Egypt needs to press on with reforms and stay on a democratic path to ensure it avoids a deep economic crisis, experts warned a day before the start of the EBRD meeting in Istanbul.
On the same day, rating agency S&P cut Egypt’s long-term sovereign ratings to CCC+ and its short-term ratings to C from B- and B. The C category shows that a country is vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
Negotiations with the International Monetary Fund (IMF) over a $4.8 billion loan have dragged on, while Ashraf al-Arabi, the planning minister at the heart of those talks, was among the departures in a recent cabinet reshuffle in which President Mohammed Morsi gave more cabinet posts to the Muslim Brotherhood.
“There has been an assumption that Egypt is ‘too big to fail’ as its economy nears collapse, but this assumption shouldn’t be taken for granted as being unbreakable,” James Petretta, associate director at the risk consultancy Maplecroft, told Emerging Markets. “The desire may be to keep Egypt’s economy going, but donors are finding themselves in an ever more awkward position. Give in too much, and they’ll be seen as supporting a government that is unwilling to carry out essential economic reforms.”
S&P said the bilateral loans and deposits from individual countries to Egypt have been “buying Egypt a limited amount of time to deliver more sustainable public finances and avoid a balance of payments crisis.”
Qatar has either provided or pledged budget support totalling $8 billion and promised $18 billion worth of investment in industrial and infrastructure projects spread over the next few years. Libya agreed last month to lend $2 billion and has offered a nine-month credit facility on crude oil worth $1.2 billion. Iraq also agreed a three-month credit line for crude oil imports in April.
But Maplecroft warned recently that by preventing the total collapse of the government’s finances in 2013, loans from the region had given the president a new bargaining chip in its discussions with the IMF, dragging out the process. The role of the IMF is more than simply to provide the finance, with investors and other donors often taking their lead from the fund.
“We don’t have any cross-conditionality with the IMF, but because we work with the private sector, if you are interested as an investor in the power sector, you really don’t want to make any investment right now until you know what the outcome of the IMF negotiations is going to be,” EBRD president Sir Suma Chakrabarti told Emerging Markets.
The IMF has given little indication it will soften its conditionality, even though the longer they wait the less impact the programme may have, and the harder the reforms will be. By the time a consensus position is found, it may be too late, Petretta said.
“Egypt may be able to ‘win’ on conditionality—though this is by no means assured,” he says. “But it will lose out on the signalling effect that the loan was meant to have in the first place.”
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