10 - 16 August 2000
Issue No. 494
|Published in Cairo by AL-AHRAM established in 1875|
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Critical supportBy Mona El-Fiqi
Local experts have taken the release of international reports on Egypt's economy as an opportunity to urge that the government heed the reports' warnings and modify Egypt's monetary policy.
Recent weeks have witnessed the issuing of numerous reports on the performance of Egypt's economy. A review of these shows a glaring lack of consensus about the country's prospects, with some suggesting a bright outlook and others cautioning that the economy is on the brink of a downturn.
Adding to the confusion about how to understand and act on the contradictory assessments offered by international rating agencies and investment houses, is the prevailing situation in the Egyptian market. Currently the market suffers from a shortage of liquidity and US dollars alongside a 40 per cent drop in share prices on the stock market -- even for the stock of prime companies such as MobiNil, Orascom and the Commercial International Bank.
Heading the list of these reports is that by Standard and Poor's (S&P's), a US rating agency which is one of the five most influential international rating agencies worldwide. S&P's announced in its report that it was downgrading its outlook for the Egyptian economy from stable to negative.
Although S&P's report does not entail a downward revision for Egypt's credit rating, it forecasts that a negative adjustment might take place within one to three years' time.
Not all reports were as pessimistic as S&P's, however. According to the report by the US investment bank Merrill Lynch, in spite of problems faced by the Egyptian economy since 1997, it is strong and its indicators are improving. Merrill Lynch added that the national income is growing, the inflation rate is decreasing and the budget deficit is under control.
Similarly positive was a report issued by Japan's Daiwa Research Institute which speculated that due to the stability of the market the growth rate will increase to 6.6 per cent by the end of fiscal year 2000/2001.
Reports by a number of international investment houses, such as Flemings, also praised the performance of the Egyptian economy. However, many of these reports suggested that accelerating the pace of privatisation would further invigorate the economy.
What are the reasons behind the contradiction between these reports and S&P's? Has S&P's report, in particular, had any impact on the economy?
Use of different base years and periods for assessment was cited as a possible reason for contradiction among the predictions offered by the reports, suggested a senior analyst at a brokerage company who, along with other sources who agreed to discuss this issue with Al-Ahram Weekly, spoke only on condition of anonymity.
This same analyst suggested that the pessimistic reports had already impacted on the economy.
Commenting on S&P's report, a local banker conceded that although it was the most negative, it was the most objective. He suggested, in line with S&P's conclusions, that certain trends, if allowed to continue, might lead to a downturn in the Egyptian economy during the next three years. He pointed to the increased budget deficit, the reduction of foreign reserves, a decrease in the Central Bank's foreign assets and the slowness of the privatisation process -- itself one of the causes of the liquidity shortage.
Offering his prescription for using the reports constructively, the banker said, "The first step towards solving these problems is for the government to admit that S&P's report is correct." At the top of subsequent steps, he suggested, would be a new monetary policy. This, he said, should include detailed measures to prevent and deal with corruption in the banking system and procedures to facilitate the inflow and outflow of foreign investment. Added to this, government spending should be curbed. Implementation of such measures, he said, is key to restoring the confidence of foreign investors in the Egyptian economy.
Discussing the impact of the reports on the investment climate, another banker conceded that they might have a negative impact on foreign investment. Regarding local investors, he suggested that the only ones who would refrain from investing on the basis of the reports' predictions are short-term investors with small amounts of capital.