Egypt, the Arab world's most populous country, has emerged from the global economic slowdown relatively unscathed, Credit Suisse said in a report on Tuesday. Though rising unemployment and slower revenues from tourism and the Suez Canal have weighed on growth, the 4.7 percent real GDP growth in FY2008/09 was strong in global context. Credit Suisse expects real GDP growth of 5.5 percent in FY2009/2010 and 6.0 percent in FY2010/2011, boosted by domestic growth in particular. Credit Suisse expects real private consumption growth of 5 percent in FY2009/2010 and also in infrastructure investments, higher FDI and a rebound in global trade, where Egypt benefits from Suez Canal revenues and exports. The report said inflation been curbed from its peak of around 24 percent in August 2008 and Credit Suisse is forecasting around 10 percent in FY2009/2010 on the assumption that food price inflation will slow down, but this is still high and higher than the government's aim of 6-8 percent core inflation for this fiscal year. Egypt is a large net importer of food products and food price increases could potentially put upward pressure on inflation. Last week, according to data released by CAPMAS (Central Agency for Public Mobilization and Statistics), headline inflation declined to 12.8 percent in February, from 13.6 percent in January. Egypt's GDP would likely need to grow at around 6-7 percent to keep unemployment levels steady. However, as this is not likely to be the case, Credit Suisse expects the level of unemployment to increase from 9.5 percent in FY2008/2009 to 10.2 percent in FY2009/2010. Management sees flat revenues or slightly down y/y, EBITDA margins pre-provisions in the mid-40 percents (i.e. 5-6ppts lower than 2009) and capex at EGP1.5-2 billion (i.e. 50-100 percent higher than in 2009). Very roughly, this would imply cuts to consensus forecasts for 2010 of 10-15 percent on EBITDA and probably 25 percent+ on net income. However, management track record is to give very conservative guidance, hence guidance looks negative, but is probably not quite as negative as it looks. Management proposed a 2009 dividend less than half market consensus, as it wants to retain cash to pay for a domestic mobile licence. If it cannot make progress toward getting a domestic mobile license by summer 2010, management will propose an interim dividend that will make up for what has not been paid at the end of 2009. Operating trends are weak in the wireline business, hence management now sees its own mobile licence as essential in defending the business overall (i.e. bundling fixed and mobile products together). Management believes a fourth domestic licence may be available and they have expressed interest to acquire it if so. “The cost for the license is unknown, but we believe it will be lower than the $2.6 billion Etisalat paid for the third licence in 2006/7,” Credit Suisse said.
