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 V.I.P. INTERVIEWS
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| CENTRAL BANK OF EGYPT |
Interview with:
Mr. Ismail Hassan
Governor
Contact
31, Kasr El-Nile street, CAIRO-EGYPT
Tel: (202) 392 62 11
(202) 392 61 08
Fax: (202) 392 63 61
February 7th, 2000 |
| Since the outbreak of the reform process, Egypt has achieved major goals and the country is among the fastest growing markets in the world. Could you update our readers on the present macroeconomic situation of the country?
The present macroeconomic situation of the country has continued the path initiated a few years ago with regards to inflation, economic growth, budget deficit, balance of payments and the external position. Presently, the inflation rate is at 3% and budget deficit around 1% of GDP. For the external position, we are meeting all our obligations in time and the structure of the external debt is favorable because most of the debt is on a concessional basis and is scheduled for a long period of time. We are trying not to borrow unless the borrowal project is generating revenue in foreign currency and able to service the external debt smoothly. With regards to the balance of payments, the current account deficit was reasonably high for the year 1997-1998, around 3%.
So you have a more ambitious target?
Yes. Because we were affected by what happened in the international market, especially in Southeast Asia and therefore our imports exceeded the ordinary level. However, the current account deficit was US 2.5 billion in 1997-98 and this figure dropped to US 1.7 billion in 98-99, representing less than 2% of GDP. On the other hand, according to our latest figures the country's economy grew at around 6% in 1999. As for the structural reforms, the privatization process is moving forward in various directions. The stock exchange is doing well and the traded volume is increasing, having reached 6 billion Egyptian pounds in January 2000.
But compared to the GDP, don't you think that the stock market should be more active?
Yes, but it is not fair to compare what is happening in a country like Egypt and the situation in developed countries. Rather, we should look at what happened in Egypt over the last years, or compare our situation with that of similar economies. It is important to note that the participation of the foreign investor in the stock exchange is increasing.
What are your expectations and your macroeconomic forecasts for the year 2000?
Three years ago, we started some mega-projects in various parts of the country. This may have an effect on the budget. The deficit may rise but not that far, about 2%. The economy's growth rate will not be below 6%. Inflation would be kept within the present level. The external debt should move downward. A better balance of payments is also expected.
According to these and other figures, what are the weakest and strongest points in the Egyptian economy?
The major challenges we are facing are the following:
How to increase our exports.
How to maximize the benefit of our natural gas resources.
How to maximize the benefit of the infrastructure that we started to build in the frame of several ongoing mega projects.
Transfer of technology. We need to incorporate this element in our economy while trying to minimize its impact on our labor.
How to cope with globalization.
Major successes include:
Monopoly policy .
The budget deficit which is under control.
Structural reforms in various areas, such as privatization, education or health system.
Foreign direct investment.
Tourism
Excellent relations with the US and Europe
On top of all this is our role in the Peace Process. In order to grow further, we need stability in the region.
One of the latest achievements in the process of construction of the European Economic and Monetary Union is the creation of the European Central Bank. Can certain aspects of this project be applied to the process of Arab integration?
Yes and no. Yes, we should look at this as an ultimate goal. In Europe, it came as a final step of a series of developments over a long time. We are studying the developments that lead to this position. We are assessing this process within the Arab league. We are observing, analyzing, and trying to follow these steps. The common market, the lifting of the barriers among the Arab world is a target. These steps and others need to happen before a Central Arab Bank is established.
I would like to have your assessment on 5 different aspects of the banking system in Egypt: capital requirements, supervision, administration, technology and marketing. Regarding capital requirements, recently, the General Secretary of the Union of Arab Banks recommended that the minimum capital requirement for Egyptian banks should be as high as US 200 million compared to 30 million now. What is your opinion in this respect?
We have some banks that exceed this minimum. Nevertheless, I believe that what is more important is not the size of the capital itself but the capital adequacy issue. We are among the few countries in the developing world that started to apply all the BASLE Accord measures in early 1991 regarding the capital adequacy issue. You have to weigh the different assets with the risk and we require banks to do it since 1991. Thus, what really matters is the comparison between the capital base and the utilization of the resources of the bank. However, practically speaking, banks are increasing their capital, not because they are weak, but to give room for further development as it is linked to the risk management policy. Either you limit yourself to what can be done with this capital base or you raise it to help you grow.
Regarding supervision, besides the application of the Basle Accord terms, what other bank supervision measures is the Central Bank currently applying in Egypt?
We apply the assets classification measures and banks are required to provide for the performing and non-performing assets categories as stated by developed countries and international rules of bank conduct.
We also require banks to follow specific foreign currency exposure ratios, for each individual currency not to be +/-10% of the equity base of the bank. We also have measures to deal with concentration. We have applied strong bank supervision since the 1950s. As a result, we do not have serious problems in the banking sector which has proved to be strong enough so as to help Egypt avoid the problems we have witnessed in other countries as a result of the financial crisis. The banking sector in Egypt applies international accounting, and audit standards and transparency is increasing. We require banks to publish their interim audited financial statements on a quarterly basis.
Don't you think that mergers between Egyptian banks, resulting in larger capitalized entities, would enable them to further contribute to the development of the Egyptian industry and to finance major projects of infrastructure?
Of course, banks should be able to further contribute to the development of the Egyptian industry to finance major projects in infrastructure. Also, I agree that mergers help in this respect and the Central Bank encourages any step in this direction. I would like to mention that banks are increasing their capital bases in order to widen their lending capacities, and I am looking forward to seeing some merger transactions materializing in the near future.
| On the subject of administration and management, do you think the Egyptian banks are sufficiently well managed and customer-oriented as you would like them to be?
You should never be fully satisfied. There is always room for improvement. We are improving, but have not yet reached the level we are looking for. To do this we expose our employees to the rest of the world. We train them in courses, including top management. We discuss with other foreign banks the latest developments.
Does the educational system in Egypt meet the requirements of the banking system?
There are no specialized institutions. There are some courses in the universities, but we rely on on-the-job training, the tailored courses organized by the banks themselves or the Banking Institute of the Central Bank, or we send our staff to be trained by our correspondents abroad.
What about the introduction of new technologies?
We are trying to introduce the latest technology. There are a number of banks which are building an ATM network. In March 2000, we will operate a system, throughout the Central Bank, to enable transfers among local banks through swifts at a very low cost. This will help customers get their transfers immediately. We are working on improving the automation of the banking system as a whole, including clearance and the settlement of payments. In this respect we are implementing some programs based on the EU and the US experience.
Would you say that after these measures are implemented, Egypt's banks will be able to cope with the latest technology and compete with foreign banks?
Once these programs are implemented, Egyptian banks will be in a better position to serve their customers. We will not necessarily reach the U.S. or European standards, but we will be moving forward.
Do you think that the bank management is aware of the importance of the role e-commerce is going to play in the present and future?
Yes. We are working to help this kind of business in Egypt by sending the staff to different seminars.
The need for marketing will immensely increase when the GATT Agreements will be fully implemented by the year 2005. What would you say to those banks who still rely on traditional ways of marketing their products and services?
One of the advantages of diversifying and expanding the banking sector is increasing competition in the field. There is no other way to face competitiveness without proper and efficient marketing. Nowadays marketing is becoming more efficient, and more banks are directed to the needs of marketing. Otherwise, the banks will lose their market share. In the past, they relied on the banking structure, as the government banking business was directed to the public sector, but now it is a new wave.
The Minister of the Economy, Mr. Boutros-Ghali, stated that the liquidity and the exchange rate problems undergone by Egypt could be rapidly solved without any requirement of restructuring. What are the measures to be adopted in such a case?
We discussed the different factors that affected the economy in the last two years- Southeast Asia, tourism (Luxor incident), employment abroad, oil, the global Arab economy - all these could have affected the economy severely. But luckily we were in a position to face the problems. For example, some might look at the Luxor incident (late 1997) as structural or long-term problem. The perceptions and solutions would be different, for some others it can be seen as a temporary and short-term problem.
Another example is the effect of the oil crisis on Egypt's economy directly and indirectly through the oil transportation through Suez canal and the remittance of Egyptians working in the Gulf). Thus, these elements of the economy depend on from which perspective you are looking at the market.
The Minister of Economy stated that we have to educate the market, to act here to cool the market down and to end speculations. Egypt increased imports from Asian countries in 1997-98, but this cannot happen every year. We have to rely on the inventory from previous years, in order to witness the market calmness. Also, remittances and oil and tourism revenues are picking up. One must look at all these factors together. And we started to make use of some of the reserves, which was very high at that time. Perhaps that is what Dr. Boutrus-Ghali mentioned. We all work together, as an effective team. The Prime Minister, in most cases, presides over the meetings of the team and H.E. President Mubarak closely follows the work of the team. It is a harmonious team, while at the same time keeping the independency of each Ministry. We cannot all afford sacrificing the benefits of reform in the country.
His Excellency the Finance Minister, Dr. Hassanein, stated that there is trust and confidence in the new economic team, from here I must ask you about the four big banks because the government is still in the process of privatizing...
With regards to this question, there are three points:
1) The market share of the four public sector central banks is declining. At present this is about 50 percent. Our forecast suggest that this will decrease further, and this means that growth is moving up in the markets.
2) A few years ago we had 26 joint venture banks where the four public sector banks owned the majority of shares. Now public sector banks are required not to own more than 20 percent in any other bank provided that it is not a local minority. For example, the share of the national bank of Egypt in the biggest commercial bank (CIB) was 99 percent. It started at 51 percent in the mid 1970s. When Chase Bank decided to withdraw, its shares were bought by the national bank of Egypt, thus bringing its ownership to 99 percent. Now it is 19 percent with no blocking minority.
3) To privatize one or more of these four public sector banks, we needed to have legislations permitting this. We succeeded in getting it.
However, we are committed to the privatization of the public sector banks and the economic team is working on this.
Which banks do you think would be privatised?
I do not want to mention the name. It is a developing country and people may think that privatization means that they withdraw their accounts and transfer them to another bank. We are taking the market gradually so not to have a negative effect.
The other point is that there is no distinction at all between the banking transactions of the four public sector banks and others. In the past, there were some limits to the public sector banks. But no longer.
Regarding the small banks, what would be more suitable for them to insure their own viability-to go into mergers or strengthen their financial position?
To go into merger is subject to them. Our goal is to have strong banks. This does not mean huge bank, but rather efficient ones. To grow effeciently you must grow on both sides. We cannot force banks into mergers except when we have a problem with a small bank. Then there are many steps: first we must ask them to increase their capital, change their management, or we can dissolve the board of directors. There are a number of options including mergers.
We encourage mergers among banks but it should come from the shareholders, not from the central bank. |
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© World INvestment NEws, 2000.
This is the electronic edition of the special country report on Egypt published in Forbes Global Magazine. August 7th 2000 Issue.
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