Economic and financial leaders debate Egypt's economic

UNCLAS SECTION 01 OF 02 CAIRO 001204

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

REF: CAIRO 2436

E.O. 12958: N/A
TAGS: ECON EFIN EINV EG
SUBJECT: Economic and financial leaders debate Egypt's economic
future

CAIRO 00001204 001.5 OF 002


Sensitive but unclassified. Please handle accordingly.


1. (SBU) Key Points:
* At the Ambassador-hosted Economic Roundtable, leading economic
minds in Egypt believe that sound macroeconomic policies have
contributed to Egypt's 7% growth the last several years.
* The Roundtable believed that Egypt will weather the current
economic downturn better than most regional peers.
* The Roundtable expressed concern that the reform mentality of the
government of Egypt has begun to wane.


2. (SBU) Summary: Continuing with recent practice (reftel),the
Ambassador invited a diverse group of financial business leaders and
economic thinkers to an Economic Roundtable to discuss Egypt's
current economic situation and its future. The group included the
World Bank's Chief Economist for Egypt, three banking CEOs, an
economics professor from Cairo University, the executive director of
a leading think tank, an advisor to the investment authority, and a
partner at a law firm who is also a former AmCham President. While
all felt secure in noting that Egypt would continue to weather the
current global recession, the deeper the discussion progressed, the
more vocally participants expressed real concerns about Egypt's
investment climate, the deterioration of the reform agenda, and the
deeper structural problems which persist. End Summary.


3. (SBU) There was general agreement that the global crisis is
easing and that the situation is improving in Egypt as well. The
group generally agreed that the 4.7% GDP growth target for the year
was feasible and that Egypt's financial system remains as sound as
it has ever been. All acknowledged some of Egypt's basic economic
indicators had suffered during the global recession, particularly
noting the reduction in: FDI, trade, tourist arrivals, and Suez
Canal receipts. The group emphasized that Egypt is not in crisis,
but that the priority for Egyptian policy makers should be the
longer-term structural problems that constrain growth and which have
plagued Egypt for years.


4. (SBU) The group was generally complimentary of the Central Bank
of Egypt's (CBE) handling of monetary policy, pointing to the
generally stable foreign exchange rate. Several pointed out that
while net international reserves have fallen (from about $35 billion
at their peak last year to about $32 billion now),they remain
healthy and it is reasonable for the reserves to deteriorate
somewhat in the given circumstances. Most felt that the CBE
intervention had been modest and warranted. None expressed concerns
that a run on the currency was likely or that there was risk of a
precipitous fall in the level of gross international reserves.
World Bank Chief Economist Santiago Hererra, however, noted that
monetary policy has suffered from a lack of transparency. He cited
the CBE's selling of some of its holdings at commercial banks as an
example of the CBE's opaqueness in monetary dealings. (Note: Given
the lack of significant movement of the Egyptian pound in recent
months vis a vis other emerging markets, the pound is stronger than
its regional competitors, therefore making Egyptian exports less
competitive.)


5. (SBU) The discussion of the Egyptian fiscal stimulus was wide
ranging. Several felt that the 15 billion LE (US$ 2.7 billion)
which was approved several months ago has not been enough. Several
argued that to truly be counter-cyclical, Egypt should be buying as
much as possible now and investing into infrastructure at a much
faster rate if it was to truly "benefit from the crisis." Yet, at
the same time, no one in the room could point to anything specific
that the stimulus money had done or any data on jobs created or
saved as a result of government interventions. Further, there did
not seem to be any expectation that the government would provide any
accounting for its stimulus spending. While the group generally
wanted more money spent, most seemed to believe that the GOE is
relatively inept at spending its infrastructure investments, and
that the GOE cannot build any public good quickly, thus largely
defeating the purpose of stimulus spending.


6. (SBU) The World Bank Chief Economist reminded the group that the
GOE has a budget deficit of 8%, so to significantly increase
spending on poorly and slowly implemented infrastructure projects
would only exacerbate that problem and may not result in the desired
increase in demand. He reminded the group that subsidies and public
sector wages still dominate the government's budget so there is very
little room to spend more, without running up the deficit. Other
participants seemed less concerned about the high deficits and were
willing to take on higher debts to fund such extraordinary spending.


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