Egypt waters down stock market tax after bourse drops sharply

Reuters Middle East

* Some assets exempted, threshold raised on cash dividends

* Stock market recoups some losses made since 10 percent tax announced

* Gulf investors may grumble, but effects seen short-term - analyst (Adds minister comment, analyst comment, market reaction)

CAIRO, June 2 (Reuters) - Egypt has watered down a tax on stock market gains it announced last week as part of efforts to trim a high budget deficit, after the country's bourse recorded its biggest daily drop in almost a year on Sunday.

Beset by more than three years of economic and political turmoil since a popular uprising ousted Hosni Mubarak in 2011, Egyptian authorities are trying to steer a course between boosting state revenues while not discouraging investment.

Finance Minister Hany Dimian announced the new 10 percent tax on dividends and on gains on share transactions on Thursday , drawing an uneasy initial response from the market.

The main share index closed down 3.5 percent on that day and, after the two-day market break, it fell a further 4.2 percent on Sunday.

"They are increasing budget revenues, (and the) initial reaction from investors is largely negative. (But) fiscal sustainability and government efforts to balance the budget ... will be positive in the long term," said Moheb Malak, economist at Prime Securities.

The budget deficit hit 14 percent of economic output in the last fiscal year and it is set to stay high at around 12 percent in the current and the coming fiscal year starting on July 1.

"They should be panicking about the deficit, it deserves panicking, but it's good that they're taking action. Nobody expected steps to lower the deficit to be popular," Malak said.

Authorities have now sugared the fiscal pill slightly, helping the market recoup some of its losses on Monday.

The finance ministry had initially set an annual tax-free limit of 10,000 Egyptian pounds ($1,400) on cash dividend payments for individuals resident in Egypt.

Financial Supervisory Authority head Sherif Samy told Reuters late on Sunday the tax threshold would be raised to 15,000 pounds. In another, earlier amendment, Finance Minister Dimian said dividends paid in shares would be tax-exempt.

'BOUND TO HAPPEN'

Ahmed Hafez, co-head of equity research at HC Brokerage in Cairo, said the announcement of the new tax had lacked clarity. "What exactly the tax will look like has led to confusion among market participants in general," he said.

Dimian estimated late on Saturday that the tax would raise between 3.5 and 4.5 billion Egyptian pounds.

It is part of a broader package of fiscal reforms announced in conjunction with last week's presidential election.

Abdel Fattah al-Sisi, the general who toppled the country's first freely elected leader - Islamist Mohamed Mursi - following mass protests, has taken more than 90 percent of the vote, according to results that are still provisional.

Profits from stock market transactions in Egypt are currently tax-free, a situation Allen Sandeep, head of research at Naeem capital, said could not last forever.

"The timing might not have been ideal... but a capital gains tax was bound to happen like in any other market," he said.

"It might affect investments from (the Arab Gulf). They might be a little bit disappointed with the capital gains tax," Sandeep said, adding any negative impact would likely be temporary.

Gulf investors repatriating such profits generally do not have to pay tax at home. Several Gulf governments have helped prop up Egypt's finances during the political crisis with aid and soft loans.

After news of the amendments to the tax, Egyptian shares were up as much as 2.8 percent on Monday. According to bourse data, local and retail investors were net sellers while institutions and foreigners were net buyers.

Investment and Industry Minister Mounir Fakhry Abdel Nour told reporters the draft tax bill had been sent to the presidency for approval and was expected to be signed into law on Monday.

($1 = 7.1504 Egyptian Pounds) (Reporting By Ehab Farouk and Shadia Nasralla; Writing by Shadia Nasralla; editing by John Stonestreet)

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