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Cablegate: Financial Sector Cash Transfer Update

VZCZCXYZ0016
RR RUEHWEB

DE RUEHEG #3365/01 3331553
ZNR UUUUU ZZH
R 291553Z NOV 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7584
RHEHNSC/NSC WASHDC
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0357

UNCLAS CAIRO 003365

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA AND EEB/IFD
NSC FOR RICK WATERS
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: EAID PREL ECON EG
SUBJECT: FINANCIAL SECTOR CASH TRANSFER UPDATE

REF: Cairo 2968

Sensitive but Unclassified. Please handle accordingly.

-------
Summary
-------

1. (SBU) Since the Financial Sector (FS) MOU cash transfer's first
disbursement of $275 million in January 2007, the GOE has met
several additional benchmarks. Pending conclusion of ongoing
financial analysis of banking sector performance, up to $275 million
could be disbursed in 2008, bringing the total disbursed to $550
million. The just-completed IMF/World Bank Financial Sector
Assessment Program Update shows that Egypt continues to make
progress in financial sector reform. We expect financial sector
reform to continue and extend well beyond completion of the
benchmarks in the FS MOU, as evidenced by the planned privatization
of Banque du Caire. End summary.

------------------------------
Possible Disbursements in 2008
------------------------------

2. (SBU) We anticipate as many as three separate disbursements in
2008 under the Financial Sector MOU. One would be based on specific
actions taken in the corporate governance and real estate financing
area, and the other two will be based on actual performance achieved
in improving the quality of the public banks' balance sheets. We
cannot prejudge the outcomes of the audits of the public banks, but
continue to believe that over the three year life of this program,
significant progress will be made, particularly in reducing NPLs and
increasing the cash recoveries by the government. In a recent
conversation with Sub-Governor Tarek Kandil, he hinted that the NPL
improvements may not show up in this first round of audit
comparisons, at least for the state-owned banks, based on the
nearly-complete audit for FY 2006.

--------------------------------------------- ---------
1st POSSIBLE DISBURSEMENT - JANUARY 2008 - $50 MILLION
--------------------------------------------- ---------

3. (SBU) In Policy Area 4 (Real Estate Financing) and Policy Area 5
(Corporate Governance), the formal USG verification has started and
when it is finished in the next two weeks, we expect to disburse $50
million against the following benchmarks:

-- Establish a private sector credit bureau
-- Facilitate a securitization process
-- Enact modern bankruptcy and foreclosure procedures
-- Establish a national land title registration system
-- Define rules for joint property ownership
-- Publish a code of corporate governance

--------------------------------------------- ------
2nd POSSIBLE DISBURSEMENT - MARCH 2008 - UP TO $100
MILLION
--------------------------------------------- ------

4. (SBU) In Policy Area 3 (Reforming the Banking Sector), the GOE
is working to reduce non-performing loans in the public banks,
recovering substantial cash repayments in the process, which
ultimately will increase the private banks' role in the system. We
are awaiting data from the private auditing firms which are
currently in the public banks assessing 2006 performance. This data
will be compared against the 2005 data in order to calculate the
cash transfer's first year pro rata disbursements. The 2006 data
should be available by January 2008 and assuming positive progress,
we anticipate a disbursement of up to $100 million could be made by
March 2008. As noted above, until we see the data, we will not know
if the ongoing NPL reductions will have been captured in this
particular audit year or not.

--------------------------------------------- ---------
3rd POSSIBLE DISBURSEMENT - LATER IN 2008 - UP TO $125 MILLION
--------------------------------------------- ---------

5. (SBU) After completing the 2006 audit work, the auditing firms
are to continue work immediately on the 2007 data. We are told they
could start in February 2008 which potentially leads to a second
annual pro rata disbursement by September 2008 (the audit takes 3-4
months, and verification/comparison takes roughly 2 months.)

6. (SBU) We also expect it may be possible to disburse against the
insurance privatization benchmark (Policy Area 6 - $25 million), as
Minister Mohieldin told PDAS Liz Dibble that this is scheduled to
happen by June 2008. Note that the insurance benchmark requires a
51% privatization level, and there remains some uncertainty about
whether that level of privatization will be achieved.

7. (SBU) Therefore, by the end of FY 2008, we reasonably hope to
disburse $275 million. More is possible but it will depend upon the
amount of progress the GOE achieves in meeting the pro-rata
benchmarks. This would leave $250 million remaining to be disbursed
in 2009.

-------------------
Remaining benchmark
-------------------

8. (SBU) CBE Sub-Governor Kandil and Sub-Governor Mohamed Tammam
told PDAS Dibble that the CBE remains hesitant to sign the
Repurchase Agreement (a benchmark worth $25 million -- part of
Policy Area 2, designed to support a well functioning securities
market). In reaction to that timeframe, PDAS Dibble suggested that
the GOE notify USAID officially if it does not foresee implementing
any of the outstanding benchmarks in the MOU within two years, so
that a decision can be made about re-programming those funds.
Kandil promised to do so. Dibble's discussion of outstanding MOU
benchmarks with other GOE officials will be reported septel.
RICCIARDONE

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