VZCZCXYZ0011
RR RUEHWEB

DE RUEHEG #0404/01 0451108
ZNR UUUUU ZZH
R 141108Z FEB 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 3583
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0257

UNCLAS CAIRO 000404 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, EB/IDF/OMA 
USAID FOR ANE/MEA MCCLOUD AND DUNN 
USTR FOR SAUMS 
NSC FOR WATERS 
TREASURY FOR NUGENT AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O. 12958:  N/A 
TAGS: ECON EAID EFIN EINV EG
SUBJECT: FINANCIAL SECTOR MOU:  NEXT STEPS 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1.  (SBU) Now that the first disbursement of $275 million for 
completion of some of the benchmarks in the Financial Sector MOU has 
been made, we are considering next steps and a tentative timeline 
for verification of the remaining benchmarks.  Five hundred and 
twenty-five million dollars in ESF are tied to the remaining 
benchmarks.  As verification of those benchmarks progresses, we will 
provide the Washington interagency community with copies of the 
documentation/data required by the Monitoring Plan as soon we 
receive them from the GOE.  The status and next steps in 
verification of the remaining benchmarks are discussed below. 
 
-------------------------------------------- 
Policy Item 2 - Government Securities Market 
-------------------------------------------- 
 
¶2.  (U) The U.S will disburse USD 25 million in DSP funds upon 
completion of the following three benchmarks for Policy Item 2: 
 
Benchmark 2.1 - Implement a Primary Dealers System with dealers 
underwriting new government debt issuance through auctions and 
trading of government securities on the open market. 
 
Completed - The Primary Dealers System was launched in July 2004. 
Information on the Decree and Executive Regulations establishing the 
Primary Dealers System can be found at:  www.mof.gov.eg/debt. 
 
Benchmark 2.2 - Initiate trading of government bonds off the stock 
exchange in an open market where buyers and sellers may directly 
trade. 
 
Completed - A secondary market for government securities, working 
through the Primary Dealers System, has developed and trading is 
taking place off the stock exchange, i.e., over-the-counter, but the 
Capital Market Law requires that all over-the-counter transactions 
be reported to the Capital Market Authority (CMA). 
 
Benchmark 2.3 - Establish the legal status of and launch operation 
of Repurchase Agreements for government securities consistent with 
international best practices. 
 
Pending - A Master Global Repurchase Agreement Contract was adopted 
by the Ministry of Finance (MOF), stipulating the rights, privileges 
and requirements of undersigning parties to repurchase agreements. 
In early November 2006, the National Investment Bank concluded the 
first agreement of its kind with the Commercial International Bank, 
for the sale and repurchase of part of its portfolio of Treasury 
bonds over a two-week period.  This was the first repurchase 
agreement of Treasury bonds to take place in the Egyptian market. 
CMA Chairman, Dr. Hani Sarrei El Din, also issued decision No. 
2/2007 in mid-January, setting the legal framework through which 
selling and repurchasing transactions of bonds - both governmental 
and corporate - are executed on the stock exchange.  The CBE, 
however, has not signed off on the Master Global Repurchase 
Agreement Contract, so the benchmark is still pending.  After the 
CBE signs, three months of data are necessary, per the Monitoring 
Program, to verify that the market is truly operational. 
 
--------------------------------------------- -------- 
Policy Item 3:  Financial Sector Reform/Privatization 
--------------------------------------------- -------- 
 
¶3.  (U) The U.S. will disburse USD 200 million in DSP funds, on an 
annual pro rata basis, upon completion of the following benchmark 
for Policy Item 3: 
 
Benchmark 3.5 - The private sector banks' share of new loans made in 
the banking system during the previous calendar year will be equal 
to at least 62.5 percent.  Intermediate progress toward this goal 
will be measured from the baseline determined by the initial audit 
referenced in benchmark 3.1 (of the MOU), and calculated each year 
by annual audits of banks according to IASB standards (Note:  Though 
the MOU calls for IASB standards, the international audit firms will 
use the newer, more stringent IFRS standards for the conversion of 
the audits.  End note).  Pro-rata disbursements against this 
benchmark may be made for annual increases in the private sector 
banks' share. 
 
Pending - USAID is currently working with CBE to obtain the required 
data on the private sector banks for the baseline year 2005 
(information which the CBE already has).  The fiscal year for 
private sector banks ends on Dec 31, so the data for 2006 will be 
submitted by the banks to the CBE within the next few months.  USAID 
will obtain copies of the 2006 data from CBE as soon as possible. 
 
 
¶4.  (U) The U.S. will disburse USD 250 million in DSP funds, on an 
annual pro rata basis, upon completion of the following benchmarks 
for Policy Item 3: 
 
Benchmark 3.6 - The share of non-performing loans (NPLs) as a 
proportion of all loans in the banking system will be reduced by 50 
percent from the baseline determined by the audit of the four 
largest state-owned banks and the annual audit of private sector 
banks. 
 
Pending - We are working to get the international audit firms access 
to the audits of the two remaining state-owned banks as quickly as 
possible.  The GOE fiscal year ended June 30, 2006, and the 
statutorily-required audits conducted according to Egyptian 
standards are almost complete, according to CBE Deputy Governor 
Tarek Amer.  The international firms will need 4 - 6 months to 
complete the conversion of the audits to IFRS. 
 
A joint statement released in January by the CBE, MOF and the 
Ministry of Investment (MOI), noted that LE 16 billion of NPLs owed 
by public enterprises to public banks were settled, equivalent to 
more than two-thirds of the debts owed by these companies.  In 
addition, LE 50 billion in private sector NPLs to the public banks 
were also settled, bringing total NPLs resolved to date to LE 66 
billion.  The statement also announced that the financial positions 
of the public banks would be bolstered by LE 6 billion in the form 
of capital increases.  LE 2 billion would be allocated to the 
National Bank of Egypt, and the rest to Banque Misr. 
 
Benchmark 3.7 - The cash recovery on NPLs will equal at least 20 
percent of the book value of NPLs to be disposed of under the 
previous benchmark. 
 
Pending - According to the CBE, of the LE 66 billion in NPLs that 
have been settled, 27 percent were collected, including cash 
recoveries of 24 percent of the overall debts resolved. 
 
--------------------------------------------- --------- 
Policy Item 4:  Strengthening the Financial Sector and Policy Item 
5:  Corporate Governance 
--------------------------------------------- --------- 
 
¶5.  (U) The U.S. will disburse USD 50 million in DSP funds upon 
completion of the following six benchmarks for Policy Items 4 and 
5: 
 
Benchmarks 4.1 - Issuance of regulations that would: 
 
- Establish standards for real estate appraisal; 
 
Completed - The format for the appraisal report was established by 
the Mortgage Finance Authority (MFA) and MOI, through the national 
project for urban real estate registration, which is being 
implemented by the Ministry of State Administration Development 
(MSAD).  The appraisal report standardization is set forth in the 
rules of the Appraisers Association, which is regulated by the MFA. 
 
 
- Establish a real estate appraisal and certification program; 
 
Completed - Over 80 appraisers have been certified by the MFA and 
can now conduct approved appraisals.  The MFA board is also 
currently developing a ranking of appraisers that conforms to market 
variables and international standards.  The 3-year license renewal 
examination of the Appraisers Association also now includes review 
of standards adopted in the real estate regulations (code of conduct 
and international valuation standards, or IVS).  MFA is also 
considering a proposal by the Association to adopt new licensing 
procedures specific to various types of real estate appraisal under 
the IVS. 
 
- Establish a national land title registration system, including 
procedures and appropriate information systems; 
 
Pending - Phase I of the new national property and land title 
registration system is underway in nine pilot zones.  The pilot 
zones are new, recently-built urban communities.  A tender was 
organized by MSAD in September 2006 to solicit a provider for 
information systems to service the new registration system in those 
nine zones.  The new system is expected to be fully operational in 
the nine Phase I zones by mid-2008.  To prepare older urban areas 
for application of the new registration system, MSAD and the 
Ministry of Justice (MOJ) are working to modernize the 
currently-operational deed registration system in those areas.  The 
procedures have been streamlined and a public awareness campaign 
initiated in one model location, the Mokattam area of downtown 
Cairo.  MSAD plans to spread the streamlined procedures to all older 
urban areas of the country in preparation for application of the new 
property and land title registration system throughout the country 
by 2013. 
 
- Reduce property transfer and/or registration fees to less than 1 
percent of the transaction price; 
 
Completed - Law 83 was enacted in May 2006 bringing registration 
fees down to a flat rate, irrespective of the contract value.  In 
early August 2006, MOI issued the new schedule of property 
registration fees under the amended law as follows:  LE 500 for 
areas up to 100 square meters, LE 1000 for up to 200 sq. meters, LE 
1500 for up to 300 sq. meters and LE 3000 for areas over 300 sq. 
meters. 
 
Benchmark 4.2 - Pass legislation to: 
 
- Define rules for joint property ownership; 
 
Pending - A draft regulation was submitted by USAID contractors to 
MOJ in February 2006, which included proposals on divided 
co-ownership of property (condominia).  The MOI is using the nine 
new urban communities mentioned above as a test case for handling 
this issue.  A protocol was signed in September 2006 between the 
Ministry of Housing and New Urban Communities and MOI to facilitate 
partial property ownership and land allocation in the new 
communities.  An initial stakeholder workshop is planned for late 
February 2007, supported by USAID, to discuss reform of property 
registration legislation, and push for movement on the draft 
legislation. 
 
- Establish land ownership (title) certification for the purpose of 
securing land holding for residential or commercial property; 
 
Pending - The law being prepared by MOJ and MSAD for establishing 
land ownership (title) certification is still in draft form. Land 
ownership certification is still problematic.  Even if land is 
initially registered, ownership transfer is not.  This is mainly due 
to cumbersome registration procedures and lack of public awareness. 
 
The Title Registration Law No. 142/1964, which is the basis of the 
new property and land title registration system mentioned above, was 
implemented in rural areas but not in urban areas.  The law has not 
been changed since its issuance in 1964, nor have supporting 
regulations or technical instructions ever been issued.  Various GOE 
stakeholders have agreed to form a committee to recommend changes to 
the law that would support the new property and land title 
registration system.  The committee has not yet been formed.  Real 
estate authorities have, however, formed a committee to draft 
recommended changes to the executive regulations of the Deeds 
Registration Law (Law No. 114/1946), the basis of the deed 
registration system currently operating in older urban areas.  The 
recommendations are expected by the end of February 2007.  The MOJ 
requested USAID review and provide feedback on the recommendations. 
 
 
Benchmark 4.3 - Pass legislation and issue implementing regulations 
to enact modern bankruptcy procedures, including foreclosure and 
eviction and procedures that would facilitate joint lender/debtor 
resolution of outstanding debts. 
 
Pending - The MOJ drafted and is presenting a new civil and 
commercial executive procedures law, that will include simplified 
articles governing bankruptcy procedures.  The draft will be 
presented to parliament for discussion and approval in the current 
session.  The amended Mortgage Finance Law Regulations, issued in 
2006, facilitate foreclosure and eviction and joint lender/debtor 
resolution of outstanding debts.  The number of agents approved by 
the MFA to certify foreclosure, eviction, and other procedures 
increased from 14 to 16 in 2006. 
 
Benchmark 4.4 - Pass legislation, if required, and implementing 
regulations that would permit establishment of private credit 
bureaus. 
 
Completed - On August 30, 2005 CBE issued rules and procedures for 
the licensing of credit bureaus, and also issued approval to 
establish the first private credit bureau.  On January 16, 2006, the 
CBE Board of Directors approved implementing regulations for the 
operation of credit bureaus; rules governing the exchange of data 
and information and the system CBE will employ to monitor credit 
bureaus.  In September 2006 the Egyptian Credit Bureau (ESTAILAM), 
was established.  The bureau has since been renamed "iScore," and 
has responsibility for credit investigations and credibility ratings 
for bank loans, real estate transactions, financial leasing and 
commodity procurement.  The minimum required capital for credit 
bureaus is LE 5 million. 
 
Benchmark 4.5 - Facilitate securitization through completion of 
legislative changes. 
Completed - Securitization regulations were introduced into the 
Capital Market Law in June 2004.  In April 2006, further legislative 
amendments were made to the Capital Market Law, specifying rules of 
establishment and operation of securitization companies.  In late 
June 2006, the MFA announced the establishment of the Egyptian 
Liquidity Facility (ELF) to play the role of market-maker through 
re-financing the portfolios of banks and companies involved in the 
mortgage industry with interest rates lower than the prevailing 
market rates.  The ELF also performs securitization for primary 
mortgage financing institutions. 
In November 2006, the CMA issued rules on securitization to allow a 
securitization company or special-purpose vehicle (SPV) to issue 
more than one securitization bond using different loan portfolios. 
This significantly decreased securitization transaction costs and 
increased efficiency, while protecting rights of investors in these 
bond issues through full legal, financial and accounting segregation 
of assets and liabilities belonging to each bond issue.  As of 
February 1, 2007, the total value of securitized bonds reached 800 
million LE. 
Benchmark 4.6 - Publish a corporate governance best practice code to 
generate awareness and encourage companies to comply with the code. 
 
 
Completed - Guidelines for private sector corporate governance were 
issued by the MOI in the form of Ministerial Decree No. 332/2005 in 
October 2005.  The guidelines were prepared in accordance with OECD 
corporate governance principles, but are not binding.  The 
guidelines apply primarily to share-holding and limited-liability 
companies, established under Law 159 for 1981 (the Companies Law) 
and Law 95 for 1992 (the Capital Market Law), in addition to 
brokerages.  A code of corporate governance for public sector 
companies was published at the beginning of July 2006 by the 
Egyptian Institute of Directors, and these guidelines are binding. 
 
-------------------------------- 
Policy Item 6:  Insurance Sector 
-------------------------------- 
 
¶6.  (U) The U.S. will disburse USD 25 million in DSP funds upon 
completion of the following benchmark of Policy Item 6: 
 
Benchmark 6.1 - Privatization of the candidate public insurance 
company. 
 
Pending - The due diligence diagnostic reports for the four public 
insurance companies were completed in September 2006.  The Insurance 
Holding Company is currently reorganizing the insurance companies in 
preparation for privatization.  If progress continues at the current 
pace, full privatization of one of the companies is possible by 
mid-2007 at the earliest. 
 
------- 
COMMENT 
------- 
 
¶7.  (SBU) The next likely disbursement of ESF will be for progress 
on the pro-rata benchmarks in Policy Item 3.  The fully converted 
and analyzed data for these benchmarks are not likely to be 
available until June, at the earliest.  Once the data have been 
verified as fulfilling the requirements of the Monitoring Program, a 
disbursement of approximately $150 million could be possible in the 
July - September timeframe.  If the Repurchase Agreement in Policy 
Item 2 is signed by CBE during this timeframe and CBE can provide 
three months worth of data verifying the market is operational, an 
additional $25 million could be added to the above figure.