Jan 17 - Egypt’s request for a USD3.2bn IMF standby facility is encouraging, although IMF assistance on this scale would only have a meaningful impact on the country’s finances if it catalysed additional international support, says Fitch Ratings.
If granted, the facility’s most positive impact would be to reassure international investors that Egypt is implementing clear and sustainable fiscal and economic policies, an essential platform for kick-starting renewed foreign investment.
This in turn could stabilise - or even ease - borrowing costs until the transfer of power from the military council, due in June.
Talks between the Egyptian government and the IMF mission began in Cairo Monday, seven months after the country’s military council turned down USD5.2bn of assistance from the IMF and World Bank, reflecting its reluctance to take on large new external debt and its preference to rely on domestic funding to finance the budget deficit.
Although demonstrating a continuing conservative approach to external debt, a long-standing feature of Egypt’s policy, this decision was a factor in keeping FX reserves under pressure in the second half of 2011. Fitch downgraded Egypt one notch to ‘BB-‘ on 30 December 2011, following a substantial and accelerated fall in reserves since October that further weakened the sovereign external balance sheet.
The Outlook is Negative. At the time of the downgrade, we said that the rating will remain under pressure until an elected government emerges and proves able to implement a comprehensive economic programme that attracts external support and foreign investment. We also said that the political backdrop seemed to be becoming less conducive to deficit cutting and spending reallocation, especially in the form of lower fuel subsidies. Egypt’s commitments to the IMF, external financial support, and decisions surrounding the FY2012/13 budget due at the end of June will all have an important bearing on future rating decisions.