Minister of Investment Talks Economic Reform, Privatization

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."

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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.


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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