GOE MINISTERS SAY EGYPT REMAINS COMMITTED TO ECONOMIC REFORM

C O N F I D E N T I A L CAIRO 001927



SENSITIVE

SIPDIS



DEPT FOR NEA/ELA

TREASURY FOR BRYAN BALIN AND FRANCISCO PARODI



E.O. 12958: DECL: 10/08/2019

TAGS: ECON, EAID, EFIN, EINV, EG, ETRD, PGOV, PREL

SUBJECT: GOE MINISTERS SAY EGYPT REMAINS COMMITTED TO

ECONOMIC REFORM



Classified By: ECPO Minister-Counselor Donald A. Blome for Reasons 1.4

(b) and (d).



1. (U) Key Points



- GOE says it is committed to continuing economic reform.

- Rachid expects exports to recover over the next 24-26

months.

- The GOE is actively working to diversify trading partners

and broaden its investor base.

- Mohieldin expects 5-5.5% GDP growth in the current fiscal

year.

- The GOE hopes to use public-private partnerships to fund

needed infrastructure investment without busting the budget.



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Summary

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2. (U) A financial conference last week in Cairo featured

speeches by Prime Minister Ahmed Nazif as well as several

members of his cabinet. The Euromoney conference focused on

Egypt's response to the global economic crisis and how the

country is adjusting to a new paradigm of less global

liquidity and lower investor appetite for risk. As with

similar conferences in the past, the GOE sent out its most

well-spoken ministers to assure the investor community that

Egypt was weathering the financial storm and remained a good

place to invest. At this year's conference, the recurring

message was that Egypt continues to show strong growth, and

that it is diversifying its trade relationships and investor

base beyond Europe and the United States. The GOE ministers

also focused on the idea that public-private partnerships

would be the key to stimulating investment in Egypt's

decaying infrastructure without jeopardizing fiscal

discipline.



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Trade is recovering, and a new focus on internal demand

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3. (U) Minister of Trade and Industry, Rachid M. Rachid, told

the conference that, despite the sharp drop in GDP growth

that Egypt has seen in what he described as one of the most

challenging years in recent memory, he is certain that the

GOE's stimulus package and confidence building measures have

given sufficient momentum for economic reform to continue.

Rachid said that there are significant opportunities for

Egypt in the short and medium term to generate investment,

create new jobs, and increase competitiveness.



4. (U) Rachid outlined two key areas of near-term focus for

his ministry. The first is a focus on "internal trade" aimed

at improving the domestic supply chain and movement of goods

within Egypt while creating more competition and better

opportunities for both consumers and producers. Admitting

that Egypt had to "make up" for a period of neglect in the

sector, Rachid said that over the next five years the GOE

intends to increase investment in the domestic sector from

LE2.4 billion (US$436 million) to LE25 billion (US$4.55

billion). These investments would be targeted at

infrastructure, supply chain improvements, and broadening

opportunity to areas outside of the main urban areas of Cairo

and Alexandria.



5. (U) Rachid was also fairly upbeat on the foreign trade. He

pointed out that Egyptian non-oil exports had risen from LE44

billion (US$8 billion) in 2005 to LE95 billion (US$17.3

billion) in 2008. He outlined an aggressive plan to increase

this number to LE200 billion (US$36.4 billion) over the next

four years. He added that this level of growth could not be

accomplished by "doing what we have been doing" and that

there would be significant cost involved. Rachid said that

his goal was to target the top 100 retailers across the globe

and help create 1000 new Egyptian exporters. A further

challenge, he added was to sustain new and existing exporters

through technical support and streamlining bureaucracy.

Rachid said another key element of Egypt's export strategy

would be to further diversify its export markets through

closer ties and trade agreements with countries in Africa,

Latin America, and Asia.



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Mohieldin: Egypt needs more PPPs and Asian investment

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6. (U) Investment Minister, Mahmoud Mohieldin while saying



that last year's economic growth was better than expected,

cautioned that it was "not time yet for celebrating." He

pointed out that despite the economic situation, (official)

unemployment was down from 11% in 2004 to a current rate of

9% and that inflation had been brought down from more than

22% in mid-2008 to 8.4%. He said that he expected fiscal

year 2009/10 (July-June) growth to rebound to more than 5%,

and that 5.5% growth was "possible." He described this rate

of growth as "promising" and said that he was encouraged that

economic growth was spread across many sectors of the economy.



7. (U) Mohieldin focused on the need for Egypt's growth to

benefit the entire population. He told the audience that the

responsibility of the government was to achieve growth that

was "inclusive, fair, and sustainable" and compatible with

social policy. A minimum of 5% GDP growth was necessary for

what he called "equity in the economy." Nothing, he said,

was "automatic" about the trickle-down effect and that the

GOE needed to do more both in terms of infrastructure

investment and better public access to education and heath

care. Within his ministry he said that projects to

decentralize investment activity in the economy would

"unleash the potential" of the different governorates of

Egypt. This would be accomplished through creation of local

investment units to support SME growth, new laws to improve

access to finance, and general improvements in doing business

in Egypt.



8. (U) Mohieldin cautioned that the problems of the global

economy are not yet behind us and Egypt was adjusting to the

new global norms of lower growth and scarcity of capital. He

said that Egypt would focus on attracting investment from the

Gulf and Asian countries to diversify capital inflow. Recent

meetings with Asian investors had been met with a "very

positive response."



9. (U) With regards to infrastructure investment and the role

of the private sector, Mohieldin focused on public-private

partnerships (PPP) as way to increase infrastructure spending

without adding to the fiscal deficit. He said that his

ministry was preparing a new PPP law to be submitted to

parliament that would help to enhance the role of the private

sector in stimulating economic growth. According to

Mohieldin, the GOE has plans for LE 8-10 billion (US$

1.45-1.81 billion) in infrastructure spending in the current

fiscal year. Further government investment, he added, would

have to be offset by revenue measures and could not be

allowed to increase the fiscal deficit.



10. (U) In response to a question about a new round of

privatization, Mohieldin said that the government still plans

to announce a new privatization scheme, but that there are

still issues surrounding the valuation of public sector

companies. He added that the share of GDP contribution and

employment in public sector enterprises continues to shrink

and is nowhere near as significant as it had been in the past.



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Nazif firm on continuing reform agenda

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11. (U) In a public interview at the close of the conference,

in response to repeated questions as to whether the global

financial crisis had discredited the ideology of market

reforms, Prime Minister Ahmed Nazif declared his commitment

to continuing reforms and integrating Egypt further into the

world economy. Nazif attributed the Egyptian economy's

resilience during the global crisis to the reforms Egypt had

undertaken since he became Prime Minister in 2004.



12. (U) Nazif listed health, education, energy, and

transportation infrastructure as his top priorities and

highlighted transportation infrastructure projects as areas

that would both attract investment and improve local economic

conditions. Egypt, he added, remains attractive to foreign

investors due to its relative strength in GDP growth, large

local market, and its geographical location as a regional

hub. He also repeatedly stated that he expected the domestic

private sector to play a bigger role in the economy than it

had before.



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Comment

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13. (C) The extremely aggressive goals set out by Rachid and

Mohieddin strike us perhaps more as aspirational rather than



the calculated result of investment and export-enhancement

planning. The investment community has by and large responded

positively, and several investment analysts have told us that

that the GOE is pursuing the right agenda to try to grow the

economy and that they are bullish on Egypt in the medium to

long term. As yet, however, the plans are short on details

and the GOE has not released any concrete details on how it

will actually achieve a doubling of exports and a ten-fold

increase in domestic infrastructure investment in the next

few years without significantly expanding the fiscal deficit.

The GOE admits that it is years behind in its infrastructure

spending and is expecting public-private partnerships to fill

much of the funding gap. This is a fairly new strategy for

Egypt and is unclear as to whether or not there are enough

favorable profit opportunities and financing options outside

of the petroleum sector to attract the required levels of

private investment. Additionally, the lack of leverage in

the Egyptian economy which helped to limit the negative

impact of global economic woes will also slow the country's

recovery and may hamper its competitiveness with respect to

its competitors in the export market.



14. (C) After a period of palpable "fatigue" among many

reform-minded government ministers, it is encouraging to see

the Egyptian government publicly renewing its commitment to

economic reform, particularly in challenging economic

conditions. Of course, context is important, and the

ministers presented their agendas to a welcoming audience

with a clear bias and often a financial stake in the

continuation of current reforms. To a large extent, the

speeches were intended for the international investment

community rather than a domestic audience. From that

perspective the ministers hit all the right notes, assuring

investors that the government will do all it can to stimulate

the economy and growth while making the country as

investor-friendly as it can as the country competes for a

share of a much smaller pool of global investor liquidity. We

suspect, however, that political pressure to

maintain stability in the run up to the Parliamentary

elections of 2010 and the 2011 Presidential election will

dampen any zeal for bold movement on the economic reform

front.

Scobey