(The following statement was released by the rating agency)
Nov 22 - An IMF agreement for a loan to Egypt provides
stability, confidence and international support for fiscal consolidation and
structural reform. We listed progress toward an IMF agreement as one of the
factors that could help stabilise Egypt's 'B+'/Negative rating in June. Other
considerations include the emergence of a stable governing structure, and
economic and structural policy reforms.
The IMF programme will provide some breathing space to implement fiscal reforms
and alleviate pressure from a weak balance of payments. Reserves have more than
halved since the end of 2010 as a result of a fall in exports, tourism receipts
and FDI. Occasional injections of bilateral financing have been necessary to
prevent import cover falling below three months.
The programme includes plans to cut a budget deficit of almost 11% of GDP in
2011-2012 - to 8.5% by 2013-2114 - and to record a primary surplus the following
year. The government will attempt to do this via spending cuts - energy
subsidiary reform, in particular - and tax reform.
Successful reform of fuel subsidies is the single-biggest reform the government
can make to improve Egypt's fiscal position or free up revenue to spend
elsewhere. Fuel subsidies account for about 20% of government spending and 73%
of all subsidies. The government has already started by targeting the subsidies
more accurately toward the poor.
Plans to reform income tax and widen the sales tax should broaden the tax base
and contribute to a reduction in the budget deficit. Agreement with the IMF is
likely to encourage foreign inflows back into the local bond market, and the
fiscal reforms will improve the budgetary position, both of which will reduce
pressure on domestic financing - which had seen Treasury bill yields pushed up
to the mid-teens, compared with inflation of 6.7%.
Structural reforms to support the development of the private sector and enable
it to generate more employment opportunities have also been agreed. These will
strengthen the weak business environment, and should have a beneficial impact on
economic performance over the longer term.
Effective communication will be vital to gain popular acceptance in the
turbulent prevailing political environment. Agreeing a new constitution is the
next stage in the political transition. Disagreements between liberals and
Islamists mean it will be difficult for the document to be finalised by the
mid-December deadline. Once agreed, the constitution will be put to a
referendum, which will be followed by a fresh parliamentary election. The timing
of the election and shape of the new parliament is uncertain, but the prospect
of polls in 2013 may affect the implementation of the planned fiscal
The USD4.8bn IMF loan carries a 1.06% interest rate. The loan is expected to be
approved by the IMF board before the end of the year, with the first
disbursement upon approval. The IMF programme also opens up finance from other
bilateral and multilateral institutions, with the Fund estimating that its loan
will be backed by almost USD10bn in loans and deposits from multilateral and