Egypt has yet to heave a sigh of relief from the political tension that paralysed its economy as Moody’s upheld on Monday its B1 negative rating on the Middle East and North Africa (Mena) state.
The start of 2011 proved tumultuous for Mena’s most populous country after it caught the first wave of the Arab Spring demonstrations, which began in Tunisia and spread across neighbouring countries including two in the GCC.
Mathias Angonin, Dubai-based associate analyst at the sovereign rating group of
Moody's, noted that while Egypt’s new government has taken steps to stabilise the country’s political landscape, the efforts have not been enough to address the people’s demand for a civilian, rather than a military, rule.
“Continued political instability and the transitional role of the new government suggest that financial stability and investor confidence will remain elusive, a credit negative for Egypt,” Angonin mentioned in the ratings agency’s Weekly Credit Outlook.
Since the turmoil toppled Hosni Mubarak’s 30-year rule in February, Egypt has been struggling to get its financial bearings. Most recently, it attempted to regain market confidence by scheduling a series of parliamentary elections until January 2012. However, the first round of elections failed to produce a clear majority, the Moody’s report said.
“Egypt’s external payments position continues to deteriorate in the post-revolution era. Foregin-exchange reserves have fallen 44 per cent since December 2010. At $20.2 billion (Dh74bn), reserves are still adequate for policy purposes or to cover near-term debt repayment,” the ratings agency said.
The country continues to face liquidity concerns, especially after the
Central Bank of Egypt rejected a $3.2bn loan offered by the
International Monetary Fund (IMF).
A recent report from Kuwait-based insurance firm Arab Investment & Export Credit Guarantee Corp offered a darker picture of Egypt’s current financial condition. The company, also known as Dhaman, said that Egypt suffered the most among turmoil-hit countries in Mena with its
foreign direct investments plunging 92 per cent to $500 million in October.
Moody’s, meanwhile, confirmed that foreign financing in Egypt “suffered a striking reversal, to a $65m outflow in the first half of this year from $4.2bn inflow in the first half of 2010.”
Euro crisis weighs down on Egypt’s fiscal growth
Egypt, one of Europe’s strongest trade partners, has also felt the blow of the ongoing sovereign debt crisis that threatens to further stifle growth in the Eurozone and the rest of the European region.
“The economic downturn in Europe is compounding pressure on Egypt’s balance of payments from domestic political turmoil. Receipts from tourism, exports and the Suez Canal are faltering,” Moody’s reported.
The litany of unfavourable indicators is expected to unfortunately haunt Egypt’s economy until next year, according to the ratings agency.
Egypt’s government deficit could reach 9.1 per cent of the GDP for 2011-2012, a very slight improvement from 10.3 per cent in 2010-2011. These deficits are financed mostly by the issuance of short-term debt to local banks.
“The burden of financing the additional government deficit weighs disproportionately on local banks. The share of government treasury bills held by foreign investors decreased to five per cent in September from 20 per cent in January,” the report said.
Moody’s added that local banks’ exposure to treasury bills during the nine-month period rose by a whopping 45 per cent to $40bn from 13 per cent in January.
Banks then have to tighten lending, making it difficult for the private sector to get access to credit and forcing companies to dip into their savings. Corporate deposits have steadily dropped by six per cent since the start of 2011.
Meagre economic expansion for 2011, 2012
In its most recent economic outlook for the Middle East and Central Asia region, IMF predicted that Egypt will expand by a measly 1.2 per cent this year and 1.8 per cent next year. Annual average inflation in the country will remain relatively significant at 11.2 per cent in 2011 and 11 per cent in 2012.
Political uncertainty and the shrinking of income from tourism and investments were some of the reasons for the severe economic downturn experienced in Mena countries such as Egypt, Jordan, Lebanon, Syria and Tunisia, said the IMF outlook published in October.
The international lender noted that stock markets in Egypt and Syria have dramatically declined since the early part of 2011 while sovereign bond and credit default swap spreads have also widened, making it more costly for governments to borrow.
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