CAIRO: The faltering global economy has left Egypt grappling with a major challenge: a slowdown in its real economy that could see growth rates fall to around 6 percent, Finance Minister Youssef Boutros Ghali said on Monday.
“The problem comes from the real economy which is [triggered by] the slowdown in global economic growth, Ghali said during his inaugural speech of the Euromoney Conference. “The challenge is the slowdown of the global economy which affects our spending patterns.
The minister, however, said it was still too soon to predict where economic growth will stand amid the ongoing global financial storm.
“When we slow down, we will be somewhere around 6 [percent growth]. I think I can safely say – between 6 and 7 is a safe bet. It is not sure, but it is a safe bet. That’s what I can see from the macroeconomic balances.
Egypt said earlier this month that it was maintaining its growth target at 6 to 7 percent for the current 2008/09 fiscal year and would take steps to counteract any fallout from the global financial crisis. The 7.2 percent growth recorded in the financial year that ended in June was the highest rate in more than 20 years.
Looking on the bright side, however, Ghali said that global economic slowdown has pulled commodity prices down, which in turn dropped inflation rates in Egypt.
“Eighty percent of our inflation rates come from increase in energy costs and foodstuffs. Prices [were] increasing due to excess demand for these commodities worldwide. Now, that demand is gone and prices have come down, he said.
Decline in global prices will continue dropping inflation rates in Egypt, Ghali added. Consumer price inflation in urban parts of Egypt fell to 21.5 percent in the year to September from 23.6 percent in the year to August.
“[Decline in inflation rates] may take a month, two months, three months. Inflation is no longer at the forefront of our policy targets. Growth is at the forefront, he said.
Ghali pointed out that a drop in inflation rates is an opportunity for Egypt because it will increase consumer spending as well as save on the budget and subsidies, which will translate into an increase in government investment (LE 15 billion) on infrastructure projects in areas such as education, health and water treatment plans.
The minister also said he expected Egypt to meet a budget deficit target of 6.9 percent: “I expect the budget deficit of this year – 6.9 percent of GDP – to be achieved, although I will increase spending on infrastructure.
Meanwhile, the main immediate effect of the global financial turmoil on Egypt has been a sharp decline in share prices on the stock exchange by around 47 percent this year. Still, Ghali urged investors not to panic.
But seeking to reassure investors, the minister argued that Egypt did not “have a problem in its financial sector. He explained that deposits were guaranteed by the Central Bank, while foreign reserves were held in traditional instruments like treasury bills.
“We have not invested in all these funny instruments … We don’t have a problem in our financial sector. Liquidity is available, interbank markets function.
Central bank Governor Farouk El-Okdah said earlier this month that the bank’s foreign reserves of around $35 billion was secure, as was $15 billion in overseas positions of Egyptian banks.
As for sharp plunges in Egypt’s stock market, Ghali advised investors to wait out the current downswing on bourse. “Sit tight and wait it out. It will pass. The companies are fundamentally sound.
“Stock markets are driven by greed and panic. There is never middle ground. You are never rational … Our stock market has 10 to 12 stocks that are connected abroad. When these drop outside, they bring down prices here, he added.
Meanwhile, Egypt’s Investment Minister Mahmoud Mohieldin said the country was not decoupled from the global crisis. Government officials have outlined tourism, Egyptian exports, foreign investment and Suez Canal revenue as the sectors that will be hit hardest by the global downturn.
Mohieldin explained that investors both domestic and foreign will continue eyeing Egypt as a country of ample opportunity, however, it will require “more effort to lure investors into the country.
“This year will require more effort and not just campaigning. We [need to] provide facilities and funding, lands with permits for investors – domestic before foreign – and we need to provide more support from governorates and not put more hurdles on investors.
He put a target to attract $10 billion in foreign direct investment [FDI] in the current 2008/09 fiscal year, down from the record high $13.2 billion in the previous year. With Egypt’s growth rates still increasing when the world sits on the brink of recession, reaching that figure is possible, he pointed out.
“Any country achieving more than 3 percent growth rate will attract FDI, Mohieldin said.
The investment minister added the government expects a significant drop in inflation and could see it falling to 12 to 13 percent this year, with a further drop in the 2009/10 financial year.
“I am betting on a major, significant drop in inflation, Mohieldin stated. “I am expecting that inflation is going to be in the low teens. We are talking about 12, 13 percent, possibly in the year 2008.
With inflation rates dropping, the main challenge the government plans to tackle is real economic growth. “This is the key for success. It’s the key for dealing with poverty and enhancing our per capita income, Mohieldin said.
The government’s plans for the next stage, he added, is to continue reforming the financial sector, which has proved strong in the face of the world’s financial storm with ample liquidity available for financing and investment.
The government’s new reform program for 2009, he said, will mainly focus on uniting non-banking financial institutions under one authority as well as seeking banking consolidation.