Egypt faces a risk-laden game of Beat the Clock as it tries to get its political house in order before its foreign currency reserves sink much more.
Reserves fell to $16.4 billion in January from about $36 million a year earlier, a drop that economists all agree imperils the economy and requires Egypt to seek support from external sources and make difficult decisions to cut back government spending and subsidies. But that will be difficult given the political situation.
Presidential elections are now scheduled for late-May, preceded by a six-week election season. Meanwhile, a parliament dominated by Islamists is tussling over who will control the government with the interim military council. A dispute with the U.S. over foreign human rights activists detained in Egypt is threatening vital American aid to the country. In the meantime, no U.S. assistance is being transferred to the country.
The timetable looks even more challenging when the role of the International Monetary Fund (IMF) is factored in. Egypt’s Ministry of Finance is reportedly counting on the IMF’s executive board to approve a $3.2 billion facility towards mid-March, which will then go to parliament for approval about the time the presidential campaign is getting under way.
“Time is not on Egypt’s side and politics could be the prime suspect to derail or delay an IMF program or exacerbate dollarization and [foreign currency] outflows,” Bank of America Merrill Lynch analyst Jean-Michel Saliba said in a note to investors last week.
Concerns that Egypt’s political trajectory looks to be on a collision course with its financial needs came in the form a downgrade in its bond rating by Standard & Poor’s (S&P) on February 10. S&P lowered its ratings to B from B+ on Friday, five notches into junk territory, and said further downgrades could be on the way.
“The negative outlook reflects our view that a further downgrade is possible if the government fails to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition," S&P said. Moody’s and Fitch, two other bond-rating agencies, cut their ratings on Egypt earlier.
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