CAIRO: Fitch Ratings recently downgraded Egypt’s long-term default and currency outlook ratings to “negative” as wavering political decisions continue to delay economic growth.
“Fitch Ratings believes Egypt cannot begin its long-term recovery until there is more certainty about its political future,” the agency said in a statement. “Fitch has previously said it expected the sharp fall in foreign currency reserves largely as a result of substantial capital outflows to start being reversed by external support in [quarter four;] the delays to the political transition are now causing concern, with reserves continuing to fall, and the global backdrop less supportive.”
The downgrade is due to affect Egypt’s domestic debt as the country continues to borrow in an effort to plug up deficit, Magda Kandil, executive director of the Egyptian Center for Economic Studies, told Daily News Egypt.
However, as the country borrows more domestically, the government is unable to keep up with the high interest rates of domestic borrowing.
“There is currently a high risk factor deterring people from buying government bills, along with decreasing reserves, sources of revenue are not returning to the country,” she said. “All of these problems result in higher interest rates for loans and lenders.”
Lenders will not let the government continue to borrow money unless they can guarantee the state can handle the high interest rates.
Fitch had anticipated that external support to Egypt’s economy would have returned to the country by now; however, the “risk of delays is reflected in the agency’s negative outlook.”
“[T]he longer delays continue, the more pressure it puts on the country’s credit profile,” Fitch said in a statement. “Greater clarity on the timeline for external support would help bolster confidence in the current global climate.”
Karim Helal, board member of Egypt’s CI Capital, is not surprised at the recent downgrading. “It is not coming as a surprise so it is not going to have any further impact,” he reiterated.
As long as there is a lack of clarity and a stream of disturbances on the political front, he said — including dwindling foreign reserves, slowing tourism and investment fears — the country’s economy will continue to suffer.
“We need to fix our house first, define a long-term strategy, and implement it and you can’t do that with an interim government,” he added.
Helal hopes that the transition to a permanent government will take place soon. The handover to a civilian authority tops the list of demands by activists and politicians, yet has been repeatedly delayed by the ruling Supreme Council of the Armed Forces.
When first taking over power from ousted president Hosni Mubarak, SCAF said the transition to a civilian government would only take six months.
While the council may have their reasons, the handover of power is already late, but the longer it takes, the more the economy will decline, Helal added.
The military council recently said presidential elections will likely take place towards the end of 2012, meaning that the SCAF and the interim government will have remained in control for about two years.
“They [the interim government] have already made some serious long-term commitments such as increasing public expenditures, giving in to public pressure and the longer this transition takes, the more the country suffers,” he said.
The transition government has already seen its second finance minister, Hazem El-Beblawi, after Samir Radwan resigned in July.
In July, approved by the ruling military council, Egypt’s interim government also issued the 2011-2012 fiscal year’s budget plan, which raised concerns among economic experts.
The plan carried a large deficit, decreased health expenses, and included no plans to accept foreign loans.
It was not until this month, however, that El-Beblawi brought up the idea of reconsidering IMF loans.
Last month, El-Beblawi also discussed a financial package from the United Arab Emirates and Saudi Arabia that could amount to $5 billion, according to Reuters.
Kandil previously told DNE that the government devised the budget as if it is capable of doing so on its own as they failed to discuss its components with the private sector.
Meanwhile, in the midst of the ongoing ambiguity and what seemed like a crackdown on private companies, the Egyptian Stock Exchange lost around $10 billion in the last week of September as Egyptian shareholders were selling off while Arab and foreign investors were buying.
On Sunday, however, the benchmark index ended higher, buoyed by reports that Egypt is negotiating financing packages to support the budget. The index gained 1.9 percent to close at 4,029 points.
Over the past month, while affirming that the country is “committed to a free market” the interim government also banned three privatized companies; two of which were owned by foreign investors.
Such discrepancies between the current government’s announcements and court actions have caused local and foreign investors to continue taking steps back from Egypt’s market.
Helal previously told DNE that the country is currently going through a political and economic identity “crisis” — a sentiment echoed in diplomatic circles.
