Qatar‘s decision to provide USD3bn of additional support is positive for Egypt, Fitch Ratings says. It will be a significant boost to foreign reserves in the continuing absence of an IMF agreement, and against a background of economic deterioration.
Qatar’s action is particularly timely, as the timetable for parliamentary elections has slipped further and Egyptian politics are becoming more polarised. Voting may now not take place until the autumn, although it is uncertain how this will affect the timing of an IMF agreement (negotiations with the Fund are continuing).
The status of IMF talks is unclear. We expect fiscal consolidation to remain the focus of any new programme. Latest data show a worsening of the fiscal position. Over the first seven months of 2012/2013 (to end June) the deficit was 55% higher than in the same period of 2011/2012. Greater subsidy payments led to a 21% rise in spending, while revenues were only 4% higher.
The official target for the FY13 budget deficit is 10.4% of GDP. Over the first seven months it is already 8.2% of projected full year GDP.
An IMF deal remains vital for a sustained improvement in Egypt‘s balance of payments, and to prevent uncontrolled currency depreciation.
We have previously said that finalising a programme would probably be more straightforward after contested elections that produced a government with a strong mandate to conclude a deal. If a programme were not finalised until after autumn elections, Qatar’s intervention would prove especially valuable in providing support in the meantime.
However, even if Qatar‘s support does reduce pressure on external finances and the Egyptian pound, it does not reduce the urgency of reaching an IMF agreement. Foreign exchange reserves fell below USD13.5bn in March, equivalent to 2.2 months of CXP cover.
A sustained period without IMF support, in the absence of further ad hoc bilateral support, could result in tighter capital controls and a sharper fall in the currency. Shortages of imports are weighing on private economic activity and the weaker pound has contributed to a near doubling of inflation since the end of last year.
The news that Qatar would provide the assistance supports our view that bilateral transfers will continue to reduce pressure on reserves and the pound. Qatar has already provided Egypt with USD5bn since the 2011 revolution, but had indicated last month that no new support was imminent.