VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #2221/01 2941058
ZNR UUUUU ZZH
R 201058Z OCT 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0676
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0423

UNCLAS CAIRO 002221 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
USTR FOR FRANCESKI 
TREASURY FOR PARODI AND BAYLIN 
COMMERCE FOR 4520/ITA/ANESA 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV PGOV EG
SUBJECT:  IS THE EGYPTIAN GOVERNMENT READY FOR A GLOBAL SLOWDOWN? 
 
Sensitive but unclassified.  Please handle accordingly. 
 
¶1. (SBU) Summary:  Egypt's stock market, like nearly all globally, 
has been significantly down this year and the global financial 
crisis has only accelerated that decline.  The index is down 50 
percent from its April historic highs, and in October, the most 
intense period of global financial crisis, the local index shed more 
than 20 percent of its value.  That said, just a small percentage of 
Egyptians are invested in the stock market, Egyptian banks are very 
conservative, and Egypt enters this volatile period with strong 
growth, so Egypt's real economy has seen relatively little specific 
impacts from the financial crisis.  However, the Government would 
probably like to believe that it is more immune than it is. 
President Mubarak has held two Cabinet meetings with his economic 
team recently, and several members of the economic team have spoken 
publicly about planned reforms and other initiatives to ease the 
economic impact of ongoing financial turmoil, including an October 
12 press conference by Prime Minister Nazif and an October 19 speech 
at the AmCham by Minister of Trade Rachid.  The message has been 
that Egypt's financial system is safe, that the GOE is monitoring 
the situation, and that even in a global recession Egypt will 
weather the storm better than others.  While we are not aware of any 
comprehensive assessments done by the GOE on the specific risks 
Egypt faces in this global crisis, some ministers have mentioned 
some "new plans" and "incentives" in the press, none of which 
contain specificity.  End Summary. 
 
¶2.  (U) At a speech to the Amcham on October 16, Minister of Trade 
and Industry Rachid warned that although the Egyptian banking sector 
is sound, Egypt is nonetheless likely to suffer from the global 
economic crisis that he predicted would inevitably follow the 
current period of financial turmoil.  Following the lines of the 
IMF's World Economic Outlook he said, that as OECD countries slow, 
growth in 2009 will come from emerging markets, including China, 
India, Indonesia and Egypt.  He expressed concern, however, that a 
protectionist trend may emerge and said that WTO's Lamy had called 
him about an emergency meeting.  The financial crisis, he said, is a 
"hurricane that must pass" but noted that it would create 
opportunities for some companies and countries.  On the positive 
side, for Egypt, the drop in commodity prices would lead to a drop 
in inflation, which, at 20-plus percent year-on-year, has been one 
of Egypt's biggest economic concerns. 
 
¶3.  (U) In the case of Egypt's banking sector, which Central Bank 
Governor El Okdah publicly described last week as "highly liquid," 
Rachid observed deposits are safe and lending continues.  This 
stability has meant that the GOE's economic team has been able to 
focus on the looming economic slowdown which Rachid predicted would 
affect Egypt's exports, and other significant sources of forex, 
including tourism, foreign direct investment, remittances and Suez 
Canal revenues.  Egypt has been spared the financial crisis, he 
said, noting that the GOE now needs to be forward thinking on 
sectoral initiatives to "at least minimize the damage" if not take 
"full opportunity of the disruption." 
 
¶4.  (U) Rachid said that under current economic conditions, the 
appropriate policy response in Egypt is "a higher level of 
engagement" on economic reform.  To continue at the same pace, he 
said, would be to lose ground and see GDP growth rates fall to 3-5 
percent.  Egypt needs 7 percent GDP growth to control unemployment 
and address poverty.  His goal, he said, is full manufacturing 
utilization rates, no layoffs, and completion of the 1000 factories 
now under construction.  To meet these goals, he said, the GOE will 
design a set of reforms and measures for every sector, with an 
overall strategy of: ensuring adequate access to finance, continuing 
to attract private investment, including by Egyptians, and 
maintaining the government's infrastructure investment program. 
This will include pushing Egyptian banks to increase their lending 
activities.  He also suggested that he will engage more actively 
with emerging markets such as Turkey and China, and maintain trade 
and investment flows with India and Africa. 
 
¶5. (SBU) Rachid's remarks followed an October 12 press conference by 
Prime Minister Nazif, Central Bank Governor El Okdah and Minister of 
Investment Mohieldin in which they recited many of the statistics 
which indicate Egypt's financial stability and safety. El Okdah 
reviewed the strong position of the Egyptian financial system, in 
part due to reforms begun in 2004; noting that net international 
reserves (NIR) are safe and are in Treasury bonds in safe countries; 
the NIR is diversified; Egyptian banks have a relatively small 
amount invested overseas; and loan-to-deposit ratios are much lower 
in Egypt than in other countries. 
 
¶6.  (SBU) All of these things are true.  Egypt has been relatively 
slow to introduce new financial products, which in the current 
environment, makes them appear wise.  Also, the CBE's bank reform 
program of the last few years has contributed to the improved asset 
quality and the more cautious approach towards lending of most 
banks.  While this has led to low credit availability and a slow 
credit growth, it leaves the banks in good stead in this 
environment.  However, while starting from a very low base, the last 
several years have seen growth in some new financial instruments 
like mortgages, credit cards, and consumer credit. While this type 
of credit is still a relatively small portion of overall credit, and 
it is primarily concentrated in a small handful of banks, some 
analysts are already warning that given the lack of familiarity with 
a credit culture and absent better financial literacy, that even 
this small amount of new credit could begin to pose some system 
risks. 
 
¶7. (U) In the period between the Nazif press conference and the 
Rachid speech, several sectoral ministers hinted at the kind of 
reforms the GOE may be contemplating.  Transport Minister Mansour, 
for example, hopes to attract more investment in ports and road 
projects.  Housing Minister Al Mahgrabi said a new plan will be 
announced to boost activity in the building materials sector.  In 
addition to announcing delays in removing energy and other subsidies 
in the industrial zones, and eliminating the export tax on cement, 
Rachid has said that Egypt's Export Guarantee Company will receive 
additional capital.  He also said new incentives could be offered to 
license industrial projects, and credit for industrial projects 
could be enhanced. Rachid told the Ambassador on the margins of the 
Amcham speech that he hoped to use the urgency of the crisis to 
accelerate additional economic reform. 
 
¶8.  (SBU) Additionally, the Ministry of Investment (MOI) will use 
financial crisis to push implementation of an existing plan to 
create a single regulator for the Capital Markets Authority, the 
Mortgage Finance Authority and the Insurance Authority.  MOI has 
been working on this key reform measure for some time.  Mohieldin 
told us over the weekend that the ministry will cite the financial 
crisis when it submits the draft single regulator law to parliament 
in November.  According to the minister's advisor, MOI will argue 
that the draft law is a key part of the GOE's response to the 
financial crisis, and ask parliament to pass the law expeditiously. 
MOI is targeting January 1 for passage of the new law, but the 
minister's advisor said it could possibly happen by the end of 
November. 
 
¶9. (SBU) Comment: There are few specifics of any of the "new 
proposals" being discussed, and given an absence of analysis about 
how slower global growth will affect Egypt, it is hard to know 
exactly where Egypt should focus any "new efforts."  Clearly Egypt's 
economy is linked to external developments, so reductions in 
tourism, Suez Canal receipts, and foreign direct investment could 
all contribute to slower growth.  Clogged credit markets have 
reportedly already started affecting exporters who depend on letters 
of credit in order to ship goods.  Anecdotally, we have heard 
bankers mention that the L/C market has been affected, something 
that will impact Egypt's export-dependent growth strategy.  That 
said, Egypt has a large domestic demand, an increasingly diversified 
manufacturing base, a huge government sector which continues to 
employ huge masses, so even if growth drops off, it will still be 
above historical norms. And, while oil prices are falling, and Gulf 
countries may have less to invest, they still are relatively well 
off to continue to invest in Egypt. 
 
¶10. (SBU) Comment (cont): Egypt's reformers have been riding a wave 
of global praise in recent years, so in some ways may think of 
themselves as infallible.  Global financial crisis or not, the 
economic team needs to redouble its efforts to keep Egyptian growth 
at a high and sustainable level and to fix the inequitable growth 
which has worsened with years of inefficient subsidies.  While 
subsidy reform was a part of Mubarak's lexicon after last year's NDP 
party conference, it has disappeared in the current environment; 
Rachid refused to answer a question at the AmCham on removing 
subsidies.  Given the declining cost of commodities and lack of 
political will to take on tough reforms, we expect that the GOE will 
continue to use subsidies as its principal way to help the poor. 
While this may help with public perceptions, it ignores long-awaited 
reforms needed for long-term economic growth in the areas of the 
education, land ownership, housing, the civil service and the 
welfare system.  It is worth noting that Finance Minister 
Boutros-Ghali has not yet weighed in publicly.  It will be 
interesting to see if any "incentives" which are rolled out run 
counter to his goal of fighting the deficit. 
SCOBEY