Korean credit lies idle
Why has a $150 million credit line extended by South Korea not yet been utilised? Sherine Nasr investigates
To encourage more commercial trade between Egypt and South Korea, the Export and Import Bank of Korea, in collaboration with the Commercial International Bank (CIB) in Egypt, has opened a credit line of $150 million to Egyptian businessmen who are interested in trading with their Korean counterparts. Unfortunately, no Egyptian entrepreneur has yet taken the initiative to utilise the initial sum of $50 million, which was allocated in September 2002.
"This sizeable line of credit indicates great trust in the Egyptian economy and future trade between the two countries," said Hisham Hassan, general manager of the Financial Institution and Correspondent Banking Group at the CIB.
According to Hassan, the credit is opened only for the CIB's clients, because the bank will act as the guarantor between Egyptian importers and the Export and Import Bank of Korea. The credit is primarily intended to finance Korean exports to the Egyptian market.
According to the terms of credit, Egyptian importers will enjoy a long grace period that ranges from six months to one year at an interest rate of 0.5 to 1.5 per cent for raw material imports, and extending up to 10 years at an interest rate of two per cent for those buying heavy equipment.
"The sum of the credit and the grace period are to be assessed with the CIB on an individual basis," said Hassan.
Favourable as the terms of the credit may be, the main obstacle deterring Egyptian entrepreneur s from exploiting this line of credit is the CIB's stipulation that the credit must be repaid in hard currency.
"The bank will study each case separately and priority will be given to clients who have a business with revenue in hard currency, since they will be able to fulfil this condition," said Hassan.
A year has already passed since the credit was offered, but no entrepreneurs have yet applied for it despite the fact that South Korean exports to Egypt are on the rise, the value of bilateral trade reaching some $456 million in 2002.
"The currency risk imposed in the deal is too big to take especially when there is very little stability in the Egyptian exchange market," commented Ismail Abdoun, head of the Financial Department at the Olympic Group and a member of the Egyptian Businessmen's Association (EBA).
Since the floatation of the Egyptian pound last January, the exchange market has been witnessing some serious swings. At present, the official rate of the dollar is LE6.15 while the black market rate is at nearly LE7.10. This fact has reflected negatively on almost every business in Egypt.
"Businesses are no longer able to set viable credit risk management. Therefore, no businessman is ready to take the risk and apply for a ten-year credit that has to be reimbursed in dollars. Who knows how much the dollar will be worth in the local currency in ten years?" said Mahmoud Shalabi, an exporter of medicinal herbs.
Some businessmen, however, disputed the implication that Egyptian import and export business will come to a standstill waiting for the exchange market to stabilise. "Are we saying that we will stop importing goods and materials in hard currency? This is impossible. We have to resume our activities and new mechanisms have to be established to make use of this credit and others," said Dr Sherif El-Gabaly, chairman of the Egyptian-South Korean Business Council. He added that a high-ranking South Korean delegation will be visiting Egypt next month to discuss further means of cooperation and that it would be embarrassing if the credit line still had not been used.
Nevertheless, suggestions have been put forward by the EBA to use the credit, such as to import Korean equipment and machinery in exchange for Egyptian raw materials, petrochemicals, textiles and ceramics.
EBA members are requesting that the CIB extend the loans in dollars while Egyptian importers would reimburse the loans in instalments payable in Egyptian pounds at the official exchange rate.
"I am ready to apply for five million dollars now and repay in instalments over a ten- year reimbursement period even if the dollar reached LE12 by that time," said Mahmoud Emira, the financial manager of a large pharmaceutical company.
Although Egyptian banks routinely open credit lines in dollars to finance importation and accept repayment in local currency, Hassan objected to the suggestion. He argued that unless the CIB has enough hard currency resources to cover for the $50 million loan, it cannot take a positive step in this direction.
Apparently, while some Egyptian entrepreneurs are ready to take the risk, the CIB is not.
"The bank can not take the chance to finance a client in these terms. Most probably, the client would turn to the bank complaining that the price of the dollar has doubled and would likely become a loan defaulter," Hassan said.
Although EBA members offered to submit any guarantees the bank may demand for loan repayment, it was still unclear how the matter will be settled.
"Principles of trust and flexibility should exist so that we can make a better use of this loan and other loans to come," said El- Gabaly.
Al-Ahram Weekly Online : 20 - 26 November 2003 (Issue No. 665)
Located at: http://weekly.ahram.org.eg/2003/665/ec4.htm