Cablegate: Embassy Cairo
DE RUEHEG #1927/01 2811644
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P 081644Z OCT 09
FM AMEMBASSY CAIRO
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C O N F I D E N T I A L CAIRO 001927
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E.O. 12958: DECL: 10/08/2019 TAGS: ECON EAID EFIN EINV EG ETRD PGOV PREL
GOE MINISTERS SAY EGYPT REMAINS COMMITTED TO ECONOMIC REFORM Classified By: ECPO Minister-Counselor Donald A. Blome for Reasons 1.4 (b) and (d).
1.(U) Key Points - GOE says it is committed to continuing economic reform. - Rachid expects exports to recover over the next 24-26 months. - The GOE is actively working to diversify trading partners and broaden its investor base. - Mohieldin expects 5-5.5% GDP growth in the current fiscal year. - The GOE hopes to use public-private partnerships to fund needed infrastructure investment without busting the budget. ------- Summary -------
2.(U) A financial conference last week in Cairo featured speeches by Prime Minister Ahmed Nazif as well as several members of his cabinet. The Euromoney conference focused on Egypt's response to the global economic crisis and how the country is adjusting to a new paradigm of less global liquidity and lower investor appetite for risk. As with similar conferences in the past, the GOE sent out its most well-spoken ministers to assure the investor community that Egypt was weathering the financial storm and remained a good place to invest. At this year's conference, the recurring message was that Egypt continues to show strong growth, and that it is diversifying its trade relationships and investor base beyond Europe and the United States. The GOE ministers also focused on the idea that public-private partnerships would be the key to stimulating investment in Egypt's decaying infrastructure without jeopardizing fiscal discipline. --------------------------------------------- ---------- Trade is recovering, and a new focus on internal demand --------------------------------------------- ----------
3.(U) Minister of Trade and Industry, Rachid M. Rachid, told the conference that, despite the sharp drop in GDP growth that Egypt has seen in what he described as one of the most challenging years in recent memory, he is certain that the GOE's stimulus package and confidence building measures have given sufficient momentum for economic reform to continue. Rachid said that there are significant opportunities for Egypt in the short and medium term to generate investment, create new jobs, and increase competitiveness.
4.(U) Rachid outlined two key areas of near-term focus for his ministry. The first is a focus on "internal trade" aimed at improving the domestic supply chain and movement of goods within Egypt while creating more competition and better opportunities for both consumers and producers. Admitting that Egypt had to "make up" for a period of neglect in the sector, Rachid said that over the next five years the GOE intends to increase investment in the domestic sector from LE2.4 billion (US$436 million) to LE25 billion (US$4.55 billion). These investments would be targeted at infrastructure, supply chain improvements, and broadening opportunity to areas outside of the main urban areas of Cairo and Alexandria.
5.(U) Rachid was also fairly upbeat on the foreign trade. He pointed out that Egyptian non-oil exports had risen from LE44 billion (US$8 billion) in 2005 to LE95 billion (US$17.3 billion) in 2008. He outlined an aggressive plan to increase this number to LE200 billion (US$36.4 billion) over the next four years. He added that this level of growth could not be accomplished by "doing what we have been doing" and that there would be significant cost involved. Rachid said that his goal was to target the top 100 retailers across the globe and help create 1000 new Egyptian exporters. A further challenge, he added was to sustain new and existing exporters through technical support and streamlining bureaucracy. Rachid said another key element of Egypt's export strategy would be to further diversify its export markets through closer ties and trade agreements with countries in Africa, Latin America, and Asia. --------------------------------------------- -------- Mohieldin: Egypt needs more PPPs and Asian investment --------------------------------------------- --------
6.(U) Investment Minister, Mahmoud Mohieldin while saying that last year's economic growth was better than expected, cautioned that it was "not time yet for celebrating." He pointed out that despite the economic situation, (official) unemployment was down from 11% in 2004 to a current rate of 9% and that inflation had been brought down from more than 22% in mid-2008 to 8.4%. He said that he expected fiscal year 2009/10 (July-June) growth to rebound to more than 5%, and that 5.5% growth was "possible." He described this rate of growth as "promising" and said that he was encouraged that economic growth was spread across many sectors of the economy.
7.(U) Mohieldin focused on the need for Egypt's growth to benefit the entire population. He told the audience that the responsibility of the government was to achieve growth that was "inclusive, fair, and sustainable" and compatible with social policy. A minimum of 5% GDP growth was necessary for what he called "equity in the economy." Nothing, he said, was "automatic" about the trickle-down effect and that the GOE needed to do more both in terms of infrastructure investment and better public access to education and heath care. Within his ministry he said that projects to decentralize investment activity in the economy would "unleash the potential" of the different governorates of Egypt. This would be accomplished through creation of local investment units to support SME growth, new laws to improve access to finance, and general improvements in doing business in Egypt.
8.(U) Mohieldin cautioned that the problems of the global economy are not yet behind us and Egypt was adjusting to the new global norms of lower growth and scarcity of capital. He said that Egypt would focus on attracting investment from the Gulf and Asian countries to diversify capital inflow. Recent meetings with Asian investors had been met with a "very positive response."
9.(U) With regards to infrastructure investment and the role of the private sector, Mohieldin focused on public-private partnerships (PPP) as way to increase infrastructure spending without adding to the fiscal deficit. He said that his ministry was preparing a new PPP law to be submitted to parliament that would help to enhance the role of the private sector in stimulating economic growth. According to Mohieldin, the GOE has plans for LE 8-10 billion (US$ 1.45-1.81 billion) in infrastructure spending in the current fiscal year. Further government investment, he added, would have to be offset by revenue measures and could not be allowed to increase the fiscal deficit.
10.(U) In response to a question about a new round of privatization, Mohieldin said that the government still plans to announce a new privatization scheme, but that there are still issues surrounding the valuation of public sector companies. He added that the share of GDP contribution and employment in public sector enterprises continues to shrink and is nowhere near as significant as it had been in the past. -------------------------------------- Nazif firm on continuing reform agenda --------------------------------------
11.(U) In a public interview at the close of the conference, in response to repeated questions as to whether the global financial crisis had discredited the ideology of market reforms, Prime Minister Ahmed Nazif declared his commitment to continuing reforms and integrating Egypt further into the world economy. Nazif attributed the Egyptian economy's resilience during the global crisis to the reforms Egypt had undertaken since he became Prime Minister in 2004.
12.(U) Nazif listed health, education, energy, and transportation infrastructure as his top priorities and highlighted transportation infrastructure projects as areas that would both attract investment and improve local economic conditions. Egypt, he added, remains attractive to foreign investors due to its relative strength in GDP growth, large local market, and its geographical location as a regional hub. He also repeatedly stated that he expected the domestic private sector to play a bigger role in the economy than it had before. ------- Comment -------
13.(C) The extremely aggressive goals set out by Rachid and Mohieddin strike us perhaps more as aspirational rather than the calculated result of investment and export-enhancement planning. The investment community has by and large responded positively, and several investment analysts have told us that that the GOE is pursuing the right agenda to try to grow the economy and that they are bullish on Egypt in the medium to long term. As yet, however, the plans are short on details and the GOE has not released any concrete details on how it will actually achieve a doubling of exports and a ten-fold increase in domestic infrastructure investment in the next few years without significantly expanding the fiscal deficit. The GOE admits that it is years behind in its infrastructure spending and is expecting public-private partnerships to fill much of the funding gap. This is a fairly new strategy for Egypt and is unclear as to whether or not there are enough favorable profit opportunities and financing options outside of the petroleum sector to attract the required levels of private investment. Additionally, the lack of leverage in the Egyptian economy which helped to limit the negative impact of global economic woes will also slow the country's recovery and may hamper its competitiveness with respect to its competitors in the export market.
14.(C) After a period of palpable "fatigue" among many reform-minded government ministers, it is encouraging to see the Egyptian government publicly renewing its commitment to economic reform, particularly in challenging economic conditions. Of course, context is important, and the ministers presented their agendas to a welcoming audience with a clear bias and often a financial stake in the continuation of current reforms. To a large extent, the speeches were intended for the international investment community rather than a domestic audience. From that perspective the ministers hit all the right notes, assuring investors that the government will do all it can to stimulate the economy and growth while making the country as investor-friendly as it can as the country competes for a share of a much smaller pool of global investor liquidity. We suspect, however, that political pressure to maintain stability in the run up to the Parliamentary elections of 2010 and the 2011 Presidential election will dampen any zeal for bold movement on the economic reform front. Scobey