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