Business Monthly
March 2009
Philip Whitfield
Dr. Mahmoud Mohieldin, Egypt’s Minister of Investment since 2004, knows full well he’s in the eye of the storm. Abroad, economies are in shreds, trading partners have mothballed their ships and new foreign investors are almost impossible to identify. At home, his plan to hand over majority of ownership of most of the nationalized companies to the public is under fierce fire.
For many reasons, Dr. Mohieldin is exactly where he wishes to be: an economist with the practical experience and political power to help his country in a time of global crisis. He is an unabashed free marketer who believes Egypt has created a balance between capitalism and public ownership that positions Egypt in a favourable situation at this particular moment in time.
He accepts his task as a work in process aimed at passing on the benefits of reform to the mass of Egyptians through “trickle down” economics – tax cuts and reduced customs duties. He accepts government’s responsibility to protect the worst affected from the vicissitudes of economic turmoil.
Mohieldin was born into the rough and tumble of political life, the son of an affluent citrus-faming political family with deep concerns to serve others before themselves. He was educated to teach and to manage; a decorated international economist unperturbed about speaking his mind in high places on Egypt’s behalf. Irascible when needs be, charming for most of the time, he is forever ebullient. Nobody doubts his acumen and intellect. He is trusted, known for utter reliability and his respect for those whose counsel he seeks.
Mohieldin has grown in stature over the past four years, yet shows no signs of leaving his post for greater status or influence. On the contrary, the master of the ship is urging his crew to head deeper into the heart of the tempest. He feels Egypt has the timbre to succeed where others flounder.
Mohieldin’s only free time is spent sleeping, briefly; teaching university students one term a year on his day off, as he puts it, and listening for three hours after Friday prayers to the pleas of his fellow villagers at the family farm in Kafr Shokr, in the Nile Delta governorate of Qalyubiya.
The rest of his time is spent working.
Mohieldin is indefatigable and energetic. Fiercely loyal to the National Democratic Party, he is fiscally conservative by nature, which gels with NDP current thinking. He believes government’s responsibility is to set policy and impose the discipline required by unambiguous regulation and well-qualified managers to oversee the day-to-day.
That non-interference, he believes, balances the tensions between competition, innovation and regulation. He says the result has left the banking sector, for example, “In very good shape. Liquidity is sound, carefully regulated.”
Born in 1965, he received his Bachelor of Science in Economics, with highest honors, first in order of merit, from Cairo University. In 1989 he received a diploma in Quantitative Development Economics from the UK’s Warwick University. The following year he received a master of science in Economic and Social Policy Analysis from the University of York. In 1995, he received his Ph.D. in Economics from the University of Warwick. Before being appointed Minister of Investment, Mohieldin was a professor in Financial Economics at Cairo University.
Mohieldin is co-chairman of the Economic Committee of the NDP and a member of the NDP’s Policies Secretariat. He represents Egypt as a governor of the World Bank and as an alternate governor of the African Development Bank and the Islamic Development Bank.
As an economic advisor to the minister of state for economic affairs from 1995 to 1997; senior economic advisor to the minister of economy and foreign trade from 1997 to 1999; and senior advisor to the minister of foreign trade from 1999 to 2002, he gained first-hand experience of the Egyptian bureaucracy. As a director of the Central Bank of Egypt and HSBC-Egypt, he absorbed a clear understanding of Egypt’s financial system.
Mohieldin arrived at the Ministry of Investment in 2004 with a clear vision for Egypt: an efficient economy fully engaged with the rest of the world, mobilizing the talents of enthusiastic, well-educated young people. He was empowered to shake up Egypt’s moribund economy alongside the minister of finance and the minister for trade and industry. He set about clearing out corruption and bad debt in Egypt’s publicly-owned banks, reshaping the capital markets, the insurance industry and mortgage lending; attracting foreign investment and making publicly-held companies profitable.
Bank reorganization
Mohieldin admits fortune favored the brave and Lady Luck timed it right when he initiated bank reform. The number of banks was reduced from 57 in 2004 to 34 in 2007, largely by consolidating the number of private banks from 28 to 12. Voluntary and compulsory mergers strengthened the banks’ competitiveness and boosted their capital.
Mohieldin managed to reach agreement with the banks over the valuation and repayment of LE 26 billion of irregular debt owed by public business enterprises to banks. The landmark sale of 80 percent of the Bank of Alexandria to Italy’s Sanpaolo IMI realized US$ 1.6 billion. Less successful was the attempt to sell 67 percent of Banque du Caire. The government reportedly turned down an offer of US$ 2 billion from the National Bank of Greece. Mohieldin says the government’s rejection extirpated allegations that the government was prepared to “sell anything at any price.”
In the three years Egypt’s nationalized banks were straightjacketed as regulators ordered non-performing loans to be sorted out and mandated best practices and efficiencies, the banks were “hospitalized to all intents and purposes getting healed,” says Mohieldin. The banks’ good fortune was to be “home and dry while this global financial storm was taking place,” he says, adding: “So we didn’t really get involved in sub-prime credit. We didn’t get ourselves involved in risky assets.”
His tenacious desire to improve risk management is tempered by deference to expertise from elsewhere. His confidence in the Central Bank of Egypt has been rewarded by best international practices introduced into the backbone departments of management, IT and MIS and human resources at the National Bank of Egypt and Banque Misr.
He expects the Central Bank to improve access to finance in coming months, particularly to help small and medium-sized enterprises (SMEs). “There are many things that we could be doing in order to encourage banks to lend further in order to have more funding for the private sector,” he says. However, having stated the policy, he regards the individual measures to be taken as the purview of the Central Bank.
Market reform
The Egyptian Stock Exchange has been one of the key drivers of growth in the economy. But the stock market’s precipitous fall of 70 per cent from a high of 11,935 in April last year has put to rest assertions that the exchange has decoupled from the markets in developed countries. However, Mohieldin takes comfort in the tighter regulation and increased efficiency in the market. He is confident the establishment of Nilex for small and medium sized companies to list their shares publicly, will in the long-term prove beneficial to the growth of SMEs. He anticipates the introduction of long-term local currency bonds, a commodities market and a secondary market for financial products associated with commodities.
Direct influence on business was extended through the Egyptian Institute of Directors (EIoD) to encourage corporate responsibility practices in companies listed on the Egyptian Stock Exchange and state-owned enterprises. The EIoD’s Codes of Corporate Governance, published in 2005 and 2006 were a first in the Middle East and North Africa.
Foreign investment
After two years as a minister, Egypt entered the World Bank’s list of top10 reformers and two years later, in 2007, was named by the World Bank as top global reformer. In that period foreign investment in Egypt grew from US$ 400 million to more than US$ 13 billion. GDP grew to more than 7 percent annually. The global meltdown is causing expectations for the current year to be revised downwards, particularly as tourism and receipts from Suez Canal traffic have dropped considerably.
Mohieldin remains sanguine. “The crisis is “pushing us to think what we should be doing differently, what we should be keeping and what we should be enforcing, because we cannot really assume it is business as usual and to continue just what we are doing in terms of reforms.”
The focus, he says, is on “speeding up the process of reforms… effective and potential regulations should be monitored closely and improved regularly, as we are doing,” he says. We are telling banks that some of you were at the hospital being cured. Now go and do your business.”
He is also concerned with what he says are the signs of new protectionist measures emerging around the world, particularly in the United States. He underscores his belief in globalization and the free movement of trade and capital. At an International Monetary Fund meeting, Mohieldin reacted smartly to an implication that developing countries were responding complacently to the global economic crisis.
Mohieldin said, bluntly: “Well, I am not really sure that you are right. You are basing your arguments on lagging indicators and misleading information.” He went on to say that while some developing countries have not experienced a collapse of an investment bank, such as Lehman Brothers “They are going to be have ‘unemployed brothers’ and ‘poor brothers.’ While I don’t really have Wall Street I will be having problems in the Main Street and there will be problems in countries that don’t even have decent streets,” he told the IMF.
Privatization
Of late Mohieldin has drawn fire by setting out a plan to transfer majority ownership of 85 publicly-held Egyptian companies to the public by listing them on the Egyptian Stock Exchange and giving citizens a bundle of shares. The detail is voluminous, which Mohieldin describes as “an Egyptian version of mass privatization to transform state ownership to the Egyptian public ownership.” But it’s not going to be “your typical Eastern European mass privatization.”
In the medium term, Mohieldin continues to strengthen mortgage lending and insurance, relying to a large degree on expertise from the World Bank, the IFC and the big financial institutions in cooperation with the Ministry of Investment, the Ministry of Finance and the Central Bank. “But the emphasis today is not just the soundness. It is basically having a more effective role for the financial intermediaries – banks or non-banks – to do their jobs of realizing savings and allocating them for investment purposes,” he says.
He clarifies the meaning to emphasize the government’s determination not to follow the example of the United States or Britain by taking over banks that are in trouble, or arranging massive bailouts. “We have a completely different approach,” he says. “Thanks to the efforts that we have been doing in terms of care of our banks during the period 2004 until 2008 when we ordered some of the banks to get merged, when we recapitalized the banks, when we changed the management, we did everything that some of the developed countries are doing today. So, we finished that before the crisis and we have no problem whatsoever in having a sound, effective banking system. But what we need is basically to have credit advanced to the private sector to finance growth and productive activities. When I say support it is basically by policies and not by measures to help the banks to do the job.
“We are applying rules of corporate governance,” he says. “Yes, we are owners of banks. We are owners of financial institutions. But corporate governance tells me that your rights of ownership doesn’t really give you the rights of a manager and doesn’t really give you the right to push credit policies and doesn’t give you the right to go beyond the limits that are allowed to you as an owner to violate the rules of supervision. So, yes we are owners. But we are not going to be intervening directly in availing credit to those whom we prefer or we like or expect that should be eligible for finance. We leave that to the banks. There will be no special favors, no special treatment, no special incentives, nothing whatsoever. They are there to work in an environment that is subject to competition and contestability.”
Social responsibility
In his public speeches and comments, Mohieldin adds another dimension, the absolute requirement to focus on improving the lives of all, particularly as 50 per cent of Egyptians are under 30. “There is no value of investment or growth, or FDI without putting the lives of people into primary consideration. The only justification for the harsh and tough measures we are taking is basically for what we believe: that they are going to be beneficial at the end of the day for the general public and not just for the few. So when we are implementing our policies we make sure that the issues of access, equal opportunities and equity are at the forefront of our policies.”
The man with a vision when he came into office reflects on how it has worked out to date: “It’s acceptable. Looking back in some of the areas there has been some significant improvement. I think in all aspects we managed to do well. In many aspects we were even above target in terms of growth last year,” citing foreign direct investment of US$ 13.2 billion against an expectation of around US$11 billion.
Even the stock market performances before the market explosion in September were basically moving in “acceptable norms,” he says. The asset management program was doing very well, not just through selling, but through corporate governance, through net profit, which rose from a deficit of LE 1.2 billion in 2004 to more than LE5.3 billion of net profit.
“So we are basically doing very well,” he says. “With the exception of inflation that went into its highest rates in recent history because of imported inflation. “In some areas we need to do more and with the challenge of the crisis we need to do more than fine tuning. We need to make some major changes in the way that we are conducting our economic policies, bearing in mind, of course, that there are some positive aspects of the crisis that we can capitalize on.” Pressed in his assessment, the professor of economics gives himself a B
Mohieldin is a stickler for accuracy, a workaholic who has a flat-screen TV in his car so that he can view news coverage of his department on CDs sent to him from all over the world. A much-published author on economic theory and practice , he thoroughly enjoys a good read. Armed with 11 books acquired recently at the International Book Fair, Mohieldin is looking forward to finding time to read The Power of Progress, written by Leon Podesta, chairman of the Obama-Biden transition team.
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