VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1311/01 1940919
ZNR UUUUU ZZH
R 130919Z JUL 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 3159
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS CAIRO 001311 
 
SIPDIS 
SENSITIVE 
 
STATE FOR NEA/ELA 
TREASURY FOR BRYAN BALIN AND FRANCISCO PARODI 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EFIN ETRD EAID PGOV PREL EG
SUBJECT: Minister of Investment Talks Economic Reform, Privatization 
and Elections 
 
¶1. (SBU) KEY POINTS 
 
- Investment Minister Mahmoud Mohieddin told the Ambassador that 
successes in the Egyptian economic reform program have helped 
mitigate the impact of the global economic crisis. 
 
- The Ministry of Investment looks to the USG for continued support 
and technical assistance. 
 
- Sustainable growth continues to be an issue for the GOE, and 
Mohieddin does not expect much near-term progress on economic reform 
given the current economic and political environment. 
 
- The MOI plans to release a revised version of its privatization 
scheme soon with more details on  broadening ownership, protecting 
the interests of future generations, and establishing a professional 
asset management agency to manage the process. 
 
¶2. (SBU) On July 1, the Ambassador met with Egyptian Minister of 
Investment Mahmoud Mohieddin to discuss the current state of 
economic reform and the effect on the bilateral relationship of 
President Obama's speech. Mohieddin talked about the newly 
implemented single non-bank financial regulator (EFSA) which had 
come into existence that day.  The EFSA places all non-bank 
financial institutions under one roof for better coordination of 
regulation. He said that he was "very pleased" about the single 
regulator and that the new regulatory structure was not simply a 
response to the financial crisis, but was the result of a project 
begun with the 2003 financial sector reforms. 
 
¶3. (SBU) If the global financial crisis had hit in 2004, he added, 
"we would have been in trouble" since the economy at that time was 
marked by weak balance sheets, poor corporate governance, bad loans, 
and ailing insurance companies.  He said that Egypt appreciated the 
"kind support" of the U.S. in financial sector reform in banking, 
insurance, and mortgage finance. He said that in the next few years 
the GOE will decide if banks will continue to be regulated by the 
central bank or if they will move regulatory supervision to the 
EFSA. 
 
¶4. (SBU) The Ambassador told Mohieddin that she was glad to hear 
that USAID had achieved goals set several years ago and added that 
the USAID was now developing a new strategic approach. For the U.S. 
and Egypt, it is time to reframe our objectives, and she added that 
the next two years will be transitional years as we move to a new 
approach. 
 
¶5. (SBU) The Ambassador said that when President Obama talked about 
expanding cooperation with the Muslim world, he was talking about 
countries like Egypt. There is a desire to expand programs in 
education, science and technology, and democracy and governance, she 
said, adding that the level of U.S. assistance was unlikely to rise 
and the days of large cash transfers are over.  Mohieddin responded 
that at this point "technical cooperation is more important than 
financial support." 
 
-------------------------------------- 
Expanding Access to Financial Services 
-------------------------------------- 
 
¶6. (SBU) The USAID Mission Director raised the issue of broadening 
access to financial services beyond the privileged top 10% of the 
population. Mohieddin agreed, saying that there has been a slight 
improvement but "nothing to be impressed about."  He pointed out 
that the majority of Egyptian companies are small  with 90% of 
corporations having less than LE 10 million (US$1.8 million) in 
issued capital, and 70% have less than LE1 million (US$180,000). 
 
¶7. (SBU) Mohieddin said that access to finance for SME and 
microfinance continues to be a focus of financial sector reform. In 
response to a question by the Ambassador, he confirmed that 
microfinance lenders will continue to be regulated by two separate 
regulatory frameworks-- the new EFSA will regulate microfinance 
companies, and the Ministry of Social Solidarity will continue to 
regulate NGOs that provide microfinance services. He added that 
regulatory oversight of issues such as terrorist finance and 
combating money laundering will apply to microfinance NGOs as well. 
 
 
--------------------------------------------- ---------- 
Economic Reform Slowed by Inflation and Credit Concerns 
--------------------------------------------- ---------- 
 
¶8. (SBU) Mohieddin said that the pace of economic reform had slowed 
over the past 18 months as a result of the sharp increase in food 
and fuel prices in 2008 followed by the onset of the global credit 
crisis. He added that commodity price inflation had a larger impact 
 
on Egypt than the credit crisis. Since then, external factors have 
improved, and Egypt expects inflation of less than 10% "for a 
while," though commodity prices have been creeping up this year. 
 
¶9. (SBU) Mohieddin said that the GOE is trying to continue reforms, 
but for the time being the focus would be more short term. The 
Ministry of Finance is concentrating on controlling the budget 
deficit, and the GOE is challenged by how to maintain high growth. 
He told the Ambassador that the second quarter growth rate had 
exceeded lowered expectations, and since 60% of Egypt's GDP comes 
from domestic demand, Egypt can survive "for a while" by relying on 
domestic demand.  However, he added that while a GDP growth rate of 
4.5% is good for this year it is not sufficient in the future. Egypt 
continues to face problems of poverty, high unemployment, low 
salaries, and a low standard of living.  "6% is the critical 
minimum" growth rate needed to improve the situation in Egypt, he 
said. 
 
¶10. (SBU) Mohieddin suggested that the Egyptian economy needed to 
diversify further and that the GOE could take other measures to 
stimulate growth such as cutting interest rates and making more 
aggressive infrastructure investments. He said that a plan covering 
52 new infrastructure projects has been presented to President 
Mubarak, but "this government will not do anything dramatic."  When 
asked, he told the Ambassador that subsidy reform was unlikely this 
year, but that the issue of energy subsidies will be revisited in 
2010, and that January could see the announcement of an "interesting 
approach" to subsidies. Lower oil prices have eased some of the 
financial burden of subsidies and the GOE's fiscal budget 
assumptions for the price of oil have been reduced from $120 to 
$60-70 per barrel.  Energy, he pointed out, represents 75% of the 
GOE subsidy bill and amounts to five and a half times education 
spending and six times the level of health spending. 
 
------------------------- 
Privatization: Next Steps 
------------------------- 
 
¶11. (SBU) Mohieddin said that the GOE privatization initiative would 
continue and that there would be an announcement in two weeks 
regarding the next steps on privatization. He said that the key 
pillars of the program would be broadening ownership, protecting the 
interests of future generations, and establishing a professional 
asset management agency to manage the process.  He said that the 
initiative would now cover 86 companies (twice as many as originally 
proposed) but will not include everything from the original 
proposal. The distribution of free shares would not be conducted, 
and shares would be sold only to Egyptians. The new proposal would 
include the establishment of a "future generations fund" into which 
some of the privatization proceeds would be deposited.  Though the 
plan is not perfect, he said it covers "80% of what I wanted." 
 
--------- 
Elections 
--------- 
 
¶12. (SBU) Mohieddin told the Ambassador that the current Nazif 
government is "cruising" and is not pursuing any aggressive reforms. 
He said that after 2010 elections, a new government may take "bold 
steps".  When asked by the Ambassador if he expected early elections 
(of the People's Assembly) to be called this summer, he replied that 
"I have no information, but it could happen." 
 
¶13. (SBU) He added that there is no dispute between the government 
and parliament, which is the normal cause for early elections, but 
that there are a number of issues that would be resolved if early 
elections were held including several disputed seats as well as the 
64 new Assembly seats dedicated to women legislators.  "We've been 
asked by the Secretary General of the NDP to be ready," he added. 
The Minister said that the mere talk of early elections has 
motivated parliamentarians to work harder for their  constituents. 
He said he "would like to see elections sooner to encourage the 
government to take action sooner rather than keeping the wait and 
see attitude." 
 
---------------------- 
Obama Speech Follow-up 
---------------------- 
 
¶14. (SBU) With respect to President Obama's speech, Mohieddin said 
that the President covered many issues that are important to the 
agenda of his ministry. He said that Egypt would be happy to 
participate in a follow-up summit. He hoped that the speech would 
encourage entrepreneurship and a larger role for "new blood" such as 
the Egyptian Junior Business Association. The Ambassador told 
Mohieddin that one of her goals was to help raise the education 
level of young Egyptians to a global level. She discussed her ideas 
 
of working with model schools and both the public and private 
sectors to enhance the level of science education.  Mohieddin said 
that human capital investment through education was critical and 
talked about new British university scholarships that the Ministry 
had established. 
 
¶15. (SBU) During the meeting, the Minister told the Ambassador that 
he planned to travel to the U.S. in September as part of an 
"investment roadshow" being put together by the American Chamber of 
Commerce in Egypt (AMCHAM). 
 
SCOBEY