UNPROFITABLE STATE-OWNED ENTERPRISES SWAP LAND FOR DEBTS

UNCLAS CAIRO 000121

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EG
SUBJECT: UNPROFITABLE STATE-OWNED ENTERPRISES SWAP LAND FOR DEBTS

REF: 07 CAIRO 829


1. (SBU) Key Points:



-- State-owned Enterprises (SOEs) are handing over real estate to
settle a significant amount of their outstanding loans to public
sector banks.



-- The land for debt swaps will settle about 80% of the SOEs
outstanding loans with the public banks.



-- This process will allow the GOE to continue its bank reforms
without spending more money.



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Land for Debt Swap

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2. (SBU) The Ministry of Investment, which oversees most
State-owned Enterprises (SOEs),is having 152 SOEs hand over some
of their real-estate to National Bank of Egypt (NBE) and Banque
Misr to settle a significant amount of their outstanding debts. NBE
and Banque Misr publicly announced on 4 January that they were
accepting the land in exchange for debt. NBE and Banque Misr are
public sector commercial banks and are Egypt's two largest banks.
Mohamed Saleh, head of the Capital Markets Unit at the Ministry of
Investment, told us on 13 January that the NBE and Banque Misr will
be able to sell the land easily because they have experience
selling land that was given to them during previous GOE reforms of
SOEs and the banking sector.




3. (SBU) Saleh told us on 13 January that this land for debt swap
will settle about 80% of the SOE's remaining LE 8.1 billion ($1.5
billion) debts to public commercial banks. It is not clear if the
land is worth $1.2 billion or if the NBE and Bank Misr are writing
down some of the SOE debt as part of the deal.



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Reducing SOE Debt Part of Banking Sector Reform

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4. (SBU) The land for debt swaps follows two rounds of the GOE
paying off outstanding SOE loans to banks in 2006 and 2007 as part
of the GOE's ongoing banking reforms (reftel). The GOE reduced
outstanding SOE debt to public and private banks from LE 31.5
billion ($5.4 billion) in June 2004 to LE 8 billion ($1.5 billion)
now.




5. (SBU) These non-performing loans (NPLs) are decades old,
according to Hisham Okasha, the Deputy Chairman of the National
Bank of Egypt (NBE). He told us on 18 January that the SOEs
involved in the swap were unprofitable when they were created under
President Nasser in the 1950s and 1960s and even though they are
more efficient now, they will never be profitable enough to pay
back their outstanding loans.



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Comment

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6. (SBU) Settling a significant portion of SOE outstanding debt to
public banks will improve public commercial banks' balance sheets,
a goal of the GOE's ongoing financial sector reform program. By
having the SOEs exchange land for their debts, the GOE is
continuing this line of reforms without having to increase
government spending and further drive up its budget deficit. The
budget deficit is already expected to rise to from 6.9% of GDP in
FY2009 and FY2008 to 8.5% of GDP in FY2010.
SCOBEY