Aid Cut-Off To Have Minimal Economic Impact

BMI View: We do not expect the US government's decision to reduce military aid to Egypt to have a significant economic impact. Whilst the political impact will be more noticeable , we think that regional support, both politically and economically , with mitigate any negative impact from the move. Indeed, we expect the aid to be returned to previous levels once elections are organised in the coming months .

The US government's decision to suspend a large part of the US $1.3bn in aid to Egypt will have a minimal impact on the Arab state . According to the state department, t he delivery of large-scale military systems as well as cash assistance to the Egypti an government would be withheld . The total amount will likely equate to hundreds of millions of dollars with the delivery of Apache helicopters, as well as Harpoon missiles and tank parts delayed. In addition, a US $260m cash transfer and a US $300m loan guarantee will be halted. The timing of the decision is surprising given that much of the worst of the violence, as well as the overthrow of the democratically elected President Mohammed Morsi occurred several months ago.

In economic terms we do not think the impact of the suspension will significant ly impact the country's finances. Whilst the size of the assistance halted is not insubstantial in itself, Egypt has received US$12bn in aid from the Gulf States since July and given recent rhetoric between the Gulf countries and Egypt, we believe more assistance could be in the offing. Indeed, Saudi Arabia pledged to fill any shortfall in aid removed by other countries in a statement which was clearly in reference to the United States.

Political Risks To Stay Elevated
MENA - Political Risk Ratings

Aid Cut-Off To Have Minimal Economic Impact

BMI View: We do not expect the US government's decision to reduce military aid to Egypt to have a significant economic impact. Whilst the political impact will be more noticeable , we think that regional support, both politically and economically , with mitigate any negative impact from the move. Indeed, we expect the aid to be returned to previous levels once elections are organised in the coming months .

The US government's decision to suspend a large part of the US $1.3bn in aid to Egypt will have a minimal impact on the Arab state . According to the state department, t he delivery of large-scale military systems as well as cash assistance to the Egypti an government would be withheld . The total amount will likely equate to hundreds of millions of dollars with the delivery of Apache helicopters, as well as Harpoon missiles and tank parts delayed. In addition, a US $260m cash transfer and a US $300m loan guarantee will be halted. The timing of the decision is surprising given that much of the worst of the violence, as well as the overthrow of the democratically elected President Mohammed Morsi occurred several months ago.

Political Risks To Stay Elevated
MENA - Political Risk Ratings

In economic terms we do not think the impact of the suspension will significant ly impact the country's finances. Whilst the size of the assistance halted is not insubstantial in itself, Egypt has received US$12bn in aid from the Gulf States since July and given recent rhetoric between the Gulf countries and Egypt, we believe more assistance could be in the offing. Indeed, Saudi Arabia pledged to fill any shortfall in aid removed by other countries in a statement which was clearly in reference to the United States.

Little Reaction From Markets

As we have highlighted previously, events in Egypt left regional and global powers in a quandary. The United States and the EU cannot be seen to be too close to the interim government and army's actions, lest they be accused of supporting a regime which has killed hundreds of its own citizens. However, given Egypt's vital importance, specifically with regard to the Suez Canal and peace treaty with Israel, Western powers will be loathed to lose what little leverage they have left over the regime. T he US government has explicitly stated that the measure is temporary stating until 'there is credible progress toward an inclusive, democratically elected civilian government through free and fair elec tions.' This leaves the door open to renewing aid in the coming months, even before elections takes place (which we expect to happen in Q214). Furthermore, given that the US has not cancelled all aid gives it some leverage if political events take another turn for the worse.

M arkets have had little response to the news with the 5 year CDS staying flat. The CDS has ticked higher in recent weeks given the continuing elevation in political risks. We expect the CDS to tick slightly higher in the coming weeks, but rule out a return to the levels of 750 and above because the financial position has been significantly steadied by the promise of Gulf aid. Indeed, the Gulf will likely be forthcoming with further assistance to support the interim government due to their vested interest in seeing anyone but the Muslim Brotherhood gain support or credibility in Egypt.

CDS To Push Higher
Egypt - 5 yr CDS Spread (bps)

Whilst the economic impact of the US' decision will be minimal, we expect the political repercussions to be more significant. For the US, the decision risks damaging the US relationship with Egypt's military which has been a cornerstone of US foreign policy in the Middle East and is linked to Egypt's recognition of Israel and protection of trade through the Suez Canal. For Egypt, the political impact is more symbolic and, to a certain extent, isolates the country from one of its major allies which may push the interim government to organise elections sooner rather than later.

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