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LETTER FROM THE EDITOR

What's a liquidity squeeze?

In journalism, there’s a fine line between convenient shorthand and empty jargon that circumvents the need for explanations. At least one business-oriented wire service bans terms like "liquidity squeeze," insisting instead on "shortage of cash in the economy."

Still, we’ve been saying "liquidity squeeze" fairly regularly in Business Monthly. So, feeling a little self-conscious, I went to the Euromoney conference hoping to find out exactly what the term means.

"We define it very loosely," Haitham Abou El Nasr, vice president for business development at Investia, told me. "It’s not a technical term as such." However, it does refer to certain economic realities. "There’s no money in the market; banks are being selective; the government has no money to pay its contractors, and is not paying its debts to the private sector."

How do these factors make themselves felt? "Money isn’t there," Abou El Nasr said. "People tell you, ‘We will invest when we have the money.’"

The conference opened with a round of speeches, but neither the prime minister nor the economy minister said anything about liquidity. Then Minister of Finance Medhat Hassanein stepped up to the podium. "The liquidity problem or the liquidity squeeze is over," he said. "The slowdown of the Egyptian economy is also over." Well, so much for that.

Stepping outside, I spotted a young man with "Ministry of Economy" printed on his nametag. "How would you define ‘liquidity squeeze?’" I asked him.

His colleague stepped in. "We’re specialized in other things," she explained.

But Hany Kadry Dimian, senior assistant to the minister, gave a detailed answer to my question. "From an economic perspective, there is no liquidity squeeze," he said. "What we have is slow liquidity growth." Meanwhile, domestic credit is not keeping up with the economy’s 6 to 7 percent growth rate. "From a macroeconomic point of view," he said, "it’s not a problem. It’s an inconvenience – an indication of some economic disequilibrium."

Others, however, insisted that lack of liquidity was definitely a problem. "On the macro side, liquidity refers to the ability to buy and sell the currency as much as you want," said Angus Blair, head of the London-based investment firm Safron. "It means being able to freely trade the Egyptian pound with foreign currency. This is part of the free movement of capital."

Is the term misused here in Egypt? "Not necessarily. The Central Bank has restricted the flow of money," and the resulting lack of liquidity has had a significant "knock-on effect," with accounts receivable piling up in a "downward spiral" of debt at every level.

James Vaughn, managing director of EAB, was even more adamant that the term is not misused. "The banking sector is short of local currency," he said. "Banks had to borrow local currency to meet their reserve requirements, and this drove up lending rates."

But the squeeze is already easing up, he added. "It’s improved quite a bit. Interbank interest rates are down."

Magdy Fadle, also of EAB, preferred a less technical definition. "Recession," he laughed. But the problem is structural as well as cyclical. "Liquidity is adversely affected in Egypt because the government is involved in everything," he said.

Still, there are some positive signs, especially with tourism and oil revenues picking up. "In my opinion," said Fadle, "by early next year it should be easing."

At which time we hope the market will produce other new and exciting catch phrases.

NEIL MacDONALD

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