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AfricaJuly 3 2005

A testing time for reformists

Much is expected of Egypt’s financial sector reforms and now is the time for the government to deliver, writes Jon Marks in Cairo.
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While speculation abounds about president of 27 years Hosni Mubarak’s intentions for Egypt’s political future, prime minister Ahmed Nazif’s government is winning praise for its application to reform. With new prudential requirements about to affect the banking sector – and much anticipation about planned bank privatisations – the view in Cairo and the investor community is that, finally, reform progress can be expected on the Nile.

There are signs of investor interest in the bank sales that are under way as local banks consolidate. And considerable international goodwill is backing up Mr Nazif’s effort – reflected in a significant planned increase in World Bank support, potentially worth up to $2.8bn in 2005/06-2008/09 for projects including financial sector reforms.

Privatisation progress

But the goodwill will not last forever if Cairo fails to exploit this opportunity; global markets like their risk to be mitigated but may bridle at the exceptionally slow pace of change that Mr Mubarak favours.

Even in financial services, it is the president who decides. Discussing the biggest planned divestment, a well-placed consultant comments: “While I think that Bank of Alexandria now really will be privatised, it will depend on Mr Mubarak signing it off, which may yet take time.”

There have been some promising signs. On June 20, traders on the Cairo Stock Exchange said that Piraeus Bank had finalised its purchase of a 69.3% stake in Egyptian Commercial Bank – enough to take control but less than the 75%-100% that the Greek bank had wanted. The E£20 ($3.45) per share transaction is worth about E£133m. Giving an insight into Egypt’s potential positioning in the global market, Piraeus Bank said the deal was part of its strategy for expansion in south-eastern Europe and the eastern Mediterranean region.

Trading vocation

Egypt – the Middle East and North Africa’s most populous country (Cairo is by far Africa’s largest city) – is rediscovering its Mediterranean trading vocation. Its most successful expression of this has been to emerge as a major supplier to the Mediterranean and wider European and trans-Atlantic gas markets, spurred on by huge liquefied natural gas (LNG) investments from companies such as BG, BP, ENI and Spain’s Union Fenosa.

This has involved major project financings – notably tapping the domestic markets as well – for LNG schemes. The $880m ELNG II structure being arranged for the second phase of the Idku LNG plant “will finance at rates below Egyptian sovereign capacity”, says the BG Egypt president, Oscar Prieto. There is plenty of appetite: by early June, commitments were three-times oversubscribed.

The arrangers are Bank of Tokyo-Mitsubishi, Calyon, Commercial International Bank (CIB), HSBC and Standard Chartered, with SG CIB acting as financial adviser to the Egyptian LNG company.

Bankers are enthusiastic. The Standard Chartered Bank director, Stephanie Hudson, says: “The only problem for Egypt is some residual perception of political risk.” This includes a change of leadership and the question of currency reserves for projects selling into the domestic market.

Leading Egyptian banks, such as CIB, are playing a significant role in these big project structures. Cairo analysts see further potential for locally based banks to chase a range of corporate business and deposits at the upper end of the market, which are now held by state giants, such as National Bank of Egypt.

Considerable interest surrounds the expected sale of the state’s remaining shares in Misr International Bank, held by Banque Misr, the second largest of the big four commercial banks. Prominent bidders include Barclays Bank, BNP Paribas, Société Générale (SocGen) and Ahli United Bank.

The presence of Gulf-based institutions reflects that region’s huge current liquidity and the search for new locations for investment in the post 9/11 environment. This is also having a significant impact on the Cairo real estate market and even on such sectors as downstream petrol retailing.

European interest

The Europeans are building on their presence: Barclays and SocGen are already significant players, via the rapidly growing National Société Générale Bank and, in Barclays’ case, its full control (since 2004) of the joint venture with Banque du Caire. BNP Paribas Le Caire is among the smaller banks that have announced an increase in their issued and paid-up capital to E£500m to meet the demands of the unified Egyptian banking law, passed in June 2003, which was due to be introduced as The Banker went to press. In the process, BNP raised its stake in the joint venture.

The new prudential requirements are expected to cull many smaller banks and force further consolidation. “How many banks will go is a question that remains to be answered,” the consultant says.

Central Bank of Egypt will not be sorry if a number of brass plates fall from the doors of the smaller and less transparent institutions.

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