
Private consump-
tion spending slew
down to 2.8% in
FY13 down from a
resilient 6.5% in
FY12
C o n s u m p t i o n
unlikely to recover
before the second
half of the year.
We expect real
private consump-
tion growth around
2.5% in the current
fiscal year.
Government con-
sumption growth
would accelerate in
FY14 to 4.8%
Unemployment (%)
Source: CAPMAS
8.0
9.0
10.0
11.0
12.0
13.0
14.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13

Prime Research 4
Growth Outlook
Investments
The government targets investments of around LE290
billion in the current fiscal year in order to reach its tar-
geted growth rate of 3.5%. The LE290 billion are sup-
posed to consist of LE120 billion public investments and
LE170 billion in private investments. We expect invest-
ments during the current year to culminate at LE270 bil-
lion, yielding a real growth rate of 2.3% on the back of:
• A major portion of the stimulus package designed by
the government, LE 15.8 billion out of LE29.7 billion,
is directed towards investments. The government
plans to invest in projects that are close to completion
(such as the third metro line) so that they would start
production as soon as possible, in addition to invest-
ing in the country’s infrastructure to encourage pri-
vate sector investments.
• The lower interest rates due to the CBE one percent-
age point rate cut would encourage the business sec-
tor to borrow and invest.
• An easing of regulations by the EFSA would boost
investments by listed companies. Indeed, the market
has already witnessed several major capital increases
since the beginning of the year.
• On the other hand, we do not expect FDI to recover
yet as it awaits further stability in the political scene
as well as on the external front (looser capital con-
trols and easier repatriation). However, the US$2.9
billion investments from the UAE as well as the
US$900 million in oil investments from the 21 new
contracts are expected to sustain FDI.
Net Exports
Despite the sharp pound depreciation during last year, we
believe exports of goods and services would decline by
1.5% during this year for the following reasons:
• Petroleum exports, especially natural gas, will decline
as domestic consumption grows aggressively, while
production stagnates as foreign oil companies ap-
proach Egypt cautiously in the current period.
• Non Petroleum goods exports face several supply constraints in the short term that would hinder it from re-
sponding elastically to the depreciation of the pound. The main constrains are energy and capacity.
• Exports of services would fall due to the plunge in tourism in the first quarter as many countries issued travel
bans on Egypt on the back of the increased violence following the ousting of the former president. While most
of the travel bans have been lifted already, the quarter of travel bans have already had a negative effect on
tourism revenues.
Imports will also decline, albeit with a smaller magnitude, by 0.8% during the year on the back of the foreign cur-
rency rationing and the free shipments of petroleum from the Gulf which have saved Egypt US$4 billion in petro-
leum imports. Still, most of Egypt’s imports are necessities or inputs to the production process which makes cutting
down imports in response to the depreciation challenging, but more on exports and imports in the External Outlook
below.
FY13aFY12aLE billion
%²GDPInv.%²GDPInv.Sectors
3.024382.92185Agriculture
(2.7)291580.126258Extractions
(1.2)125191.01117a) Crude Oil
(4.0)15939(0.7)14552b) Natural Gas
2.9702.360c) Other Extractions
2.3263260.723820Manufacturing
2.7209-4.71710a) Oil Refining
2.2243171.022110b) Other Manufacturing
4.621165.91917Electricity
4.1554.645Water
5.97733.3672Construction & Build-
ing
2.967212.86131Transportation & Storage
4.941155.23914Communications
3.4354.132Information
(3.8)3203.9310Suez Canal
2.818482.01669Wholesale and retail
2.75512.2501Financial Intermediation
3.16002.5540Insurance & Social soli-
darity
6.65372.3466Tourism
4.243353.23839Real Estate
2.81862.5166Education
3.12143.0194Health
2.9201232.917817Others³
2.11,6772422.21,509236
¹ GDP at factor cost, both GDP and implemented investments are in nominal
² %: real growth rate of GDP by sector
³ Others include sewage & drainage, general government and other services and
settlements
Source: Ministry of Planning
GDP¹ and Implemented Investments by sector
We expect invest-
ments during the
current year to
culminate at LE270
billion, yielding a
real growth rate of
2.3%
We believe exports
of goods and ser-
vices would decline
by 1.5%
Imports will also
decline, albeit with
a smaller magni-
tude, by 0.8%

Prime Research 5
Fiscal Outlook
New Government, Old Budget
Despite the changing political and economic climate post
June 30 which required the new government to set a new
budget that reflects its own assumptions and plans, the
government embraced the budget prepared under the
previous government and approved by the dissolved
Shura Council. The budget expected to spend LE692 bil-
lion and collect LE497 billion in taxes and other revenues,
leaving LE195 billion or 9.6% of GDP as budget deficit, a
deficit level which the new government committed to. The
only amendments to the budget, by the new government,
represent the LE30 billion stimulus package on the expen-
diture side and its financing from the Gulf on the revenue
side.
We view the government’s deficit target not to exceed
10% of GDP as unrealistic. We estimate deficit to GDP
ratio at around 13.9% for the following reasons:
1) The changing economic environment had two main
effects on the budget, namely:
• The eruption of street violence and the application of
a dusk-dawn curfew seriously harmed business activ-
ity and consumption in the first quarter of the year
thus, lowering sales and corporate taxes as well as
taxes on international trade and other revenues than
previously forecasted by the budget.
• The fall in yields on the government’s T-bills and T-
bonds, following the ousting of former President
Mursi, is estimated to save the new government
around LE21 billion in interest.
2) The government has taken several policy measures that would raise the government’s expenditure bill, namely:
• Applying a minimum wage to all public sector employees of LE1,200 starting January 2014 (the Ministry of Fi-
nance estimates that the policy will raise salaries and wages by LE11 billion in FY14)
• Increasing pensions by 10% with a minimum increase of LE50 starting January (Estimated by official sources to
add LE4 billion to the expenditure side of this year’s budget)
• Raising the income tax exemption bar to LE12,000 annually (which will cost the government LE4 billion in lost
income tax revenues according to official estimates).
Before we briefly present our view on the budget’s main items for FY14, we would like to discuss a few longer term
issues.
Structural Problems
Despite massive political change and the transfer of power between several regimes, the economic system remains
widely unchanged and continues to suffer from the same deeply rooted structural problems.
• Salaries, interest and subsidies continue to dominate the majority of government spending with north of 80%
of total expenditure in FY13. Unlike other items in the budget, the above three are largely inflexible in the
sense that cutting down on any of them would require major policy change (such as lifting subsidies, firing
employees or defaulting on debt). Hence, the government’s budget has very little room for maneuvering to
significantly lower deficits in the short term without tackling the above issues.
• The government continues to make long term commitments while only considering the short term availability of
funds. The new policies mentioned above will cost LE17 billion this year which sounds affordable against the
LE60 billion aid from the Gulf. However, the same policies will burden FY15 budget by LE31 billion during times
in which the deficit has already reached alarming rates and availability of financing is still unclear.
FY14fFY14b**FY13a*FY12aFY11aLE billion
456527345304265Total Revenues
303357251207192Tax Revenue
32325102Grants
7195565641Property Income
5043323030Other Revenue
735718583471402Total Expenditure
19517514112396Compensation of
Employees
3231252726Purchase of Goods &
Services
16118214710485Interest
229212197150123Subsidies & Social
Benefits
8080383640Purchase of Non-
Financial Assets
3838353131Other Expenditure
279191238167137Cash Deficit
13.99.513.610.610.0Deficit (% of GDP)
f: prime forecast b: government budget
*FY13 figures are preliminary
** The figures represent the approved budget by the Shura Council in addition to
the modifications to the budget approved by President Adly Mansour
Source: Ministry of Finance & Prime Estimates
State Budget
The government
embraced the
budget prepared
under the previous
government
We view the gov-
ernment’s deficit
target not to ex-
ceed 10% of GDP
as unrealistic. We
estimate deficit to
GDP ratio at around
13.9%
Salaries, interest
and subsidies
dominate govern-
ment spending
The government
continues to make
long term commit-
ments considering
only the short term
availability of funds

Prime Research 6
Fiscal Outlook
Compensation of Employees
We expect the salaries bill to rise to LE195 billion up from
LE141 billion last year on the back of:
• The introduction of the minimum wage law starting
January which will require salary increases and ad-
justments not just for the lowest employment grades
but to the whole grade ladder and most of the gov-
ernment’s employees. The Ministry of Finance esti-
mates the cost of the minimum wage LE21.4 billion,
revised upwards from LE18 billion for the full year or
around LE11 billion for 2H FY14.
• Increased hiring by the government especially under
the temporary workers category for the projects
planned in the stimulus package.
Debt Service
The widening of the budget deficit to record levels in the
previous three years led to a swift increase in government
debt which further burdened the following budgets with
debt servicing. We expect government gross domestic
budget sector debt to continue to climb aggressively dur-
ing FY14 to hit LE1.8 trillion on the back of another year
of aggressive deficit spending by the government.
Despite the continuation of the crowding out effect by the
government, yields on T-bills and bonds started falling
following June 30 on improved investor sentiment and the
expectations of rate cuts by the CBE. Rates on T-bills fell
by around 4 percentage points between June and October
depending on maturity. Rates on bonds also declined al-
beit with smaller magnitude. We expect T-bill and T-bond
rates to stabilize at the current levels at least until the end
of Q3 FY14.
Of course, T-bills do not constitute all of the domestic debt but only 30% of it. The rest of the debt is mostly fixed
rate, longer maturities, limiting the favorable effect of the decline in fixed income yields on the debt servicing bill
of the government.
As for external debt, we discuss it extensively in the external outlook below. However, we expect its debt servicing
bill to come in slightly higher in LE terms than last year on the back of a weaker pound. Otherwise, we expect pay-
ments in US$ to remain stable despite the rise in outstanding debt, as most of the new debt is interest free.
Based on the above analysis we expect interest payments to stand at LE161 billion up from LE147 billion last year
but lower than the budgeted LE182 billion due to lower rates than forecasted by the budget.
Salaries
Gross Domestic Debt
T-bill auction yields
10.00
11.00
12.00
13.00
14.00
15.00
16.00
27-Jun
4-Jul
11-Jul
18-Jul
25-Jul
1-Aug
8-Aug
15-Aug
22-Aug
29-Aug
5-Sep
12-Sep
19-Sep
364 days 273 days 182 days 91 days
Source: Ministry of Finance
We expect the
salaries bill to rise
to LE195 billion
We expect govern-
ment gross domes-
tic budget sector
debt to continue to
climb aggressively
during FY14 to hit
LE1.8 trillion
We expect T-bill
and T-bond rates to
stabilize at the
current levels at
least until the end
of Q3 FY14.
we expect interest
payments to stand
at LE161 billion
The composition of Egyptian debt (FY13)
SIF bonds
16%
T-bonds and
notes issued to
CBE
16%
T-bills
30%
T-bonds
23%
Borrowing from
other sources
4%
Budget Sector
Bank loans
11%
-
500
1,000
1,500
2,000
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14f
LEbillion
-
40
80
120
160
200
Gross Domestic Debt (left axis)
Interest Payments (right axis)
Principal Payments (right axis) - not forecasted for FY14
52
63
76
85
96
123
141
195
0
40
80
120
160
200
LEbillion
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14f

Prime Research 7
Fiscal Outlook
Subsidies, Grants and Social Benefits
Subsidies are one of the most crucial items not just in the
Egyptian fiscal budget but perhaps in the Egyptian econ-
omy as a whole. The subsidy system, especially the en-
ergy subsidy system, has been criticized for years for its
inefficiency and its social value has been questioned re-
peatedly. Indeed, the government has taken several
measures towards adjusting the prices of energy delivered
to different industries. However, the will to reform subsi-
dies on consumer items (benzene, gas oil and butane)
have been weak for fear of a major hike in inflation.
The latest program to conserve oil subsidies has been the
smart card system; the introduction of which has been
delayed several times till now. The early phases of the
program will require vehicle drivers to use the smart cards
at the petrol stations, yet with no restrictions on quantities
or price changes. This stage is planned to kick off during
the current fiscal year. However, we are skeptic that it will
cause major savings in subsidy spending. However, we
believe that the smart card system could be used in later
stages to deliver subsidies to those who need it exclu-
sively or cut subsidies all together in an organized manner
over phases (e.g. geographical areas or types of consumers).
While writing this report, Prime Minister Hazem El-Beblawi said that the government will start the first phase of a
five to seven year program to reform fuel subsidy, pending “a smooth passage of the roadmap”. While, we see that
political will, public awareness and even media attention regarding the issue are remarkably improving, we remain
doubtful that any actual cuts in subsidy will take place before the political situation in the country stabilizes through
a new constitution in place and an elected parliament and president overseeing the government.
Based on our analysis we expect subsidies and social benefits to amount to LE229 billion compared to a last year
figure of LE197 billion and a budgeted figure of LE206 billion. Out of which food subsidies contribute LE39 billion
(LE33 billion last year and LE31 budgeted), while petroleum products subsidies amount to LE108 billion (LE120 bil-
lion last year and LE100 billion budgeted).
Purchases of Non-Financial Assets (Investments)
The government’s original budget figure for investments
for FY14 was LE64 billion, almost double the final figure
for last year of just LE38 billion. Furthermore, the major
part of the stimulus package, LE15.8 billion, is directed
towards investments, taking the government’s targeted
investments level to a staggering LE80 billion. The gov-
ernment plans to invest in projects that are close to com-
pletion (such as the third metro line) so that they would
start production as soon as possible, in addition to invest-
ing in the country’s infrastructure to encourage private
sector investments.
While we will not speculate on how much of the govern-
ment’s planned investments are going to be executed,
we would like to highlight a certain trend with regard to
investments in the budget. Before 2011, the govern-
ment’s final investment figure used to overshoot the
budgeted figure by at least 15%. On the contrary, since
2011, the government’s final investment figure started to
come short of the budgeted figure as the government’s
finances tighten amid a need to curb the deficit.
Our deficit to GDP forecast of 13.9% implies that the government would meet its ambitious invest-
ments target. While we will not speculate over how much will the government spend into investments, we would
like to draw attention that the government might have an incentive to cut back in its investments to con-
tain the deficit.
Stimulus Package Breakdown by category
Acquisition of
financial
assets, 4.3
Investments,
15.8
Wages and
Salaries, 2.6 Purchases of
goods and
services, 0.8
Subsidies, 6.2
Energy subsidy vs. oil price
No restrictions on
quantities or price
changes in the
early phases of the
smart card system
We remain doubtful
that any actual cuts
in subsidy will take
place before the
political situation in
the country stabi-
lizes
Subsidies and social
benefits to amount
to LE229 billion
The major part of
the stimulus pack-
age, LE15.8 billion,
is directed towards
investments
Since 2011, the
government’s final
investment figure
started to come
short of the budg-
eted figure
Government might
have an incentive
to cut back in its
investments to
contain the deficit
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14f
LEbillion
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Petroleum Subsidy Brent Crude (US$/Barrel)

Prime Research 8
Fiscal Outlook
Revenues
As mentioned earlier, the new government that took over
in July did not amend the budget prepared during Mursi’s
one year in power. The new Finance Minister Ahmed Galal
repeatedly mentioned that deficit will not exceed 10% of
GDP just like in the budget.
One main reason why we see the budget deficit targeted
by the Minister as unrealistic is that the tax revenue esti-
mates in the budget were made in a different economic
environment. The fundamentals of several sectors
changed significantly with the regime change as well as
the general level of economic activity. To elaborate, the
budget did not foresee almost a quarter of dusk-dawn-
curfew, neither did it predict tourism sector plunging that
hard in Q1 FY14.
Furthermore, we do not expect significant progress on any front that will lead to a higher tax revenue amid such a
fragile political environment. The Minister of Finance had made it clear several times that the government does not
currently intend to raise taxes. The government, however, cites efforts to widen tax base by formalizing the huge
and unregulated informal sector in Egypt, which we see as a better option. Still, given the government’s short life
and its long list of more critical priorities, significant progress in this front will also be unlikely.
Hence, we believe that the tax and other revenue items in the budget are remarkably overstated. We expect the
government to collect revenues of LE456 billion (vs. LE345 billion last year and LE497 billion budgeted). Out of
which, tax revenue amounts to LE303 billion (LE251 billion last year and LE357 billion budgeted). Other revenues
will bring around LE121 billion (vs. LE89 billion last year and LE138 billion budgeted). The rest is the LE32 billion
grants from the Gulf aid package.
Revenues
The tax revenue
estimates in the
budget were made
in a different eco-
nomic environment
We do not expect
significant progress
on any front that
will lead to a higher
tax revenue amid
such a fragile politi-
cal environment
We believe that
revenues in the
budget are re-
markably over-
stated. We expect
the government to
collect revenues of
LE456 billion
0
50
100
150
200
250
300
350
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14f
LEbillion
Tax revenues Grants Other Revenues

Prime Research 9
External Outlook
Reserves Replenished
By the end of June 2013, the CBE’s net international re-
serves had reached US$14.9 billion covering only 3.1
months of imports, only slightly above its near decade low
of US$13.1 billion reached in March 2013. The decline in
reserves was accompanied by a steep depreciation of the
pound that started in early 2013 when the pound lost
around 15% of its value.
The new government received a US$15.9 billion aid pack-
age from the Gulf to replenish its reserves and cover
Egypt’s domestic oil needs temporarily until economic
activity picks up and Egypt can rely on its own sources of
foreign currency again. The aid took different forms:
grants, petroleum products, interest free deposits and
FDI.
BOP Fundamentals Still Weak
Unfortunately, fundamentals for the Balance of Payment,
albeit slightly better, remain weak in our opinion. Sources
of currency inflows remain limited while currency outflows
prove resilient.
In our opinion, the trade deficit will marginally narrow to
US$28.5 billion in the current fiscal year, down from
US$31.5 billion last year. However, the services surplus
will fall to US$4.2 billion from US$6.7 billion on the back
of lower tourism and other transportation revenues offset-
ting the improvement in the trade balance. Remittances
will also stagnate as Saudi Arabia, the largest foreign mar-
ket for Egyptian labor, proceeds with its labor reform to
create more jobs domestically. All in all the current ac-
count deficit would culminate at US$4.7 billion, slightly
better than US$5.6 billion last year.
Regarding the capital and financial account, most of the
capital inflows will appear under Central Bank liabilities in
the form of deposits from the Gulf at the bank to replen-
ish reserves. we do not expect a recovery in net FDI to
take place during this current year, only sustained by the
US$2.9 billion investment in wheat silos from the UAE as
well as 21 new petroleum contracts. Inwards portfolio In-
vestment will be scarce discouraged by the capital controls.
The financial account would culminate at US$6.8 billion
down from US$9.8 billion last year leaving a balance of
payments surplus of only US$1.2 billion.
As a result, reserves will have to decline from their current
levels to US$16.2 billion back to alarming levels (3.5
months of import coverage based on FY14 imports and
lower in terms of FY15 imports). Downward pressures on
the value of the pound could be renewed.
The dynamics will leave Egypt in need of further aid or in
risk of further depreciation of the currency towards the end
of the fiscal year. We estimate that the Egyptian economy
would need between US$3.0 and US$5 billion in additional
aid during the current fiscal year to avoid a renewed crisis.
FY14fFY13aFY12aFY11aFY10aUS$ billion
25.726.025.127.023.9Exports of goods
11.512.011.212.110.3Petroleum
14.214.013.814.913.6Non-Petroleum exports
(54.2)(57.5)(59.2)(54.1)(49.0)Imports of goods
(9.5)(12.5)(11.8)(9.3)(5.2)Petroleum
(44.7)(45.0)(47.4)(44.8)(43.8)Non– Petroleum imports
(28.5)(31.5)(34.1)(27.1)(25.4)Trade Balance
19.122.220.921.923.6Services Receipts, of which
8.99.28.68.17.2Transportation, of which
5.15.05.25.14.5Suez Canal
7.09.79.410.611.6Tourism
(14.9)(15.5)(15.3)(14.0)(13.2)Services Payments
4.26.75.67.910.3Services Balance
19.519.318.413.110.5Transfers
(4.7)(5.6)(10.1)(6.1)(4.3)Current Account
3.03.04.02.26.8Net FDI
0.71.5(5.0)(2.6)7.9Inwards Portfolio Inv.
6.89.81.1(4.2)9.0Financial Account
1.20.2(11.3)(9.8)3.4Balance of Payments
6.06.51.201.2Central Bank Liabilities
16.214.915.526.635.2End of Period Reserves
Source: Central Bank of Egypt & Prime Estimates
12
16
20
24
28
32
36
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
5.8
6
6.2
6.4
6.6
6.8
7
7.2
NIR (US$ bn) EGP/USD
Source: Central Bank of Egypt & Bloomberg
Net International Reserves and exchange rate
Current Account
Fundamentals for
the Balance of
Payment, albeit
slightly better,
remain weak in our
opinion
Trade deficit will
marginally narrow
to US$28.5 billion.
However, the ser-
vices surplus will
fall to US$4.2
billion.
All in all the current
account deficit
would culminate at
US$4.7 billion.
Most of the capital
inflows will appear
under Central Bank
liabilities in the
form of deposits
from the Gulf
The financial ac-
count would culmi-
nate at US$6.8
billion
Reserves will have
to decline from
their current levels
to US$16.2 billion
The Egyptian econ-
omy would need
between US$3.0
and US$5 billion in
additional aid

Prime Research 10
External Outlook
Exports of Goods and Services
While standard economic theory suggests that exports of goods should boom upon a currency depreciation as they
become cheaper to the outside world, Egyptian exports face several supply constraints that would hamper the
growth in exports at least in the short run.
Petroleum exports, especially of natural gas, will come under pressure as domestic consumption grows aggressively
motivated by the subsidized prices, while production stagnates as foreign oil companies approach Egypt cautiously
in the current period on the back of the accumulating dues, political turbulence and the reluctance of the consecu-
tive governments to proceed with subsidy reform. Hence, we see petroleum exports at US$11.5 billion in FY14.
Regarding non petroleum exports, the chemicals industry, one of Egypt’s top non petroleum exporters, is facing
severe shortages in natural gas supply, which represents its main input, and has reduced production capacity
sharply since the beginning of 2013. Other energy intensive industries are all experiencing shortages in energy sup-
ply and have reacted in a similar fashion. Meanwhile, agricultural exports can not grow to a significant level as they
are already constrained by cultivated land, fertilizers supply and domestic consumption. Other export categories
such as pharmaceuticals have a high imported component of raw materials that would offset most of their gain
from the depreciation of the pound. As a result, we expect non petroleum exports to amount to US$14.2 billion in
FY14, up from US$14.0 billion in FY13.
Service receipts or exports of services are also not going to benefit from the depreciation. Tourism, which repre-
sents 43% of service receipts and a staggering 20% of total exports of goods and services, has seen a severe
slump on the back of the undermined security situation and the travel bans issued by countries which dominate
Egypt’s tourism market. We count at least one quarter of extremely low levels of tourism revenue, while Egypt’s
peak tourism season still faces a weak flow of tourists. Recovery is not expected before the third quarter of the year
and could possibly take longer. Hence, we expect tourism revenues to fall sharply to US$7.0 billion from US$9.7
billion last year.
Suez Canal receipts are expected to see a marginal improvement on the back of stronger recovery in Europe and
Asia. However, transportation other than Suez Canal, mostly on land transportation that passes through Egypt, is
expected to suffer from the instability in Sinai from the East and the developments in Libya from the West. As a
result, transportation receipts are estimated to total US$8.9 billion, down from US$9.2 billion last year.
Imports of Goods and Services
The shortage and rationing of foreign currency, since the FX crisis hit early this calendar year and the introduction
of the new FX auction system by the CBE, undoubtedly plays a crucial rule in squeezing imports and prioritizing
them to the most essential. Furthermore, the petroleum products aid from the gulf (US$3 billion in the original aid
package, in addition to an estimated US$1.3 billion from the UAE based on announcement by officials) will help
offset part of the petroleum imports bill.
Still, Egypt’s imports are mostly dominated by necessities
which are harder to ration or substitute. Fuels, Wheat and
Maize which are basic necessities represent around a third
of the imports and are hard to ration. Intermediate goods
represent another third and are used as inputs in produc-
tion; squeezing them would add to the domestic slow-
down and could possibly affect exports if some of them
are to be re-exported. Investment goods are another
US$10 billion (17% of imports) and are also needed to
raise production capacity and accelerate growth. Con-
sumer durables like cars, refrigerators, etc, which cost
US$3.2 billion, are expected to decline as their prices rise
on the back of the depreciation amid a period when Egyp-
tians cut back on consumption. Consumer non-durables,
US$9.3 billion is the category which is most likely to see
sharp contractions as Egyptians substitute its components
for cheaper local alternatives. All in all, we see goods im-
ports declining 5% to US$54.2 billion in the current fiscal
year, down from US$57.5 billion last year.
Wheat
US$2.0
Other (iron ore,
cotton, etc)
US$2.4 bn
Undistributed
Commodities
US$0.6 bn
Consumer non-
durables
US$9.7 bn
Intermediate goods
US$16.0 bn
Investment goods
US$9.8 bn
Raw M aterials
US$5.6 bn
Consumar durables
US$3.2 bn
Fuels
US$12.6 bn
M aize,
US$1.2 bn
The breakdown is based on 2012 figures
Source: Central Bank of Egypt
Imports Breakdown by Degree of Processing
Egyptian exports
face several supply
constraints
Petroleum exports
at US$11.5 billion
N o n - p e t r o l e u m
exports to amount
to US$14.2 billion
Tourism has seen a
severe slump,
recovery is not
expected before
the third quarter
Tourism revenues
to fall sharply to
US$7.0 billion
Egypt’s imports are
mostly dominated
by necessities
which are harder to
ration or substitute
we see goods
imports declining
5% to US$54.2
billion in the cur-
rent fiscal year

Prime Research 11
External Outlook
Remittances
It is worth mentioning that workers’ remittances have worked magnificently in the last few years to offset the weak-
ness in tourism and FDI, doubling since 2010. However, the labor reforms taken in Saudi Arabia, the largest foreign
market for Egyptian labor, to create more domestic jobs for Saudi citizens will in best case slow down the growth of
remittances, if not reverse it. 40 thousand Egyptians have already left the Saudi Arabia and 38 thousands are facing
troubles with their work permit disputes in the Kingdom.
FDI
Foreign Direct Investments in Egypt have always been
dominated by the Petroleum sector which represented
north of 60% of gross FDI inflows in any given year, even
during the high growth years pre-2008.
As already known, yearly net FDIs have fallen significantly
since January 2011 due to both declining FDI inflows and
rising FDI outflows. However, the remarkable outflows
have been contributing more significantly to the falling net
FDIs than the deterioration in inflows.
While no official breakdown of the FDI outflows is avail-
able, a large sum of which must have been attributed to
the petroleum sector which represents the majority of
foreign direct investments in the country. This can be
seen in light of the fact that Egypt had accumulated dues
to foreign oil companies operating in Egypt amounting to
US$6.2 billion in addition to delaying contracted natural
gas shipments and directing it to domestic use. Such prac-
tices by the Egyptian authorities have definitely discour-
aged foreign oil and gas companies from reinvesting their
earnings in the country in order to limit their exposure.
We see the new government keen on amending relation-
ships with foreign oil and gas companies by scheduling its
dues and planning to start repaying them quickly in order
to draw investors back to the sector. The government had
already signed 14 out of 21 new excavation agreements,
which are the first since 2010, scheduled for this year.
The 14 signed agreements amount to US$585 million in
investments as well as US$91 million in signature bo-
nuses. However, it is worth highlighting that the tough
investment experience of oil and gas companies in Egypt
in the past three years had made them reluctant to invest
aggressively in the sector before subsidy reform measures
are taken to cap the huge domestic demand leading to a
repeated outcome of directing production to the domestic
market and accumulating dues by the government.
Still, we do not expect a recovery in net FDI to take place
during this current year. In fact, we expect gross FDI in-
flows to fall sharply during the year as foreign investors
shun Egypt on the back of the political instability and the
risk of inability of repatriation, but we also expect FDI
outflow to fall offsetting the fall in gross inflows as inves-
tors find difficulty in repatriation. As a result, We expect
net FDIs to amount to roughly US$3.0 billion in FY14
dominated by the US$2.9 billion investment in wheat silos
from the UAE as well as the petroleum contracts. There is
potential however for further FDI from the Gulf as their
aid to the Egyptian economy starts taking a more sustain-
able shape.
H1 FY13FY12aFY11aFY10aFY09aUS$ million
3,2427,1017,0157,5779,667Petroleum
160733804456852Manufacturing
94813026276Agriculture
9127109304226Construction
2886134305138Real Estate
260213114874441Finance
1442158247122Tourism
91391763727Communication & IT
42465207383283Other Services
8591,530996538305Undistributed
4,71911,7689,57411,00812,836Total FDI inflow
4,4187,7867,3864,2504,723FDI Outflows
3013,9822,1896,7588,113Net FDI
Source: Central Bank of Egypt & Prime Estimates
FDI by Economic Sector
FDI Inflows and Outflows
The labor reforms
taken in Saudi
Arabia will in best
case slow down the
growth of remit-
tances, if not re-
verse it
Remarkable out-
flows have been
contributing more
significantly to the
falling net FDIs
than the deteriora-
tion in inflows
We see the new
government keen
on amending rela-
tionships with
foreign oil and gas
companies
we expect gross
FDI inflows to fall
sharply during the
year but we also
expect FDI outflow
to fall offsetting the
fall in gross inflows.
Net FDIs to amount
to roughly US$3.0
billion in FY14
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
FY09
FY10
FY11
FY12
FY13
US$billion
FDI inflow FDI outflow

Prime Research 12
External Outlook
External Debt
The last fiscal year has seen external debt balloon signifi-
cantly rising by US$8.8 billion or a staggering 26%. The
rise in external debt was the last resort, after net interna-
tional reserves were consumed, if the country was to
avoid a severe energy shortage, a freefalling exchange
rate and skyrocketing inflation.
Still, given that external borrowing was the only short
term option for the government, we believe that the
terms at which the government raised its external debt
were rather favorable. The majority of the debt taken
during the year was in the form of interest free deposits
at the CBE, which saw its external debt leap around
US$6.5 billion. Of which, US$2 billion are a Libyan deposit
with a maturity of 8 years, while the rest were a US$4.5
billion Qatari deposits, US$1 billion of which was con-
verted to a 3 year bond at 3.5% per annuam, US$2 billion
were to be covered by bonds while the rest were to re-
main as deposits. Bonds and notes increased by around
US$2.25 billion on the back of the issuance of US$2.5
billion in bonds to Qatar maturing in November 2014 and
carrying an interest of 4.25%.
The favorable external financing obtained is reflected in
stable interest payments on external debt. Interest paid in
FY13 amounted to US$643 million compared to US$658
million in the previous year.
External debt has continued to rise in FY14 as foreign
assistance continues to be the only short term solution to
the Balance of Payments problem. The Gulf aid package
which included US$ 6 billion in interest free deposits are
expected to take the monetary authorities debt higher
even after the repayment of US$3 billion back to Qatar.
External debt as of the date of this report is estimated at
US$46 billion.
Additional aid
Based on our analysis above, it seems likely that balance of payments dynamics are going to lead reserves to de-
cline again by FY14 end, which can potentially renew pressures on the currency and endanger the whole economy,
unless further aid is secured which we view as the more likely scenario. The amount of additional aid needed to
avoid another balance of payments squeeze during the current year is between US$3.0 and US$5.0 billion.
We examine below the sources of additional financing potentially available:
The Gulf states
So far the Gulf states have provided massive amounts of aid to support the Egyptian economy. Till the date of writ-
ing this report, Saudi Arabia, UAE and Kuwait have provided US$15.9 billion. However, the possibility of further aid
from the Gulf remains unclear. On one hand, the Emirati Minister of presidential affairs was quoted saying that the
Arab support to Egypt won’t last long . On the other hand, news are circulating that negotiations are under way
with Saudi Arabia, Kuwait and the UAE regarding further aid whether grants or petroleum products. Still, we view
additional aid from the Gulf as the most likely scenario.
The International Monetary Fund (IMF)
The IMF has already reiterated that it is ready to cooperate with the new government waiving its US$4.8 billion loan
that has been on the table since January 2011. However, the IMF loan comes with pre-conditions, the most impor-
tant of which is a committed and fast paced plan towards subsidy reform along with austerity measures that bring
the budget deficit to a more sustainable level. While all the consecutive governments since January 2011 have
avoided the loan for the harsh conditions that will come along with it, the loan will remain as the last resort to
avoid a severe economic crisis driven by further devaluation, which would dismantle the subsidy system and
enforce austerity measures any way.
External Debt and Debt Servicing
Last fiscal year has
seen external debt
balloon significantly
rising by US$8.8
billion
The terms at which
the government
raised its external
debt were rather
favorable
External debt has
continued to rise in
FY14 as foreign
assistance contin-
ues to be the only
short term solution
Additional aid
needed to avoid
another balance of
payments squeeze
during the current
year is between
US$3.0 and US$5.0
billion
We view additional
aid from the Gulf as
the most likely
scenario
The IMF loan will
remain as the last
resort to avoid a
severe economic
crisis
FY13aFY12aFY11aFY10aFY09aUS$ million
28,49025,59427,09226,24925,818Gross External
Government Debt
5,1592,9012,8213,0801,926Bonds and notes
23,33122,69424,27123,17023,892Loans
14,7448,7907,8147,4455,713Gross External Non-
Government Debt
9,0642,6121,5001,260212Monetary Authorities
1,6001,6241,7251,9641,797Banks
4,0804,5544,5894,2213,705Other Sectors
43,23334,38534,90633,69431,531Gross External Debt
Source: Ministry of Finance & Central Bank of Egypt
Gross External Debt Breakdown
-
10,000
20,000
30,000
40,000
50,000
FY07
FY08
FY09
FY10
FY11
FY12
FY13
US$million
-
1,000
2,000
3,000
4,000
5,000
External Debt (right axis) Interest Paid (left axis) Principal Repaid (left axis)

Prime Research 13
Monetary Outlook
In this section, we briefly include our position on monetary developments during the year.
Inflation
Inflation has picked up sharply starting this fiscal year
due to many consecutive events starting with Ramadan
then the dusk-dawn curfew, which drove upwards trans-
portation costs, followed by the Adha Eid and the back to
school season. Food inflation, which crossed the 15%
mark, in October continued to climb at rates north of 1%
monthly becoming a serious concern for the government.
As a result the government has imposed “indicative
prices”, among other policies, in order to combat further
food price jumps. However, so far, government efforts
have failed to contain the rising prices.
We expect inflation to moderate until January growing at
less than 1% per month. This comes due to a better
functioning food supply chain following the removal of
the curfew resulting in lower transportation costs and
availability of food items in the markets.
Post January, we see inflation averaging 1% per month
till June due to a pick in consumption spending as the
effects of “social justice” policies by the government kick
in. Average y-o-y inflation for the year would culminate at
10.9%.
Interest rates
The expansionary fiscal policy followed by the Ministry of
Finance has been matched with expansion monetary policy
by the Central Bank of Egypt (CBE). Indeed, the Monetary
Policy Committee (MPC) of the CBE has already cut rates
twice, each time by 50 bps in two consecutive meetings in
order to stimulate private investments and growth. The
lowering in rates by the CBE coincided with falling yields
on the government’s T-bills and T-bonds which lowers the
government’s spending on debt servicing.
We believe that the CBE still wants to lower rates further
as it outweighs growth over inflation, according to the
MPC’s communiqué, amid a three year long recession. A
further rate cut by the CBE would encourage borrowing
and investing which have reached record lows as shown
by the loan to deposit ratios of the banking the system.
Furthermore, by cutting rates, the debt servicing bill of the
government’s T-bills and T-bonds declines helping to con-
tain the budget deficit.
However, we do not expect the CBE to cut rates again
before late February 2014 in order to make sure that the
inflationary risks from the introduction of the minimum
wage law and the rise in pensions has subsided. In addi-
tion, clarity regarding the balance of payments position
and the ability to secure more aid will be needed before
the CBE can lower rates further. Otherwise, the rate cut
might actually add to the inflationary pressures and en-
danger reserves and the currency.
Once the CBE has made sure that risks have subsided, it
would cut rates by another 50bps with potential for more
cuts in the next fiscal year.
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
0.00%
4.00%
8.00%
12.00%
m-o-m y-o-y
Headline annual and monthly inflation
46%
48%
50%
52%
54%
FY10
FY11
FY12
9MFY13
Aggregate Banking system loans to deposits
CBE overnight lending and deposit rates
8.00%
8.50%
9.00%
9.50%
10.00%
10.50%
11.00%
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Deposit rate Lending rate
The government
h a s i m p o s e d
“indicative prices”,
among other poli-
cies, in order to
combat further
food price jumps.
However, so far,
government efforts
have failed to
contain the rising
prices
Average y-o-y
inflation for the
year would culmi-
nate at 10.9%
The expansionary
fiscal policy fol-
lowed by the Minis-
try of Finance has
been matched with
expansion mone-
tary policy
We believe that the
CBE still wants to
lower rates further
as it outweighs
growth over infla-
tion
However, we do
not expect the CBE
to cut rates again
before late Febru-
ary 2014
Once the CBE has
made sure that
risks have sub-
sided, it would cut
rates by another
50bps

Prime Research 14
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