 |
Al-Ahram Weekly 20 - 26 July 2000 Issue No. 491 
|
||
Published in Cairo by AL-AHRAM established in 1875 |
| ||
|
Al-Ahram Weekly 20 - 26 July 2000 Issue No. 491
|
||
| Published in Cairo by AL-AHRAM established in 1875 |
| ||
Egypt Region International Economy Opinion Culture Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Poor standards?
By Sherine Abdel-RazekEconomic actors of all hues were taken aback when the American rating agency, Standard & Poor's (S&P's) announced last week that it was downgrading its outlook for the Egyptian economy from stable to negative. While this does not yet entail a downward revision for Egypt's credit rating, S&P's has suggested that a negative adjustment might take place within one to three years' time.
It was not the first time that an international institution issued a pessimistic outlook for Egypt. In February, Robert Flemings, the British investment bank, produced a report to which the government objected for its alleged use of outdated data and wrong criteria.
Reactions to the current survey, however, have been much calmer. Official statements, including those by the Minister of Economy and Foreign Trade Youssef Boutros Ghali, local investment houses, and businessmen, have all acknowledged the current recession and liquidity squeeze.
A note released by the Egyptian Financial Group-Hermes (EFG-Hermes), Egypt's largest investment bank, also said the concerns voiced by S&P are neither new nor unknown.
Critics of the report, however, have pinpointed S&P's failure to review government efforts over the past three months to deal with the current shortcomings.
By criticising the sluggish pace of structural reform, the existence of fiscal deficits and an inflexible monetary policy as a burden to Egypt's credit standing, S&P's emphasises the need to strengthen budgetary discipline, to accelerate the pace of privatisation, and to adopt more flexible monetary policies.
Singling out the fiscal deficit as the main problem dogging the economy, S&P's has used the government's upward readjustment for the 1998-1999 budget, which puts the deficit at 4.2 per cent of GDP as opposed to the previously announced figure of one per cent, to draw attention to the yawning gap in government coffers.
Consequently, S&P's has questioned the government's ability to address the current cash shortage by raising imposts, suggesting that neither value added tax legislation nor a revision of tax codes will boost revenues significantly so long as the country's infrastructure continues to require increased budgetary allocations.
"Budget deficits will persist if revenues continue to fall and investment spending runs further into arrears owing to the implementation of current projects," the agency noted.
But are prospects really that bleak? According to EFG-Hermes, S&P's ignores recent changes which have already produced a drop in inter-bank rates of 10 to 12 per cent as opposed to 17 per cent last January.
S&P's concludes that if unchanged, the government's monetary policy will diminish its ability to manage adverse internal and external shocks. EFG-Hermes, however, notes that the two-month old policy which allows foreign exchange companies to set exchange rates according to market forces has already eased the exchange rate mechanism and furnished more reliable exchange rates. The exchange rate of the Egyptian pound to the dollar settled at LE3.52 as opposed to LE3.44 last month.
Moreover, the Flemings report which asserted that the pound was 40 per cent overvalued has ignited a debate on the necessity of devaluing the Egyptian pound. While there is no official announcement yet that devaluation is imminent, the government seems to consider breaking its nine year-old policy of pegging the pound to the dollar. The value of the pound's official Central Bank mid-rate has already dropped.
S&P's survey also criticises the government for its "cautious approach toward implementing economic reform," citing the liberalisation and EU partnership agreements as prime examples, but glossing over the government's more recent endorsement both of privatisation and the Euro-Mediterranean agreement.
Recent re-shuffles on the boards of holding companies have given younger and more qualified executives better opportunities. Moreover, a $20 million contract was awarded to a group of banks and consultants led by Pricewaterhouse-Cooper to provide technical and advisory services for the Public Enterprise Office (PEO), the government's privatisation agency. The decision comes only shortly after the government pledged to float stakes in state-owned electricity and telecommunication enterprises through public offerings expected to fill government coffers before the end of this year.
Rumour also has it that President Hosni Mubarak will soon ratify the EU Partnership Agreement after heading a recent cabinet meeting highlighting Egypt's ability to modernise the economy and qualify for the EU's stringent liberalisation criteria.
Moreover, Khaled El-Mahdi, the head of research in HSBC Investments, has joined EFG-Hermes in praising the government's ability to stem the fiscal drain and improve its balance of payments. The decline in foreign currency reserves has been improving since the beginning of this year. After being stripped of $5 billion during 1999, the leakage of the Central Bank of Egypt's foreign reserves during April, the latest available figures, was only $27 million to settle at $15.04 billion. Moreover, oil receipts are expected to peak. Revenue from the tourism industry has already shown signs of perking up. Even better, royalties from the Suez Canal, one of Egypt's main sources of hard currency, "are expected to exceed $2 billion this year, as higher oil prices, the recovery of Asian markets, and the canal's competitive shipping fees will push the revenue up from last year's level of $1.86 billion," speculated a senior canal official last week.
