The big question for Egypt is can it defy the sceptics to develop its potentially huge consumer base and re-emerge as a major player in Arab banking, boosted by a string of major project financings? Cairo bulls believe it can. Or, as an equal number of pessimists argue, is the Arab world’s traditional centre of gravity doomed to collapse under its huge, youthful and predominantly poor population, while Gulf banking centres such as Bahrain and Dubai – and even, potentially, a liberalised Iraq – roar ahead?
There are positive signs. The dash to develop a new generation of natural gas projects has attracted world-scale multinationals such as BP and Royal Dutch/Shell to Egypt. Competition is fierce to develop major liquefied natural gas (LNG) schemes for export, while Egypt is also taking a regional (Africa and the Middle East) lead in developing gas use for the local market.
Stock market boom
Judging from the Cairo and Alexandria Stock Exchanges (CASE) equities market, business should be booming. The local Hermes index more than tripled in value between January 2003 and May 2004. Having peaked at 15,995 points, there has been a correction with a fall of more than 1500 points – but traders say this was mainly due to geopolitical concerns and fears about rising interest rates, rather than any fundamental weakness in the local market.
Added to this was the performance of Egypt’s biggest banks in 2003, whose levels of assets, lending and profits all rose. This does not, however, mean that the sector can avoid a major shake-out if it is to become more responsive to changing global markets and help the local economy to take off.
Many companies operating in the local market are not so optimistic. Businesses are burdened with bureaucracy and state-owned enterprises still dominate key sectors of the economy. Small caps, such as investment bank EFG-Hermes, have been under pressure.
Barclays Bank numbers among the bulls, taking over its subsidiary Cairo Barclays Bank in a E£340m ($55.1m) deal to buy the state’s 40% stake, which was concluded in March.
The was the model of the sort of deal the Cairo authorities want to transact, with a major international bank investing in a local operation to boost services and competition. Barclays’ reinvigorated bank – the only wholly-owned foreign subsidiary in the market – is already adding credit card services and new branches to its network, having seen a niche in retail banking to the professional classes.
The gas-related project finance boom is stimulating interest in corporate and debt markets. The Egypt Liquefied Natural Gas (ELNG) first train financing closed on 29 April, delivering $949m for the sponsors, led by BG (formerly British Gas). According to Stuart Fysh, BG managing director for the Mediterranean Basin and Africa, the $1.35bn ELNG first train project “will help catapult Egypt into the top seven global LNG exporters by 2006”.
A second 3.6m tonnes per year train is under way at the site – which company officials believe will also be project-financed – and other projects could follow.
As ever in Egypt, things take time. The ELNG financing package, for which Société Générale acted as financial adviser, took months to conclude. This was partly due to changes in the sponsor group, where Malaysia’s Petronas replaced Edison International Group in 2003; then the US-led invasion of Iraq intervened. But, as one banker close to the market observes, while corporate and geopolitical problem caused delays, the project’s backers “were still looking at a hard currency-producing scheme, with a confirmed, highly credit-worthy buyer for the offtake, which are the fundamentals for raising project debt”.
About $154m of the ELNG financing package was mobilised by a group of the more go-ahead local banks: Commercial International Bank (CIB), acting as Egyptian co-ordinating bank, National Société Générale Bank (NSGB) and Misr International Bank (MIBank).
Reform continues
Reform is the order of the day in the Egyptian banking sector, as it is across the wider economy. Central Bank of Egypt (CBE) has led the trend towards restructuring. CBE – now under former National Bank of Egypt (NBE) chairman Farouk el-Okdah – has raised the pressure to improve provisioning and clean up loan portfolios of the 60 or so banks under its remit.
It has also promised to sell off stakes in joint venture banks – including the state’s minority stakes in such important local institutions as CIB, Egyptian American Bank and NSGB – in a potentially important privatisation initiative that would help to galvanise the financial services sector.
This is essential to modernise a system that has some glaring weaknesses. By mid-2003, non-performing loans were equivalent to 20% of total loans in the banking system. It was calculated that gross problem assets could be the equivalent of 75% of domestic credit to the private sector and non-financial public enterprises – the equivalent of more than half of GDP.
According to Doha Abdelhamid, senior policy adviser in the finance ministry, and lawyer Ziad Bahaa-Eldin, capital market regulations have improved significantly in the past decade. This is essential in the Egyptian context, after the 1980s, when millions lost out as so-called Islamic finance houses collapsed in a pyramid scheme gone wrong that severely undermined local confidence. “The absence of sufficient information transparency [means that] smaller investors are more likely to be affected by a systemic failure than larger ones”, who may exit earlier, Messrs Abdelhamid and Bahaa-Eldin argued recently – but overall regulation and safeguards are much-improved, they concluded.
Consolidation required
This difficult situation cries out for consolidation. One reason why Barclays took full control of its Cairo affiliate was so that it could grow the bank beyond its previous narrow confines in a system where the big four state-owned banks – NBE, Banque Misr, Banque du Caire and Bank of Alexandria – account for about half of total bank assets, with branch networks that continue to suck in retail deposits. The biggest private sector players are CIB and MIBank, both with assets of about E£24bn in 2003. They are key shares traded on the CASE.
CBE is committed to bringing the banking sector into line with most of the Basel II principles. In 2003, the central bank set a E£500m minimum capital requirement, which banks had to reach by the start of 2004. A large number of smaller state and privately owned institutions have failed to reach this capital adequacy level, suggesting that tough action should follow – if the political will is there.
Moody’s Investors Service has forecast that some smaller banks will not survive the shake-outs to come. However, in the past, the market has proven resistant to reform, with vested interests defending banks that might otherwise be doomed.
The problem for those waiting on reform is that in Egypt such movement is slow. When asked about the promised joint venture divestments, one local banker says: “Will we be buying up the government’s stake in our business? We don’t yet know as we are still waiting for details.”
Political entanglements
The prospects for change in the banking system cannot be divorced from the wider political and social environment. The system remains hierarchical and the state makes many of the key appointments. Decision-makers’ outlooks are influenced as much by the Nasserite past as by the pressures of globalisation and recent initiatives, such as Egypt’s Euro-Mediterranean Partnership association agreementwith the EU.
In this environment, radical Islamist groups have been driven deep underground – and in the case of ultra-radical leader Ayman al-Zawahiri and many of his people, out of the country to join Osama Bin Laden’s al-Qaeda. Meanwhile, many Egyptians have taken to interpreting Islam more literally: for example, more women wear headscarves and other ‘Islamic clothing’, in a marked contrast to the more secular Nasserite tradition.
“My big worry is that while we move so slowly to modernise the economy, our society is changing fast – dividing people over their outlook for what direction Egypt should take,” says one Cairo banker, who asks not to be named. “The authorities crushed the armed Islamists, but they didn’t make people like the government.”
“I see too little being done to reverse the negative trends in our economy and society,” says an Egyptian-born senior executive with a big New York-based institution. “In everything, from the drift towards greater Islamisation in our society to the speculation about [presidential] succession, Egyptians seem paralysed by doubt.”
Succession question
The question is of a successor to President Hosni Mubarak. Now in his mid-70s and head of state since president Anwar Sadat’s assassination in 1981, the former air force officer has never appointed a deputy, creating a constant buzz of anticipation about the future in the salons of Cairo. The state of his health became an embarrassing public issue when, in November 2003, he nearly collapsed while addressing the National Assembly. This pitched the usually taboo subject of succession into the open, at least for a while. It forced Mr Mubarak to deny emphatically the prevalent gossip: that he planned to pitch his pro-Western son Gamal into the presidency.
Gamal Mubarak cuts an impressive figure, and would please investors and markets. A former banker at JP Morgan Chase, he has risen to number two in the National Democratic Party, playing a key role in attempts to modernise the ruling party – which, like so much of Egyptian society, has been slumbering under the control of an older generation of power brokers, for whom terms such as globalisation and political reform have little resonance.
Privately, The Banker was told by several sources that Gamal had told investors and bankers that he would not be president. More likely, the next president will, like his predecessors, come from the military.
The hot favourite is intelligence chief Omar Soleiman, whose appointment might be seen by many analysts as a sign of stability, even though it would not serve to answer critical questions about Egypt’s ability to enact across-the-board reforms, a process in which the financial sector is a microcosm of a wider problem.
