Egypt's reform efforts are increasingly being recognised by the international community, Niveen Wahish writes It seems that the Egyptian government's efforts to raise its profile are bearing fruit. Last week, as a number of ministers from the economic cabinet were in London for the Euromoney conference to tout Egypt's economic reforms and seek new investors, a pair of reports was released, singing the praise of these government efforts. The first was the revision by Standard & Poor's (S&P) Ratings Services of their outlook on Egypt from negative to stable. The second report was a preliminary assessment by a delegation of the United Nations Conference on Trade and Development which was reviewing UNCTAD's Investment Policy Review on Egypt last issued in 1998. The revival of reform efforts by the government was at the heart of the two reports, and was labelled as conducive to attracting increased investment. "Custom reforms, the gradual privatisation of state-owned enterprises and a more favourable investment climate are forecast to lift inward portfolio and direct investment flows to a little more than one per cent of GDP annually in the medium term," said an S&P press release. Similarly, a UNCTAD press release regarding the findings of the reassessment found that the Egyptian economy has come a long way since 1998. Although FDI performance has been "weak", it finds that interest is picking up among both new and existing investors. "Over the past eight months the FDI scene has become more vibrant," the press release said, while it rated the government's track record in improving the investment framework as "impressive". The highlights of government efforts included reforms in such areas as FDI entry, customs procedures, foreign exchange requirements and labour regulations. "The government is listening more to investor concerns and acting more quickly on them," UNCTAD reported, adding that such a relationship between the public and private sectors "will enable private investment to flourish and to benefit Egypt". S&P meanwhile said in a press release that "the stable outlook balances the prospects for a continued period of structural reform and a nascent improvement in economic prospects, against a widening of fiscal imbalances driven by tax and custom reforms and policy- makers' mixed track record on pursuing meaningful reforms over a prolonged period of time." An outlook indicates the possible direction in which a rating may move over the next six months to two years. A stable outlook means that the rating is unlikely to change, while a negative outlook indicates that it could be lowered. S&P praised Egypt's external position saying Egypt's external indicators remain resilient, and are expected to continue strengthening in the coming years. S&P analyst David Cooling said in the press release that the outlook revision reflects the "improvements in external liquidity underpinned by a reinvigorated programme of structural reforms, and concomitant strengthening of Egypt's external balance sheet which lowers the external risk emanating from widening budget deficit and burgeoning government debt burden." The agency reaffirmed its present ratings of BB+ long-term and B short-term foreign currency, as well as BBB- long- term and A-3 short-term local currency ratings on Egypt. The long- and short- term ratings reflect a borrower's capacity to meet its financial commitments. Despite their overall positive tone, however, each of the two reports had a word of caution. UNCTAD believes the reforms involving administrative machinery are quite recent and will require an "enormous" programme of management reform and retraining of civil service before they become entrenched and sustainable. S&P also maintains that any "hiatus in reform could erode confidence, extinguish the economic recovery, deplete fiscal sustainability, exacerbate fiscal imbalances and quickly place renewed downward pressure on the credit ratings on Egypt." It noted that the lowering of customs tariff and non-tariff barriers and corporate income taxes will aggravate the government deficit in the near term before their medium- to long-term effect on growth kicks in. The proposed tax reforms could lower revenues by as much as 1.5 per cent of GDP, widening the consolidated general government deficit to 3.8 per cent of GDP in fiscal year 2004/2005. Furthermore, the widening fiscal deficit and further off-budget outlays are forecast to lift the net general government debt-to-GDP ratio to 77 per cent in 2004/05. The S&P press release also noted that further structural reforms, including the downsizing of the pervasive influence of the public sector are essential for growth, stronger private sector investment and fiscal sustainability in the medium term. Minister of Investment Mahmoud Mohieddin is only too aware of these problems. He admits that more needs to be done, but he is optimistic. He is expecting a mission from Moody's Ratings next month for a review of their outlook on Egypt. "Given the kind of development within economic policy-making, tackling most of the issues of concern raised by the rating agencies during the last three years, we expect another positive assessment of the Egyptian economy," he told Al-Ahram Weekly. Earlier this year Fitch Ratings had also revised its outlook on Egypt from negative to stable. Some of the issues Mohieddin is aware need to be dealt with are those regarding access to land, access to credit, and bureaucratic red tape. "What the various bodies of the government are trying to do is not to offer partial reforms. The country at large is witnessing very serious reforms in the political, economic and social spheres. This holistic approach to reform is helping the investment at large." A more dynamic privatisation programme may also play a crucial role in attracting increased investment. While moving vigorously on the Law 203 companies' portfolio, the government also plans to take action on huge entities such as Telecom Egypt. A share of the incumbent fixed line operator had previously been slated for privatisation, but market conditions had not been suitable. This year, the environment may be suitable once more. Mohieddin had announced during the Euromoney conference that it may be considered for privatisation during this year. He told the Weekly that during the next two months, the company will be making a call for investment banks for what is called a "beauty pageant". "We will listen to their suggestions as to whether a share of the company should be sold, whether a strategic investor is more suited, or even the possibility of issuing GDRs for the company or linking it to the cellular system through a G-3 licence."
