Cablegate: Economic and Financial Leaders Debate Egypt's Economic


DE RUEHEG #2436/01 3351347
R 301347Z NOV 08





E.O. 12958: N/A
SUBJECT: Economic and financial leaders debate Egypt's economic

Sensitive but unclassified. Please handle accordingly.

1.(SBU) Summary: The Ambassador invited a diverse group of financial
business leaders and economic thinkers to the Residence for an
Economic Roundtable to discuss Egypt's current economic situation
and its future. The group included the World Bank Resident
Representative, two investment bank CEOs, an economics professor
from the University of Cairo, and a partner at a leading law firm
who is also a former AmCham President. There was considerable
agreement about the problems Egypt faces, many of which are well
known, but less confidence that the road ahead will be smooth or
that the government would cope with the challenges competently. The
overall tone showed somewhat more anxiety than similar such
conversations just a few months ago, presumably a function of the
continued global downturn and the first quarter growth in Egypt
(July-September) coming in under expectations at 5.8 percent and
Egypt's stock exchange has been one of the hardest hit in the
region, losing over 60 percent year-to-date. End Summary.

2. (SBU) There was an unwavering view that the global situation was
extremely serious and that it has already begun to affect Egypt.
There was also general agreement that compared with many other
countries, Egypt's banking system was in better condition than
others and that Egypt was entering the crisis from a position of
relative strength. This is a result of the banks' conservative
history and the Central Bank's supervision which has emphasized
stringent availability of credit, over the need to expand credit
growth to spur business.

3. (SBU) There was also general agreement that Egypt would feel the
effects of the global crisis through reduced FDI, less demand for
exports, reduced remittances, and reduced use of the Suez Canal.
Participants went on to note that domestic demand would also likely
suffer, in part from psychological effects of malaise. The group
stated that domestic demand needs to be energized, and they seemed
to share the view, expressed by Minister of Finance Boutros Ghali
recently, that interest rates are excessive and that reducing
interest rates should be one tool the government uses to stimulate
demand (Note: urban inflation came in at 20.2% in October, and the
benchmark interest rate is 11.5%. End note.) Mohammed Taymour,
Chairman of Pharos Holdings, argued that inflation is falling, so if
one takes a forward-looking approach, the real interest rate is not
as negative as if one looks backward, arguing that rates need to
come down to stimulate domestic demand, as is being done in many
countries around the world.

4. (SBU) Two other means of stimulating demand suggested by Taymour,
were to direct new fiscal spending towards subsidizing mortgages to
stimulate the housing market and providing more quality investments
in schools. (There is a subsidized mortgage product in Egypt, but it
is only for the poor. Regarding investing in schools, the Finance
Ministry has been trying to launch a public-private-partnership
program to build 300 schools and we expect its launch imminently.
Its impact on jobs, growth, domestic demand, or on the quality of
education, will not be known for some time. End note.)

5. (SBU) Taymour noted that the Central Bank's handling of the
exchange rate also contributes to Egypt's falling exports. He noted
that nearly all currencies of the world have depreciated this year
against the dollar, yet the pound remains at or near the same rate
the year began. He argued it should be allowed to float more freely
and that Egyptians should not be so psychologically concerned about
the pound reaching 6 LE/$1 (Note: the pound currently trades at 5.56
LE/$1. The pound has not shown much movement since the CBE adopted
the current "managed float", but this summer the pound did show some
strength, appreciating to 5.25 LE/$1 in August, before depreciating
towards its more historical trading band where it stands now. End
note.) Alla Saba, from Beltone Financial who also sits on the
Central Bank Board of Governors, noted that the Central Bank is not
trying to peg the rate, but rather, wants to limit extreme
volatility. Saba warned that if the pound were to depreciate beyond
6 LE/$1 it could result in greater dollarization.

6. (SBU) Regarding the labor force, the group noted that the
government has been focused on job creation in the last several
years, setting a target of creating 750,000 jobs a year just to
barely keep ahead of new job entrants. This effort has shown some
results in the official data as unemployment figures have edged down
from 11% to 8% in the last several years. All noted that the big
firms in Egypt have been in a hiring mode for the past several
years. However, speaking from real experience, some in the group
noted that not only were firms slowing down new hires, there were
some who were considering layoffs. As a means to make Egypt's labor

law more flexible and to make the hiring and firing procedures more
responsive to private sector needs, the 2002 Labor Law included a
provision which states that firms may release labor when economic
conditions merit it. Taher Helmy of Baker MacKenzie noted that the
looming downturn will force the first test of that provision, as the
economy has been growing steadily since the provision was
introduced. The outcome of that test was far from clear, he noted.

7. (SBU) The Roundtable coincided with President Mubarak's annual
address to the Parliament, and there was some commentary on
Mubarak's remarks. In particular, all agreed that in order to
ensure that job creation is maintained, and to provide something
useful to the country, there needs to be greater government
attention paid to investing in infrastructure that can employ large
numbers. The quality of infrastructure in Egypt has been improving,
but remains below the quality of regional peers and is one deterrent
for more investment. Some speakers decried the large projects,
which are the typical Egyptian response, often with large fanfare
and large expense but take a long time to materialize and do not
have the practical impact needed. They suggest that instead, the
government should focus on smaller projects, as simple as paving
unpaved roads, adding sidewalks where there are none, etc.
Mubarak's speech did refer to infrastructure, but only in general
terms, mentioning the need for investment in water, ports and roads.

8. (SBU) As with any discussion on the quality of Egypt's banking
sector, there was praise for the banks' conservative positions which
makes them less vulnerable in this down turn, along with the
accompanying frustration in the banks' consistent lack of interest
in actually lending and playing the critical role of stimulating
private sector development. (Note: Banks in Egypt make reliable
strong returns simply by rolling over government debt, so do not
have strong incentives to lend. Banks also tend to stick with their
trusted large corporate clients, and have been slow to enter the SME
market. This is slowly changing. Egypt also does not have a strong
non-bank financial sector geared towards the needs of the poor;
microfinance is relegated to NGOs and business associations which
are not able to generate the efficiencies of scale needed to make
microfinance more successful. End note.) Alia el Mahdi from Cairo
University believed that Egypt's banks have failed the Egyptian
entrepreneurs and Taher Helmy strongly agreed. Saba agreed that
banks had become too risk averse, but urged the group to consider
where the sector has come, noting that the Central Bank has largely
ceased to direct banks when and how to lend, but rather, has allowed
market principles and credit risk analysis to determine the value of
potential new clients. All agreed that access to finance for micro,
small and medium customers remained a significant stumbling block to
Egypt's successful growth, and that neither the government nor the
market were responding quickly enough or efficiently enough to this

9. (SBU) Comment: The group concluded by noting that many reforms
considered "low hanging fruit" had been completed, and that now the
reform effort was more difficult for the government. They noted
that there is little political consensus in the country, and little
trust between citizen and state. The instinctive reaction of the
public and the media is to assume the worst with any new government
initiative, regardless of the economic merits of the reform. The
conversation reinforced the need of the government to develop a
greater political consensus and to improve its dialogue and
messaging with the citizenry. Converting that to a reality will be
difficult, so in the meantime, USG efforts to support the reformers
as much as possible needs to continue, to set the stage for the day
when the government can tackle large structural issues with the
support of its populace.

© Scoop Media

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