VZCZCXYZ0014
PP RUEHWEB

DE RUEHEG #1930/01 2811657
ZNY CCCCC ZZH
P 081657Z OCT 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 3806
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

C O N F I D E N T I A L CAIRO 001930 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR NEA/ELA 
TREASURY FOR BRYAN BALIN 
 
E.O. 12958: DECL: 09/17/2019 
TAGS: ECON EFIN EINV EG PGOV
SUBJECT: DEFICIT FINANCING AND DEBT MANAGEMENT REF: 08CAIRO2408 Classified By: Minister Counselor for Economic and Political Affairs Do nald Blome for reasons 1.4 (b) and (d)
1.(C) Key points: -- The Director of Debt Management at the Ministry of Finance (MOF) is pessimistic about fiscal reform until after the Presidential election in 2011. -- The MOF is increasingly borrowing from banks, mostly public ones, along with planning to sell public land and possibly securing foreign loans to fund Egypt,s high and increasing budget deficit. -- The MOF is trying to capitalize on low international interest rates through interest rate swaps and extending the average maturity of its debt stock. ---------------------------- Pessimistic on Fiscal Reform ----------------------------

2.(SBU) Econoff met with Mohamed Assaad, Director of Debt Management at the Ministry of Finance (MOF), on September 13 2009. Assaad was pessimistic that the Egyptian government would undertake any significant reforms or privatizations that would reduce government spending or significantly increase revenue until after the Presidential election in 2011. The government does not want to risk public anger over reduced subsidies or increased unemployment before the 2010 Parliamentary elections and 2011 Presidential election. Assaad asserted that the new privatization scheme announced in November 2008 (Reftel) to transfer shares in 45 state-owned companies to all eligible Egyptians was on hold because of the public outcry against it. Assaad said the plan was poorly formulated in part because it was too complicated for the average Egyptian to understand. --------------------------------------------- --- Borrowing from Domestic Banks to Fund Shortfalls --------------------------------------------- ---

3.(U) At the end of August 2009, five public banks bought LE 4.8 billion (US $900 million) worth of treasury bills. The banks were the National Bank of Egypt, Banque Misr, Banque du Caire, the Arab Real Estate Bank, and the Bank of Development and Agricultural Credit. This continues the GOE's trend-started last fiscal year-of relying heavily on domestic banks to fund its budget shortfalls. In FY 2008/09, the GOE borrowed LE 98 billion (US $18 billion dollars) from domestic banks to finance the LE 72 billion (US $13.1 billion) deficit and pay back other debts. This was a significant increase from the previous two years when the GOE's net borrowing from domestic banks was negative, meaning that the GOE paid off more in old loans than it borrowed from domestic banks, according to Ministry of Finance statistics. Assaad assured us that the MOF did not pressure the banks into buying the government debt. (Note: According to Sahar Nasr, a financial economist at the World Bank, banks prefer investing in government debt because it is both a safe investment and highly profitable. End note.) -------------------------------------------- Other Sources for Funding the FY2010 Deficit --------------------------------------------

4.(SBU) Assaad indicated that the GOE was planning to sell more public land to raise between 3.5 and 5 billion LE (US$640 to $900 million). At the end of FY 2008/09, according to Assaad, the GOE sold public land to an investor from the Gulf and securitized the investor,s future payment installments to receive all the money up front in order to help bring the deficit down to roughly FY2007/08 levels before the end of the fiscal year.

5.(C) Assaad told us that the African Development Bank (ADB) was offering Egypt a US $1 billion budget support loan for a low interest rate close to LIBOR with a 20 year payment term. Assaad told us that he strongly encouraged Minister of Finance Youssef Boutros-Ghali to accept the loan because the terms were so good, despite Boutros-Ghali's strong inclination against increasing Egypt's external debt burden. Assaad attributed Boutros-Ghali's aversion to foreign denominated loans to Egypt's debt crisis in the early 1990s that preceded Paris Club debt relief in 1991. The deal has not been finalized or publicly announced (Note: Egypt,s external government debt burden is relatively small at about E 14% of GDP, according to Ministry of Finance statistics. End note.) --------------- Debt Management ---------------

6.(C) Assaad told us that the MOF is trying to capitalize on low international interest rates, and is in the process of securing an interest rate swap with Morgan Stanley for some of its World Bank loans, which have floating interest rates, to hedge against increases in interest rates. Assaad also told us that he is trying to extend the average maturity of the debt stock from two to three and a half years by 2010 by issuing more treasury bonds to reduce the risk of rolling over the debt. ------- Comment -------

7.(C) Comment: The GOE seems to be avoiding economic reforms that would upset the public and is relying on easy and noncontroversial ways to finance its large and growing deficit. The banking system has sufficient liquidity to support current levels of or a limited increase in government borrowing because deposit levels are high and banks are extremely risk averse and lend little of their deposits to private sector businesses. If the government continues to borrow heavily from banks, the banks will be even less inclined to lend to private sector companies, whose business ventures would spur growth and employment. Scobey