VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #2436/01 3351347
ZNR UUUUU ZZH
R 301347Z NOV 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0956
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0434

UNCLAS CAIRO 002436 
 
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 EG
SUBJECT:  Economic and financial leaders debate Egypt's economic 
future 
 
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 
reality. 
 
¶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. 
SCOBEY