No IMF Deal In 2013

BMI View : A combination of financial assistance from Gulf States and a lack of political resolve will ensure that the Egyptian go vernment does not complete nego ti a tions with the IMF this year. Whilst this may be positive for the short - term political stability of the country, it does not bode well for the longer term economic outlook.

We do not expect the US$4.8bn Stand-By Arrangement between the IMF and the Egyptian government to be concluded in 2013. Negotiations have been ongoing for the past two years, but now looked to have stalled. The agreement is key to unblocking a wider package of financial assistance from a range of external donors which totals approximately US$14.5bn.

Political will for concluding, or even continuing, negotiations with the IMF has substantially reduced following financial assistance from the Gulf over the past two weeks. Since the overthrow of the Muslim Brotherhood, Saudi Arabia, UAE and Kuwait have pledged a total of US$12bn in assistance. This has relieved the pressure on foreign reserves, which reached US$14.9bn at the end of June - coverin g just three months of imports. Therefore, even though the interim government is facing a budget deficit of around US$3.2bn a month, equivalent to almost half of state spending , they appear content to maintain the status quo .

Gulf Assistance To Provide Huge Boost
Egypt - Foreign Reserves

BMI View : A combination of financial assistance from Gulf States and a lack of political resolve will ensure that the Egyptian go vernment does not complete nego ti a tions with the IMF this year. Whilst this may be positive for the short - term political stability of the country, it does not bode well for the longer term economic outlook.

We do not expect the US$4.8bn Stand-By Arrangement between the IMF and the Egyptian government to be concluded in 2013. Negotiations have been ongoing for the past two years, but now looked to have stalled. The agreement is key to unblocking a wider package of financial assistance from a range of external donors which totals approximately US$14.5bn.

Gulf Assistance To Provide Huge Boost
Egypt - Foreign Reserves

Political will for concluding, or even continuing, negotiations with the IMF has substantially reduced following financial assistance from the Gulf over the past two weeks. Since the overthrow of the Muslim Brotherhood, Saudi Arabia, UAE and Kuwait have pledged a total of US$12bn in assistance. This has relieved the pressure on foreign reserves, which reached US$14.9bn at the end of June - coverin g just three months of imports. Therefore, even though the interim government is facing a budget deficit of around US$3.2bn a month, equivalent to almost half of state spending , they appear content to maintain the status quo .

No Improvement On The Horizon
MENA - Political Risk Ratings

A fundamental part of the IMF arrangement requires subsidies to be reduced, particularly for food and fuel. From a political perspective this is unpalatable as any reduction in subsidies will likely result in widespread protests. The interim government appears eager to let the issue of subsidy reform be handled after new elections are held (which we expect in February 2014). The finance minister, Ahmed Galal has stated the government will pursue a path of fiscal stimulus and not austerity. In addition, Ashraf al-Araby, the interim government's planning minister, said 'the time is not appropriate to begin a new round of negotiations with the IMF. Aid from Arab countries will help Egypt get through the transitional period.' The IMF, or its part, has stated that it would not resume talks with the government until it had gained broad international recognition. It is, however, the government which is dragging its heels on the issue and will determine when talks recommence.

Picking Up, But Not Quickly Enough
Egypt - Government Revenues & Expenditure, EGPbn, and Budget Deficit

While we do not think the Stand-By Agreement, and other resulting assistance is a silver bullet to Egypt's economic problems, reducing subsidies is vital for the long term health of the economy. In addition, an agreement with the IMF would be symbolically important as it would show investors that the government is committed to reforming its economy which could trigger an uptick in investors' sentiment and thus fixed investment.

Subsidies Remain Key
Egypt - Breakdown of Government Expenditures

Below are some of the key pillars of the proposed IMF SBA:

  • Reduce expenditures by reforming subsidy system.

  • Increase the progressivity of income taxation and broaden the general sales tax (GST) to become a full-fledged value added tax (VAT).

  • Reduce the budget deficit from almost 11% in 2011/12 to 8.5% of GDP in 2013/14, while the budget sector primary deficit will decline from 4% in 2011/12 to 0.6% in 2013/14

  • Strengthen public financial management and the transparency and accountability of public sector operations. Key measures toward that end include broadening the coverage of the treasury single account, and regular publication of key budgetary and financial sector information.

  • Monetary and exchange rate policies will be geared toward ensuring declining inflation over the medium term, enhancing Egypt's international competitiveness to stimulate trade and attract capital inflows, and increasing international reserves to protect against external shocks.

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Sector: Country Risk
Geography: Egypt
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