VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #0565/01 0921345
ZNR UUUUU ZZH
R 021345Z APR 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 2080
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS CAIRO 000565 
 
SIPDIS 
 
STATE FOR USTR 
 
E.O. 12958: N/A 
TAGS: ECON EPET EFIN EAGR ETRD ENRG PGOV EG
SUBJECT:  Egyptian Deputy Central Bank Governor discusses 
intervention and the economy 
 
¶1. (SBU) Key Points: 
 
--Deputy Central Bank (CBE) Governor Hisham Ramez said that the 
general nominal weakening of the Egyptian pound from July 2008 
onward was primarily a function of market forces. 
 
--After the pound hit a recent high of LE 5.7/$US in the exchange 
bureaus during the weekend of March 15, the CBE felt it had to 
signal to the market that trading for speculative purposes alone 
needed to be curtailed. 
 
-- He shared the general optimism expressed by private analysts that 
inflation would continue to trend downwards, likely reaching single 
digits before June. He expected the real interest rate, which has 
been negative since December 2007, to become positive this summer. 
 
--Since 80 percent of GDP is driven by consumption, Ramez argued 
that the government should be finding ways to stimulate consumption. 
 He argued the 15 billion LE stimulus this fiscal year and 15 
billion LE next year may not be enough. 
 
 
Central Bank Intervention 
------------------------- 
 
¶2.  (SBU) Deputy Central Bank of Egypt (CBE) Governor Hisham Ramez 
discussed the CBE's approach toward inflation and the exchange rate 
with Treasury Attache on April 1.  Regarding the CBE's interventions 
in the foreign exchange market, Ramez stuck close to standard CBE 
talking points, noting that the CBE's policy is to allow supply and 
demand to dictate the exchange rate and that the CBE has no 
predetermined price for the pound in mind, and that the fundamentals 
of the country's economy will ultimately determine what the pound's 
value is.  He said that the general nominal weakening of the 
currency from July 2008 until very recently was a function of market 
forces.  He noted that it was a well known fact that Egypt's balance 
of payments situation was deteriorating and with it should come a 
natural weakening of the pound.  However, in late February when 
Prime Minister Nazif made comments about the pound weakening, the 
CBE started to witness much more speculative activity in the market. 
 
 
¶3.  (SBU) After the pound hit LE5.7/$US in the exchange bureaus 
during the weekend of March 15, the CBE felt it had to signal to the 
market that trading for speculative purposes needed to be curtailed. 
 He said all the CBE wanted was enough of an intervention to 
demonstrate to currency speculators that the CBE was willing to 
intervene to prevent disorderly depreciation.  When asked what he 
thought of the press reporting on the intervention size, which 
varied from reports saying that the CBE spent $1 billion to "less 
than $100 million," he called the $1 billion reference "ridiculous" 
and pointed out what he had also pointed out to journalists - there 
were only $330 million in foreign currency purchases in the 
interbank market that day, so the CBE intervention had to be less 
than that.  When journalists then glommed onto a figure of $100 
million, he neither confirmed nor denied, but he told us it was less 
than $100 million.  He felt that the pound's stable trading around 
LE5.65/$US ever since the intervention shows that speculation has 
slowed or stopped and that the current price is a relatively 
accurate price for the currency.  He noted that the Egyptian focus 
on the dollar-pound rate was unwarranted, and that the euro-pound 
rate was equally, if not more, important.  The CBE's intention to 
focus increasingly on the euro-pound rate was also conveyed in last 
November's IMF Article IV consultations with the GOE on 
macroeconomic policy conditions.  (Note: During the recent period in 
which the pound has nominally depreciated by about four percent 
against the dollar, the pound has appreciated against the euro. 
Compared with most world currencies, the pound has been very stable, 
and on a trade weighted basis, the pound has appreciated.) 
 
Reserve Adequacy 
---------------- 
 
¶4.  (SBU) Ramez noted that the Central Bank still has large reserves 
and that "reserves are there for a purpose, so we will use them if 
we have to."  That said, when referencing the $1 billion 
intervention figure from the press, he said that the CBE would not 
want to have to intervene that much, as it could indicate a more 
significant erosion of reserves.  He said the end-March reserve 
level was $32.187 billion, which shows an $886 million decrease 
compared with end-February ($32.1 billion still represents 8 months 
of imports or 657% of short-term debt).  The $866 million decrease 
is the largest monthly drop reported recently, and it throws into 
question how much the CBE really is intervening.  Based on Ramez's 
end-March number, reserves have fallen $2.8 billion, or about 8%, 
since their peak in September 2008.  In last November's IMF Article 
IV, the authorities indicated that they felt the reserves were 
adequate such that the balance of payments pressures could be met 
comfortably with a modest decline in CBE net reserves and more 
 
 
flexible exchange rate management.  When asked about the composition 
of the reserves, he noted that only he and the Central Bank Governor 
know the details, but said that all the international reserves are 
in very conservative government paper, with none in corporate bonds 
or equities.  He said that given recent low global interest rates, 
the CBE had been shortening the tenure of its investments. 
 
¶5.  (SBU) Comment: While the deterioration in reserves is not 
unexpected, and the levels remain healthy, the monthly reduction has 
become rather consistent and cannot continue forever.  Currency 
traders may continue to watch CBE response to the weakened pound and 
could test the CBE's commitment to market principles. End comment. 
 
Inflation 
--------- 
 
¶6.  (SBU) Regarding inflation, he shared the general optimism 
expressed by private analysts that inflation would continue to 
decline, likely reaching single digits "before June". He expected 
the real interest rate (difference between the nominal interest rate 
and inflation), which has been negative since December 2007, to 
become positive this summer.  He noted, however, that with the pound 
depreciating and monetary policy easing, he remains concerned about 
inflation ticking back up next year.  Hence, he noted, the recent 
decision to bring rates down by only 50 basis points, rather than 
100, showed the Central Bank's conservatism.  Acknowledging the 
tremendous political pressure that the CBE has been under from 
nearly all parts of the government and the private sector to reduce 
rates more quickly, Ramez stuck to standard CBE talking points that 
price stability remains the overarching objective of the Central 
Bank, and with real interest rates negative, as they have been 
recently, there was no way to reduce rates more quickly.  He is also 
concerned about the rising government deficit, which he argued could 
contribute to inflationary pressures.  He also noted that the CBE 
intends to keep modernizing its monetary practices, with publication 
of the minutes of the Monetary Policy Committee meetings, one of the 
next important transparency improvements, expected within a year. 
 
¶7. (SBU) Ramez noted that foreign investors left the Egyptian market 
very quickly in September-October 2008 at the peak of the worldwide 
financial crisis, as risk appetite dried up and investors had to 
cover their margins elsewhere.  While losing $8-10 billion in such a 
short time was a shock to the system in Egypt, he noted that the 
withdrawal of foreign investors was orderly, and Egypt took pride in 
the fact that when investors wanted to take their dollars home, they 
did not face any limitations or restrictions.  He felt that this 
"positive" experience for investors will be remembered and will 
contribute to their desire to return when risk appetites return.  He 
expected to start seeing a return of foreign investors later this 
year. 
 
Banks 
----- 
 
¶8. (SBU) Ramez noted his frustration that banks in Egypt "still have 
a free lunch," meaning that they can safely make much of their money 
from investing in nearly risk free Egyptian government treasury 
bills.  Growth in lending and the leverage ratios at banks have 
barely moved in the past several years.  Ramez reiterated that the 
CBE will not force banks to lend, but that they will try to find 
ways to make lending a more attractive business activity to banks. 
He also noted that the state-owned banks still have a ways to go in 
terms of modernizing and behaving on a commercial basis. 
 
Crisis Reaction 
--------------- 
 
¶9. (SBU) Regarding the slowdown in growth and the government's focus 
on trying to maintain high growth rates, he noted that interest 
rates will not contribute to economic recovery as much as fiscal 
spending will.  Since 80% of GDP is driven by consumption, the 
government should be finding ways to stimulate that consumption, so 
he argued the LE 15 billion (US$2.65 billion) stimulus this fiscal 
year and LE 15 billion (US$2.65 billion)next year would not be 
enough.  He expressed optimism in terms of the global response and 
the response in Egypt, noting that the U.S. had acted quickly and 
that international cooperation was unprecedented.  He noted that the 
Finance Minister was under considerable pressure to simultaneously 
keep the deficit down while stimulating growth and sticking to the 
GOE reform agenda. 
SCOBEY