Bloomberg News

Egypt Stocks Tumble Most Since April on Capital Gains Tax Plan

June 02, 2011

June 2 (Bloomberg) -- Egyptian stocks fell the most in almost seven weeks after the government unveiled a capital gains tax on dividends and higher corporate tax bracket to rein in the budget deficit. The country’s 2020 dollar bond surged.

Egypt’s benchmark EGX 30 stock index, the world’s third- best performer in May, lost 2.7 percent to 5,361.88 at the 2:30 p.m. close in Cairo. That marked the steepest drop since April 18. Commercial International Bank Egypt SAE, Egypt’s biggest publicly traded lender, fell the most since April 20. EFG-Hermes Holding SAE tumbled 5.9 percent.

“The market is reacting negatively, which is normal,” said Walaa Hazem, who helps oversee about $1 billion in Egyptian assets at Cairo-based HC Securities & Investment. “The tax hike on companies will cause a decline in profitability, so it is causing local and institutional investors to re-evaluate their investments.”

The North African country will levy a 10 percent capital gains tax starting next fiscal year on dividend payments, mergers and acquisitions and asset revaluations, Minister of Finance Samir Radwan said yesterday. The government also plans to raise taxes for companies with profit of 10 million Egyptian pounds ($1.7 million) or more a year to 25 percent from 20 percent.

The plan to levy a capital gains tax only applies to dividend distributions and not to profit from trading in stocks, the Egyptian Exchange said today. The bourse is studying the plan and will discuss it with the business community and the market’s regulator before giving its opinion to the government.

Budget Deficit

The most populous Arab country is trying to finance a budget deficit projected to widen to 11 percent of gross domestic product in the year ending June 2012 from an estimated 8.6 percent for the year ending this month, according to a cabinet statement yesterday.

Egypt plans to increase subsidy spending and salaries of state employees to meet demand for improving living standards after a popular revolt ended 30 years of rule by former President Hosni Mubarak in February.

The EGX 30 is down 25 percent this year, the worst performer among 91 indexes tracked by Bloomberg, even after climbing 10 percent in May.

Default Swaps

The government’s 5.75 dollar bond due in April 2020 jumped after the tax announcement eased concern over the budget deficit. The yield on the security fell 15 basis points, or 0.15 percentage point, to 5.66 percent, at 3:13 p.m. in Cairo, the lowest level since Jan. 14. The cost of insuring Egyptian government debt against default for five years fell 5 basis points to 299, the lowest level since Jan. 14, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The tax hikes may be “negative for the market but positive for the budget deficit,” Mona Mansour, the co-head of research at CI Capital, a Cairo-based investment bank, said yesterday. “This will help reduce the deficit because it will bring in more revenue for the government.”

Commercial International Bank retreated 3.7 percent to 29.98 pounds. EFG-Hermes, the country’s biggest publicly traded investment bank, slumped to 21.13 pounds. Credit Suisse Group AG cut its recommendation on the shares to “neutral” from “outperform.”

--Editors: Claudia Maedler, Shaji Mathew.

To contact the reporter on this story: Ahmed A Namatalla in Cairo at anamatalla@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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