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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 27 April - 3 May 2000 Issue No. 479
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Special Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Not so inscrutable liquidity
By Niveen Wahish
Ask any shop owner how business is going and the practically unanimous answer would be a variation on the word slow. Ask why and you will be told that disposable incomes are being eroded by private lessons, mobile phone bills, and the whole paraphernalia of life's bare necessities. But this is only the tip of the iceberg. Over the past couple of years the whole economy, it has becoming increasingly obvious, is afflicted by a lack of liquidity.
Recession is dragging the stock market down
photo: Khaled El-Fiqi
One result of this situation was the unprecedented rise in inter-bank rates to 17 per cent, a situation that was only ameliorated when the Central Bank of Egypt temporarily reinforced liquidity by repurchasing treasury bills (repose). This action helped banks swap treasury bills for cash but only on condition that the treasury bills would be repurchased at a later date.
It is only after many months of intermittent crises in the Egyptian market, though, that officials are beginning to react. Last week, Minister of Economy and External Trade Youssef Boutros Ghali, announced that the government is assessing the most appropriate package to alleviate the possible onset of recession, formulating measures that will, hopefully, provide permanent rather than short-lived solutions. These include the monthly injection of around LE2 billion, aimed at paying up a host of government arrears.
The liquidity shortage, it is often cited, is a result of the mega-projects on which Egypt has embarked. "There will be no short term turnover on the money invested in these projects, if indeed there is any turnover at all," remarked one banker, who preferred to remain anonymous.
The over-supply of expensive real estate in the new cities is also cited as a cause for the shortage. "Demand did not meet the expectations of those who made huge investments in building the dream homes that have sprouted around the new cities," said the banker. And as a result the construction companies are now defaulting on their loans.
The contracting sector, as a whole, has been hard hit by recession. Government debts to the sector amount to some LE22 billion. Arab Contractors, one of the leading construction companies, is currently owed LE2 billion by the government. To cover expenses, Ismail Osman, Chairman of Arab Contractors, says he has to borrow from banks and pay interest to fulfil "commitments and pay employees' salaries at the beginning of every month".
Should the value of the housing units already constructed fall in line with a seeming absence of demand, then the banks will have little hope of recovering loans already extended, a situation which might, believe some bankers, lead to the kind of melt-down that paralysed South-Asian markets in 1997. One of the main causes for that crash was the collapse of the real estate market.
In South Asia that collapse was combined with extensive borrowing by the private sector. In Egypt, according to Central Bank figures, private sector borrowing in local currency accounted for 60.9 per cent of total domestic credit in 1999. In that year the private sector debt to banks reached LE95.2 billion, compared to LE54.6 billion in 1997.
he fall out of the recession has hit the stock market which, with the exception of January and February when a flurry of takeover bids inflated the prices of a handful of stocks, has seen only sluggish trading.
This might change, according to Nashaat Abdel-Aziz, managing director of an investment fund management company, if a mortgage law is passed to revitalise the real estate sector. Once that is achieved, Abdel-Aziz believes, "it could pull the whole market up with it." He pointed out that among the causes for the market rebound in 1996 was the privatisation of the Heliopolis Housing and Urbanisation Company.
Others, though, are less optimistic, and doubt whether the new mortgage law will deliver an upturn in the real estate market. It might facilitate movement in lower priced housing units, but it is unlikely, many believe, to have an impact on the upper end of the market, where the problem really lies.
The crisis in the real estate sector has once more underlined the need for greater market awareness among investors, who tend to follow the lead of individual successes, creating oversupply and the classic, exploding cobweb of economic text books.
In the wake of the Asian crisis Egyptian importers rushed headlong to import cheap South East Asian goods, hoping to sell them at a higher price at a later date, exacerbating last year's dollar shortage. The market they were counting on proved pie in the sky, and they too found themselves unable to service their debts.
The dollar crisis has again subsided, giving a temporary breathing space. According to Rawheya El-Assar, chairman of an exchange rate company, foreign currencies are at a low, and relatively stable, level. But whether or not this is simply a product of low demand, caused by the absence of liquidity, remains to be seen.
Additional reporting by Mona El-Fiqi
