Counting on the troika

On a recent visit to Britain, Gamal Essam El-Din heard mixed evaluations of the Egyptian economy from a number of people in the financial sector including Mohamed Metwalli, director of investment banking for Merrill Lynch's London operations
Counting on the troika
US-based Merill Lynch has been one of the leading international investment banks in Egypt, managing the sale of a number of major public sector companies and banks. Merrrill Lynch is also involved in issuing quarterly research reports on Egypt within the framework of its larger Emerging Markets Research. In an exclusive interview conducted in the company's branch on London's Ropemaker Street, Mohamed Metwally, director of Merrill Lynch's Investment Banking division, offers an evaluation of the current performance of the Egyptian economy and forecasts for the coming period.
The Egyptian economy has suffered a two-year spate of monetary policy inconsistencies, slow structural reforms and a yawning trade deficit gap, yet Merrill Lynch's quarterly reports on the Egyptian economy are generally optimistic. How would you explain this?
We strongly believe that despite several negative economic shocks since 1997, Egypt's macroeconomic performance has remained quite strong. Anyhow, there are two options in evaluating a national economy. You have the option of concentrating either on the empty or the full half of the cup. Any government would like to concentrate on the full half by trying to announce as many positive indicators as possible. By contrast, a large sector of the press, especially the opposition press, tend to concentrate on the empty half by exaggerating the negative aspects.
In Merrill Lynch's view, the Egyptian economy suffered three severe shocks from 1997 through the first quarter of 1999. These included the global financial markets turmoil following the Asian and Russian crises, low oil prices and a terrorist attack on foreign tourists in Luxor. The financial meltdown in Southeast Asia and the consequent devaluation of their currencies, for example, induced many Egyptian importers to flood the domestic market with cheap imports from this area. This caused huge demand on the US dollar at the expense of the Egyptian pound, finally leading to a significant drain of the Central Bank of Egypt's (CBE) US dollar reserves.
In dealing with this situation, a large sector of the Egyptian press concentrated on the empty half by giving the impression that the Egyptian economy is on the verge of collapse. This led to many negative consequences. Foremost among them was that 2.5 million Egyptian expatriates in the Arab Gulf decided to stop transferring their annual dollar remittances estimated at $8 billion annually.
Does this mean Merrill Lynch believes Egypt's economic problems over the past three years have largely been due to external factors?
There is no doubt that the above-mentioned three shocks are largely exogenous, but other domestic factors are also to blame.
In general, we think the previous government's way of addressing these shocks was neither fast nor effective enough. The CBE, for example, was not given the necessary authority to face the harmful ramifications of the shocks with the required speed and resolution. Leading officials of the previous government considered the setbacks temporal -- that they would not cause detrimental long-term effects on the economy. This is why they remained stuck to a rigid peg to the dollar, while the Central Bank was forced to run down its dollar reserves.
How does Merrill Lynch evaluate the performance of Atef Ebeid's government in dealing with these setbacks?
Unfortunately, the negative effects of the three blows were exacerbated due to the inappropriate reaction of the previous government. It is true that most of the current ministers were members of the previous government, but they were denied a say in the decisions taken. As for the current government, we are particularly optimistic regarding the trio consisting of the 67-year-old Prime Minister Atef Ebeid, Minister of Economy and Foreign Trade Youssef Boutros Ghali and Finance Minister Medhat Hassanein. We believe these US-educated ministers possess the required academic background and practical experience to continue and to accelerate the process of economic reform. The fact that the country's macroeconomic performance remained strong due to the far-reaching economic reforms implemented since the early 1990s will be a big help to them. We emphasise that international investors have strong confidence in this very strong economic team, which has so far managed to take great steps ahead.
Under the team, real Gross Domestic Product (GDP) remained robust at five per cent and the inflation rate was kept in check at 2.8 per cent. These figures, as recently announced by Ebeid before parliament, are true and realistic. Besides, Egypt's tourist traffic has bounced back to its pre-Luxor attack levels. Egypt's external balance is also on the mend, with the balance of payments deficit narrowing to $156 million in the fourth quarter of 2000, compared to over $1.4 billion over the same period in 1999. As for the new exchange rate regulations, which led to a new "managed peg" system allowing a margin of fluctuation, it has so far proved effective because it gives CBE a greater role and more flexibility in maintaining the exchange rate at reasonable market levels. We have found that investors are currently not facing any problems in transferring their corporate dollar profits abroad. Private remittances to Egypt from Egyptians working abroad are expected to reach $4 billion this year. We also expect the exchange rate to hold at or near current levels. We even expect more exchange rate flexibility that would bring the Egyptian pound to its earlier 3.40 level against the dollar.
Most importantly, the trio recognises that without collaboration with the CBE, the government would not be able to secure a sound and safe investment environment.
What sources do you primarily depend upon for data in issuing your quarterly analysis reports on Egypt?
Our information and statistics come from three sources: the Ministry of Economy, the Ministry of Finance and the Central Bank of Egypt. We have a highly qualified research team that extensively analyses the information and statistics provided by these three sources. I do not think the current government could risk its reputation in international markets by releasing misleading information about the national economy.
What do you think of the recently launched campaign against Merrill Lynch by an independent Egyptian newspaper alleging that the company is controlled by Israel and the CIA?
Economy Minister Ghali sent us a copy of this attack and asked us for a response. In turn, we gave detailed answers to these allegations and provided certified information that 95 per cent of them are entirely unfounded.
In our view, the main reason for this attack was the fact that Merrill Lynch and Morgan Stanley were recently awarded a bid by the Egyptian government to issue Egyptian sovereign Eurobonds. We are the largest international investment bank with the largest record of business deals, not only in Egypt, but in all the Arab markets as well (Morocco, Tunisia, Lebanon and others). This could never have happened if these Arab markets have the slightest suspicion that we are controlled by Israel or the CIA.
Do you believe the time is right for issuing Egyptian Eurobonds?
Yes. We believe the time is really favourable for issuing such bonds. The government has considered issuing a Eurobond for several years. A variety of factors, however, have delayed the move. In 1997 and 1998, the international bond markets were severely hit by the financial meltdown in Southeast Asia and Russia's economic crisis. In 1999 and 2000, domestic exchange rate problems led to a further delay. Now that the problems have largely subsided, the issuance appears to be on the government's agenda.
In our view, this is a very sensible move as it would send a positive signal to the markets about the progressive nature of the new government, especially as Egypt's external debt service obligations look quite manageable.
Could the government's delay in privatising Telecom Egypt and state-owned electricity companies be sending negative investment signals?
National governments usually take a long time to privatise this kind of companies. For example, it took seven years before Italy finally embarked upon some strategic privatisations. Preparing strategic companies for sale takes time.
Generally speaking, we gave the government recommendations on these two privatisations and we believe the government will reach a final decision on them shortly. We think the deregulation of the energy and telecommunications sectors could bring investments ranging from $3 to $5 billion over the next few years.
Does Merrill Lynch plan to open a regional office in Egypt?
We can never open offices everywhere in the world, but opening an office in Cairo is expected. However, for Cairo to be the financial hub of the Middle East, some requirements should be met first. Cairo should have the best airport in the region and class A office space. Excellent traffic regulations and telecommunications infrastructure should also be made available.
You have recently toured London and remarked on how these factors have made it the capital of global business.
Interviewed by Gamal Essam El-Din
Recommend this page
Related stories:
Cement for sale
Related links:
Merrill Lynch
© Copyright Al-Ahram Weekly. All rights reserved
Send a letter to the Editor