1 The WTO’s perspective: where Egypt stands Abdel-Hamid Mamdouh Director Trade in Services Division World Trade Organization

2 Some facts first: financial services in a globalized world The financial sector is a major player in modern economies......However, the financial systems of all developing countries are small, accentuating the concentration of risks Financial markets have become increasingly globalized......making integration to world financial markets inevitable

3 What drives financial liberalization? What experience shows Desire to improve the mobilisation of domestic savings Desire to improve the efficiency of financial intermediation Ambitions to develop into an international or regional financial centre Fears that important domestic financial activity might drift offshore

4 But...what are the main challenges to successful financial reform? (I) Macroeconomic problems Large government deficits –Can stand in the way of the development of stable competitively-priced financial instruments High and variable rates of inflation –A previous history of high inflation may have led to the maintenance of high real interest rates, and may have undermined public’s trust in the stability of the system Unrealistic exchange rates –Exchange rate misalignment provides wrong signals to investors

5 But...what are the main challenges to successful financial reform? (II) Institutional & regulatory situation The legacy of stringent regulation –A much too cosy relationship between institutions and the regulator The smallness of the financial system –Limiting the range of marketable financial instruments Highly concentrated systems –Only a few (sometimes state-owned) dominates the market Banking systems weighed down by bad loans –Often a legacy of earlier policies of government-directed lending

6 What has Egypt done? A view from Lac Leman (I) Insurance Establishment of a new and comprehensive legal framework –Law 156 of 1998 & Law 45 of 1999 Market liberalization –Removal of limitations on majority foreign ownership –Authorization has been given to the government to privatize the four state-owned companies Strengthening of prudential entry requirements –Increase in minimum capital requirements –Favour access of companies intending to introduce new products or develop already existing ones Improving transparency and information disclosure

7 What has Egypt done? A view from Lac Leman (II) Banking (I) Establishment of a new and comprehensive legal framework –Banking Law 88 of 2003 Market liberalization –Full foreign ownership of banks has been allowed since 1996 –Foreign bank branches are allowed to deal in Egyptian currency –Legislation (1998) allowed the privatization of four state- owned banks that control over 50% of sector’s assets –In general, credit allocated according to market principles and interest rates are market-determined

8 What has Egypt done? A view from Lac Leman (III) Banking (II) Strengthening of prudential entry requirements –Increase in minimum capital requirements (following Basle recommendations) –Plans to comply with Basle II standards by 2006 Improving transparency and information disclosure –Since 1997, banks have been required to apply International Accounting Standards (IAS) and publish financial reports based on IAS. Improving regulatory framework –New legislation on Mortgages (law 48 of 2001) and leasing (law 95 of 1995)

9 What has Egypt done? A view from Lac Leman (IV) Capital Markets Establishment of a new and comprehensive legal framework –Capital Market Law 95 of 1992 Market liberalization –Foreign investors have full access to capital markets –The law allows the establishment of Egyptian and foreign companies that provide underwriting, brokerage services, securities and fund management, and venture capital. Independent regulation –The law empowered the Capital Market Authority (CMA) to be an independent supervisor Transparency and disclosure –Listed companies are required to adopt int’l accounting and auditing standards

10 What has Egypt done? A view from Lac Leman (V) Challenges remain... High level of non-performing loans –Around 16% of all credit assets The situation of state-owned institutions –Profitability of public sector banks remains weak –Plans to privatize state-owned banks and insurance companies progress slowly Adjusting to new competition –Challenge for smaller institutions

11 The role of GATS in financial services liberalization (I) How does the GATS fit into this framework?  Types of government intervention Macroeconomic policy Prudential regulation Non-prudential Dom. Regulation Trade liberalization: entry by foreign financial services and institutions The GATS touches only upon some of them

12 The role of GATS in financial services liberalization (II) Liberalizing access to the domestic market? How?

13 The role of GATS in financial services liberalization (III) Liberalizing access to the domestic market? By eliminating what? Market Access barriers  N° of institutions  Total value transactions/assets  Total N° service operations  Total N° natural persons employed  Types of legal entity  Foreign equity limitations Discrimination (*) between foreign and domestic like financial services and financial service suppliers (*) De facto or de jure NT

14 The role of GATS in FS liberalization (IV) How can the GATS help? By not interfering......with macroeconomic policy, prudential regulation and the design of an efficient judicial system...with the promotion of sound corporate governance practices...with the development of a state-of-the-art legal system for financial transactions By supporting regulatory reform processes.....Multilateral commitments can give momentum and sense of direction to regulatory reform programmes By promoting competition By inducing others to do likewise......and lead to a virtuous cycle of liberalization

15 What has Egypt done with its commitments? Source: WTO, and AmCham