CAIRO: Say you’re a Gulf oil baron, still flush despite some recent setbacks and anxious to pump your cash into something steady, long-term and reliable. A toll road in Egypt might look pretty good to you – traffic flows are predictable and the Egyptian government, bulwarked by its army and citadels of bureaucracy, is there to back you up.
But there’s one problem: The drivers on that road will be handing over Egyptian pounds, a worrisome prospect given the guinea’s drop against the dollar since August, from around 5.30 to 5.59 at yesterday’s close.
Suddenly a safe bet becomes a gamble staked on forces beyond your grasp.
“It’s a risk issue, said James Goold, CEO of Ahli United Bank (Egypt), at a workshop Tuesday. “If you get 20 years of revenues in a foreign currency, you’re taking on enormous risk.
This problem could dampen foreign funding for infrastructure in Egypt, hampering growth in a sector that has been touted by officials and businesspeople throughout this year’s conference as vital to staving off the pain of a worldwide recession.
In the United Kingdom, some projects are financed by as little as 10 percent equity, with the rest coming from borrowing arrangements that last as much as 20 years, said Goold.
“At the moment here in Egypt you’re lucky to be able to get financing in LE beyond three years, he said.
With the notable exception of ports, most infrastructure projects bring in local currency, as with roads, hospitals, bridges and waste water treatment.
But outside investors are rarely eager to finance in Egyptian pounds, especially given the 15 to 20-year terms of many infrastructure projects.
“People shouldn’t take currency risk, frankly, Goold said. “If the revenue is in dollars, the investment should be in dollars. If it’s Egyptian pounds, it should be in Egyptian pounds.
“The only party who can really take on this risk is government, he added.
Add to this that liquidity outside of Egypt is drying up. Ahli United Bank arranged a $480 million, 15-year loan to develop the port in Damietta, Goold said. “We could not do that today, he said. “That market for new, greenfield projects is basically closed.
Despite relative liquidity, Egyptian banks must grapple with high interest rates and “loan maturity issues, Goold said. “There’s plenty of cash [in Egypt], but it’s not the right type of cash, he said.
Many of the questions posed to the workshop panel came from businessmen concerned that this currency problem could hamstring their work. “You have given us more questions than answers, one complained to Goold.
To cope, the government could take on the exchange rate risks of some projects by guaranteeing returns for investors, Goold said, though cautioning that this is not likely given the state’s position on previous projects. There are no long-term currency swaps in Egyptian pounds, he noted. In fact, Goold said, the Central Bank actively discourages such arrangements.
Rather than devising a “cookie cutter approach to exchange rate risk, borrowers and lenders should look at risks specific to each project and draft thorough, precise contracts to address them.
The World Bank provides “political risk insurance for many projects, said Srilal Perera, advisor to the Multilateral Investment Guarantee Agency, which is a member of the World Bank. This includes cases where the government seizes land or breaches its contract, where war or other conflicts destroy property, and where the investor is unable to convert between currencies. The World Bank does not ensure against devaluation risk, Perera said.
Sherif Oteifa, advisor to the Minister of Investment, pointed to a road project in Upper Egypt aimed at connecting three governorates to the Red Sea as an example of how the state is funding infrastructure development.
The LE 1.6 million-project will be financed by primarily through proceeds from privatization and land sales, Oteifa said.