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Egypt to use gulf billions to spur economy

Egypt plans to avoid raising taxes or cutting spending but instead use billions of dollars in aid pledged by Gulf Arab states to spur the economy through new investments, Finance Minister Ahmed Galal said on Tuesday. After Islamist President Mohamed Mursi was deposed by the army last month, Saudi Arabia, Kuwait and the United Arab Emirates promised Egypt a total of $12 billion in loans, grants and fuel shipments. Of that, $5 billion has already arrived. The army-backed interim government, keen to improve conditions for a deeply polarized population battered by more than two years of political and economic turmoil, is under intense pressure to avoid unpopular austerity measures."The best way to deal with that is by bringing in funds from outside the country, by seeking support, by counting on friends who can provide us with some injection of funds from outside," he told a news conference."By doing that, you are not raising taxes and pushing the economy into contraction or reducing expenditure and tightening the belt," said Galal, who was appointed shortly after the army ousted Mursi on July 3. Nonetheless, it also hopes to cut energy subsidies by an annual 3.5 billion Egyptian pounds ($500 million) after it begins giving smart cards to vehicle owners next month, and would like to target more such cuts, Galal said. In the year to June 30, Egypt ran a budget deficit equivalent to just under 14 percent of gross domestic product, Galal said. The 2012/13 budget, when it was announced last year, projected a deficit of only 7.9 percent of GDP, down from 8.2 percent in 2011/12.

He expects to release the final figures for last year's budget within days. INFRASTRUCTURE PROJECTS The aid pledges by Gulf states should allow Egypt to cut its deficit both directly and by lowering its cost of finance, which has been pushed up by large-scale state borrowing from local banks since the uprising that toppled Hosni Mubarak in 2011 plunged its finances into chaos. Galal said the Gulf money had helped reduce Egypt's financing needs from outside donors to $5 billion this fiscal year from the $19 billion that had been projected six months ago.

It has reduced pressure to pursue the $4.8 billion loan that Mursi's government had been seeking from the International Monetary Fund. "So far it doesn't look like we have to, but we don't exclude it," he said. Rather than increase wages and other current expenditures, the government plans to spur the economy through investments, especially by completing ongoing projects and infrastructure such as water, sanitation, roads and bridges, he said. It will concentrate on projects that are labor intensive and benefit the poor. It will also try to pay arrears."Contractors are owed money, and because of this they don't pay other people, and it becomes a chain," Galal said. "At the end of the day the economy slows down."

"This will help economic growth in the future while helping the relatively poor," Galal said. Galal said Egypt would begin issuing smart cards to vehicle owners in September to ration fuel products and to curb leakage through theft and smuggling. Diesel and gasoline, alongside fuel oil and cooking gas, account for 20 percent of state spending. The previous government had already issued cards to tanker trucks and gasoline stations to monitor fuel deliveries. Though card holders will initially be able to buy as much fuel as they want, the state expects a reduction in theft will save it about 3.5 billion pounds a year. It also expects to use data gathered from the cards to track consumption and user needs, helping it pinpoint ways to cut subsidy costs further."Eventually you want the major users to be the ones to be charged higher energy prices, meaning in a way that corresponds to international prices," Galal said. The current interim government, which expects to remain in power only until elections early next year, is unlikely to raise fuel prices, but rather lay the groundwork for a government with a popular mandate to do so.

Money markets ecb deposit rate cut priced by markets seen unlikely

* Markets still price for cut in ECB deposit rate* But analysts see cut to zero unlikely* Could have detrimental effect on short-term marketsBy Kirsten DonovanLONDON, May 4 Markets are pricing in a cut in the rate the ECB pays banks to deposit funds overnight as a faltering euro zone economy raises expectations of further policy easing, but such a move may have a detrimental effect on financial institutions and short-term lending markets. The European Central Bank on Thursday neither signalled further monetary easing nor eliminated the possibility of more stimulus despite bank President Mario Draghi noting the uncertain picture for the euro zone economy. BNP Paribas calculates that markets are pricing in a 1-in-4 chance of a 25 basis point cut in the deposit rate - which banks receive when they park cash with the ECB - taking it to zero percent, or a 1-in-2 chance of a 12.5 basis point cut. This compares to a 33 percent and 66 percent implied probability prior to Draghi's press conference. The projections are based on the Eonia overnight indexed swap rate - a measure of future expectations for overnight market lending rates - at the time of December's ECB policy meeting. This is currently priced at around 27 basis points, around 7 basis points below current Eonia (interbank overnight) fixings, implying some measure of cut.

"A cut in the deposit rate could potentially stimulate banks to lend to the wider economy, but zero percent seems unlikely at this juncture," said RBS rate strategist Simon Peck."Markets have moved towards pricing a cut, and could go further with that, but whether it happens or not is another matter."The bank thinks the December overnight rate could fall further, to 20 basis points, as the market prices in a higher probability of a deposit rate cut, but analysts think it is unlikely the ECB's deposit rate would fall to zero."If they were to cut to 12 or 15 bps they're not forcing the banks to lend, it's more of gentle push. But if the deposit rate goes to zero it's a very different game," Peck added.

The ECB has pulled out all the stops to help the banking sector as investor and counterparty confidence crumbled with the escalation of the euro zone debt crisis on concerns over exposure to sovereign debt. The central bank's latest move was to pump over a trillion euros of three-year funds into the banking system, a notable step up in its policy to provide unlimited low cost funding. Banks are currently paid 25 basis points if they deposit money at the ECB overnight, a no risk option. If the rate is cut to zero this option disappears. Around 800 billion euros is currently being parked there and even though Draghi has said that it is not the same banks borrowing cash from the ECB as depositing it overnight, those banks that are keeping money at the ECB would lose income unless they were prepared to risk lending the money on.

"(Cutting the rate to zero) wouldn't really be in the spirit of what the ECB has been trying to do," said Credit Agricole rate strategist Orlando Green."It doesn't seem consistent, it might even be counter productive."Indeed, there are small signs that banks are being encouraged to lend anyway after the central bank's two three-year funding operations. The ECB's lending survey released last week showed banks expect to end the recent trend of tightening the rules for companies to obtain credit, although small and medium sized firms were struggling to get funding. Commerzbank rate strategist Benjamin Schroeder also said a cut in the deposit rate could have a knock-on effect on money market trading volumes and other shorter-term lending markets, such as the repo market."The "better" banks can still obtain funds from banks that have no recourse to the deposit facility at rates lower than the deposit rate. They then deposit the money at the ECB," he said."Those trades would vanish and the effect on turnover in money markets would be detrimental with no prices for short-term liquidity."

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