Cablegate: Egypt: Eighth Annual Euromoney Conference Sept. 11-12

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DE RUEHEG #5942/01 2641130
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R 211130Z SEP 06
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 1529
INFO RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS CAIRO 005942

SIPDIS

SENSITIVE
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STATE FOR NEA/ELA, NEA/RA, EB/IDF/OMA
USAID FOR ANE/MEA MCCLOUD AND DUNN
USTR FOR SAUMS
TREASURY FOR NUGENT AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: EGYPT: EIGHTH ANNUAL EUROMONEY CONFERENCE SEPT. 11-12

Sensitive but Unclassified. Not for Internet distribution.

1. (U) Summary: Prime Minister Nazif kicked off Egypt's eighth
Euromoney conference September 11-12, highlighting improvements in
Egypt's economy and laying out his government's plans for the coming
five years. His upbeat assessment was echoed by the economic
ministers in the Cabinet, who each recited a litany of their
accomplishments over the past two years and promised even greater
effort to bolster economic growth in the near future. Panelists at
the conference discussed challenges facing the economy, particularly
the stock exchange, which has recently lost some of the gains it
made over the past two years. Private sector reps at the conference
complained about insider trading, and the key obstacle to economic
growth, lack of access to credit. End summary.

2. (U) In his keynote speech, Nazif recited a familiar litany of
accomplishments since taking office in mid-2004. Tariff and tax
cuts, banking reform, and reduction in red tape were highlighted as
irreversible structural changes that would ensure growth in the
coming years. Nazif pointed out that growth had already risen 6.9
percent in FY 2005/06, driven by increased domestic consumption,
surging exports, and $5 billion in FDI. While acknowledging that
inflation had also risen to around 8 percent, Nazif stated that
controlling inflation was less important than fostering growth. In
the next 5 years, the GOE would promote public-private partnerships,
particularly at the local level, in health care, education,
transportation, industry and agriculture, aiming to increase FDI to
$8 billion by 2011. Audience members inquired about plans to
address unemployment, currently 10% per official figures. Nazif
replied that growth would eventually diminish high unemployment
levels.

3. (U) Minister of Investment Mohieldin was harshly critical of the
World Bank's recent "Doing Business" report, which ranked Egypt 165
out of 175 on a range of criteria related to establishing and
operating new businesses. Mohieldin insisted that his ministry's
"One-stop Shop" had removed bureaucratic obstacles for new
businesses. He dismissed the WB methodology, claiming that the
sample survey of 16 businesses in Egypt was too small to give an
accurate picture of the business operating environment. Mohieldin
went on to list reforms under his portfolio, including expedited
privatization, restructuring of public companies, issuance of
corporate governance guidelines and reforms designed to stimulate
growth in the mortgage and insurance sectors. Plans for the next
few years include development of economic courts, and the opening of
a small cap stock exchange and a commodities exchange for cotton,
rice and possibly wheat.

4. (U) Minister of Finance Youssef Boutrous Ghali (YBG) touted
Egypt's successful tax reforms, noting that despite a 50 percent
reduction in tax rates, revenues were up 17 percent over the
previous fiscal year. The number of taxpayers filing returns
increased from 1.7 million in 2005 to 2.4 million in the first half
of 2006. He credited the new "trust" between the Tax Authority and
taxpayers with the improvement in collection and promised pension
reform would also be based on trust between pensioners and the
government. Turning to the deficit, YBG reined in his previous
estimates of 1.5-2 percent reductions per year over the next 5
years. He now projects reductions of 1-1.5 percent per year.
Despite budget cuts, however, privatization proceeds will be used to
expand social infrastructure, including education, health care and
transportation, to protect the poorest members of society.

5. (U) The conference continued with panel discussions, including
one on the Cairo and Alexandria Stock Exchange (CASE), the world's
best performing emerging economy stock exchange for two years.
Panelists included, inter alia, Maged Shawky, Chairman of the CASE,
Hany Sarieldin, Director of the Capital Market Authority (CMA), and
Mohamed Taymour, Board member of EFG Hermes, Egypt's largest
investment bank. Shawky pointed out that with the advent of
e-trading, retail investors have flooded the exchange, accounting
for 70 percent of total trading over the past year. Many of these
traders are amateurs, unable to assess market cycles, and have
contributed to recent volatility on the exchange. He blamed last
February's correction, when the market fell nearly 20 percent, on
retail traders who panicked when Gulf investors pulled funds out of
Egypt to shore up positions in their home markets. The slump
highlighted the need to attract more institutional investment to
stabilize the market, increase transparency of companies listed on
the exchange, and educate investors.

6. (U) Sarieldin explained that CMA is drafting amendments to the
capital markets law to authorize mutual funds, which should attract
more institutional investment, and increase disclosure requirements
for companies trading on the CASE. Steps are also underway to
facilitate entry of new companies onto the exchange. Sarieldin noted
that the CASE is dominated by a few large companies that often make
up 50 percent of the trading on a given day. The CMA will begin a
program to educate small and medium size enterprises (SME) about the
possibilities of raising capital on the exchange, a potentially
attractive alternative to the tight bank credit market.

7. (SBU) Comment: While the CASE panel touched on many of the
challenges facing the exchange, little mention was made of the fact
that insider trading is still legal in Egypt. An EFG-Hermes rep
told econoff that insider trading has led many foreign investors,
particularly large institutions, to avoid the exchange. Despite the
problems on the stock exchange, however, most business leaders at
the conference were bullish on Egypt's economy, eager to take
advantage of opportunities in tourism, mining, infrastructure,
construction and IT, among others. The real obstacle facing
investors, according to business leaders, is lack of access to
credit. While some SMEs may choose to raise capital on the stock
exchange, most still prefer bank loans. The banking sector,
however, remains conservative in credit assessments, making it
difficult for SMEs to obtain the loans needed to establish or
continue operations. End comment.
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