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Weathering the storm
Published in Al-Ahram Weekly on 25 - 12 - 2008

Economic indicators suggest Egypt is beginning to feel the pinch of the international credit crisis. But not everything is bad news, writes Sherine Nasr
Figures released this week show that Egypt's foreign exchange reserves fell by $600 million in November to $34.4 billion, the first decline in four years. Foreign Direct Investment (FDI) almost halved in the first quarter of the current fiscal year, falling to $1.6 billion compared to $3 billion a year earlier. The government lost $3.5 billion on its investment portfolio, mostly treasury bills. The economy still grew at a rate of 5.8 per cent during the first quarter of 2008/ 09, though this is down from 6.5 per cent for the first quarter of the previous year.
"Egypt has not entered recession and growth rates remain sufficient to absorb entrants to the labour market," Farouk El-Okda, governor of the Central Bank of Egypt (CBE), said during a press conference held on Sunday. Yet he warned that revenues from tourism and the Suez Canal, which have not yet declined, are likely to do so in line with all other global services. In short, the Egypt-is-immune line spouted by officials in the immediate aftermath of the global financial meltdown is no longer on anyone's lips. Indeed, a raft of more proactive measures is being taken by the government to mitigate the impact of a local financial crisis in the making.
On his part, Rachid Mohamed Rachid, minister of trade and industry, urged traders to read the economic scene according to the new findings that have lately emerged. He warned that those who fail to do so, may as well go bankrupt.
"Traders should not aspire for a price surge in the near future. It is likely that prices will fall further, and profit margins are expected to grow less. The faster the commodities in stores are sold, the better," said Rachid during his meeting with members of Alexandria Trader Chamber on Sunday. Rachid made it clear that the government has no intention to interfere with the exchange or interest rates as it is up to the CBE to decide on both issues.
The approaching economic tsunami has at least earned Egypt's small and medium-sized enterprises (SMEs) the recognition they have long deserved. The CBE's announcement that it was cancelling the 14 per cent reserve requirement on loans to businesses with annual sales of between LE1 million and LE20 million was a step in the right direction. The move is tailored to ease the access of SMEs to finance and the decision comes into force from 1 January. In the meantime, moves are afoot to remove the obstacles in the path of SMEs growth. Specialised units are to be set up to help SMEs seek investment and banking services and upgrade their accounting procedures to meet international standards of transparency. Legislation governing the sector is also due to be revised with the aim of creating favourable conditions for growth.
"It is our intention to boost the SMEs sector as part of the package of measures containing the possible negative impact of the current financial crisis," said El-Okda.
SMEs are a major engine of the local economy. The sector is responsible for almost 90 per cent of economic activity and employs 70 per cent of the nation's workforce.
Earlier this year, the Nile Stock Exchange (Nilex) was established to give medium and small cap companies a chance to raise capital within a regulatory environment designed to meet their needs. Nilex offers relaxed listing and disclosure requirements in addition to lower listing and trading fees.
Attempts to boost the economy through SMEs supplement the earlier decision to exempt capital commodities from sales tax and reduce customs tariffs on intermediary and capital goods. The government also plans to pump LE15 billion into the labour intensive infrastructure sector and a similar sum into promoting public-private partnerships and encouraging more Arab and foreign direct investment.
Aiming to mitigate the impact of the international crisis on the Egyptian economy the government is hoping to stimulate greater regional cooperation, targeting Arab investors by stressing the comparative advantages the economy enjoys.
Samir El-Alaili, deputy chairman of Global Investment House, a leading asset management and investment banking company operating across the region, believes there are valid reasons why Egypt could emerge as a winner from the current economic downturn.
Egyptian financial institutions' exposure in the world's financial credit market is minimal, argues El-Alaili. "Local banks have abundant liquidity, with an average loan to deposits ratio of 54 per cent compared to 80 per cent as the international norm," he said during the two-day Cairo Investment Forum held this week.
El-Alaili also points out that the International Monetary Fund's 2009 growth forecast for Egypt, at six per cent compared to a world average of three per cent, and the World Bank's 4.5 per cent compared to 0.9 per cent as a world average foregrounds Egypt as an attractive destination for FDI.
"Egypt certainly comes out as an FDI favourable destination," says El-Alaili. He added that future FDI inflows are expected in the manufacturing sector where Egypt has the comparative advantages of low labour costs, abundant raw materials and a favourable position vis-à-vis European markets.
"In turbulent times opportunities lie in private equity, which has outperformed in most sectors and in most markets around the world, and in investing in SMEs," said El-Alaili who concluded that the latest procedures will help make SMEs less vulnerable to economic upheavals.

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