VZCZCXYZ0001
PP RUEHWEB

DE RUEHEG #0476/01 0781430
ZNR UUUUU ZZH
P 191430Z MAR 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 1959
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS CAIRO 000476 
 
SIPDIS 
 
DEPT FOR NEA/ELA 
TREASURY FOR BRYAN BALIN AND FRANCISCO PARODI 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN EINV PGOV EG
SUBJECT: EGYPT ECONOMIC UPDATE: INFLATION FALLS, GROWTH 
SLOWS, GOE INTERVENES TO SUPPORT THE POUND 
 
¶1. (U) Key Points 
 
--     The Egyptian Central Bank buys $1 billion in Egyptian 
pounds to support the currency. 
 
--     Inflation dropped again in February, but vendors are 
slow to lower food prices. 
 
--     GDP growth continues to slow. 
 
 
--------------------------------------------- --- 
The Central Bank Intervenes to Support the Pound 
--------------------------------------------- --- 
 
¶2. (U) On March 15, the Central Bank of Egypt (CBE) 
reportedly bought $1 Billion in Egyptian pounds, driving the 
rate from nearly 5.7 EGP/USD to 5.62. This is the largest 
intervention in recent memory by the CBE (normal daily EGP 
interbank trading is around $400 million)  and amounts to 
approximately 3% of the CBE's foreign reserves.  Since its 
recent peak in August 2008, when the pound traded at 5.3 
EGP/USD, the currency has lost more than 6.5% of its value. 
Despite this intervention there is general consensus among 
economists and analysts that along with Egypt's slowing 
economy and increasing current account deficit, a gradual 
weakening of the pound over the next year is very likely 
(estimates range from 5.8-6.1 EGP/USD). 
 
¶3. (U) While the CBE will rarely publicly acknowledge 
intervening in the foreign exchange market, the move by the 
CBE should be seen as an effort to show that the GOE will 
intervene if it sees too sudden a decline in the pound. 
Egypt's foreign reserve position, often cited by Egyptian 
officials as evidence of its strong economy, remains strong 
at $33 billion, more than twice what it was four years ago. 
Analysts at Beltone Financial in Cairo expect that the 
reserve position will be $27 billion towards the end of the 
year.  According to Beltone, Hisham Ramez, the Deputy 
Governor of the CBE, has said that the CBE would intervene 
again, if the exchange rate slides "unjustifiably" because of 
speculation. 
 
--------- 
Inflation 
--------- 
 
¶4. (U) Inflation in Egypt continues to drop. The urban 
inflation rate in February was 13.5% on a year-on-year basis, 
down from 14.4% y/y in January.  As food prices continue to 
decline, the expectation is that inflation should drop into 
single digits in the second half of 2009.  Despite the drop 
in global commodity prices over the last year, local prices 
-- particularly for food -- have fallen more slowly as 
vendors are reluctant to lower prices because of a desire to 
maintain wider profit margins and, in many cases, until they 
have sold off higher-cost inventories. 
 
¶5. (U) At the February meeting of the CBE's Monetary Policy 
Committee (MPC), the CBE lowered its overnight deposit rate 
to 10.5% and its lending rate to 12.5%.  As inflation 
continues to drop, it is widely expected that the CBE will 
make further rate cuts in its overnight lending rates. The 
next MPC meeting is scheduled for March 26. 
 
---------------------------- 
Growth Estimates Are Lowered 
---------------------------- 
 
¶6. (U) According to preliminary GOE reports on Q2 2008/9 
(Oct.- Dec. 2008), annual GDP growth slipped to 4.1% during 
the period which is a marked decline from the 7.7% annual 
growth rate in the same period a year ago and 5.8% in Q1 
2008/9. Though estimates vary widely, some expect that the 
growth rate from Q3 and Q4 will be near zero and may even 
show a slight contraction. Analysts at Beltone Financial tell 
us that, even with expanded GOE fiscal spending through its 
stimulus plans, GDP growth will continue to slow in FY 
2009/10. 
 
¶7. (U) Youssef Boutros Ghali, Egypt's Minister of Finance, 
has publicly acknowledged that economic growth in the 2008/9 
fiscal year would be in the 4-4.5% range.  He also said that 
he expects the Egyptian economy to show signs of recovery in 
8-9 months.  Boutros Ghali's estimate is more optimistic than 
that of many analysts, most of whom have lowered their GDP 
growth forecasts for fiscal year 2008/9 (July-June) to 3-3.5% 
and expect even slower growth in the 2009/10 fiscal year in 
 
the range of 2-2.5%. 
SCOBEY