Prioritising growth
For the first time in four years, Nazif's government officials did not use the Euromoney as a podium to boast their achievements,
Sherine Abdel-Razek hears the change in tone
Coinciding with the financial crisis that has struck the local economy as well as the rest of the world, the Euromoney conference this year told of the birth of a new attitude. "We have to change the line-up and start to talk about things that do not concern us because chances are they will concern us really soon," said Minister of Finance Youssef Boutros Ghali in the conference opening session. "We are facing a slowdown, maybe even a recession, whose duration remains unclear but which may well last for one or two years," he added.
Speakers and commentators agreed that the slowdown in the world economy will put a lid on inflation rates worldwide and in Egypt. Investment Minister Mahmoud Mohieldin said he was betting on a significant drop in inflation, somewhere in the range of the low tens, possibly by the end of 2008. Egypt's inflation rate shot up from the beginning of this year to reach 23 per cent in August, its highest level in 16 years. It started to head south in September to settle at 21 per cent.
However "inflation is not in the forefront now: growth is," said Ghali. The decline in exports, foreign direct investments (FDIs), Suez Canal receipts and remittances will be reflected in a slower growth rate, one which Ghali predicts will hover around six to seven per cent.
So the question today is, how will growth be financed? Securing more investments, both private and public, especially in infrastructure projects, and enhancing domestic spending, were two common suggestions offered throughout the conference sessions.
The government is aiming to attract investment from the Gulf. Its intensified efforts to attract the region's petrodollars will most probably be fruitful. Mohamed Sammakia, head of the Middle East division of UBS Bank, pointed out that with the Gulf's sovereign wealth funds losing about 30 to 40 per cent of the value of their investments in international markets they are eyeing emerging markets, especially those of North Africa now. Egypt is on their radar, he said.
However, Sammakia's later remarks raised scepticism on the viability of this alternative. "It is a rule of thumb that every $25 drop in the price of oil wipes out LE100 billion of those funds," he said. And the bad news is oil prices have been on the slide to lose almost 50 per cent of their all time high of $148 in July.
Government officials made very clear throughout the conference that Egypt is seeking local and international investors to spend money on the country's infrastructure projects such as roads, rails and ports. Transport Minister Mohamed Mansour said at one of the sessions that when financial markets collapse, investors look to put their money in something more solid, like infrastructure, adding that Egypt expects investments in transport projects to reach $8.9 billion this year.
But while the government aims to attract the private sector to partner with it to undertake such projects through public-private partnership (PPP) agreements, both local and foreign members of the private sector will face the problem of financing their investments, as foreign banks tighten their credit facilities. Moreover, as discussed at one of the conference's sessions, foreigners choosing to enter into PPP arrangements in infrastructure projects which last for up to 20 years will likely fear the risks of deterioration in the local currency. Most infrastructure projects, including roads, hospitals, bridges and waste water treatment, reap revenues in local currency. The Egyptian pound has declined to LE5.59 to the dollar in mid-week, as compared to LE5.30 in May, and is expected to decline further in light of expectations of a reduction in local interest rates.
So it seems the government will be taking the responsibility of pouring huge investments and to play a larger role in the economy. In fact, conference attendees could easily see the government stepping back off its religiously-guarded economic liberalisation and mass privatisation. Highly indicative of this move were the words of Mohieldin himself. A veteran advocate of market economics and privatisation, he said the Washington Consensus is not relevant to Egypt any more and added that privatisation, liberalisation and stabilisation proved not to be suitable for all countries all the time.
Amidst all this change it seems that the government will have to rely on consumer spending to fill the gaps in growth motivators. And despite inflationary pressures domestic spending is booming, as revealed in a session where a representative of AC Nielsen for market information noted that consumption and spending amongst the middle class have doubled. "We see more use of credit cards, car sales, spending on mobiles and dining out," he said. A Carrefour Egypt senior official speaking at the same session said the percentage of purchases covered by credit card payments had increased from 15 per cent in 2003 to 36 per cent in 2008.
However, World Bank senior economist Sherine El-Shawarbi clarified that this consumption and spending boom is not happening everywhere in Egypt, nor does it cover all economic strata. She explained that while the average growth rate in per capita consumption for all Egypt in the period from 2005 to 2008 was four per cent, the poorest tranche in rural areas had negative growth rates, while in urban areas those belonging to the high- income bracket spend more.
This contradicts with what Prime Minister Ahmed Nazif believes, as indicated by his remarks at the closing session. Asked about the effects of the expected slowdown on the trickle-down effect, Nazif said he meets with many low-income Egyptians, mainly farmers and construction workers, and challenged the audience to prove that people from this bracket are not in a better situation today than they have been.
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