Fitch Says Egypt Military Changes Look Positive, Politics Are A Risk
Egyptian president Mohamed Morsi’s removal of two senior military leaders and his reversal of a constitutional decree that increased the military’s power are potentially positive developments, said Fitch Ratings. They could signal a move towards a better and more sustainable relationship between the country’s military and civilian powers.
“It is likely that the forced retirement of Field Marshal Mohamed Hussein Tantawi, defence minister, and General Sami Annan, chief of staff, was agreed with members of the Supreme Council of the Armed Forces (SCAF). Both have been appointed as advisers to the president, and Tantawi’s replacement as defence minister also sat on the SCAF, which governed Egypt from February 2011 until Morsi took office in July this year. Bloomberg reported on Tuesday that the military authorities had described the retirements as ‘natural’.
“The moves by President Morsi to strengthen his position need not therefore signal a worsening of relations with the military. Rather, it seems that the president and military want to forge a working relationship. If the departures of Tantawi and Annan support this process, it would be positive, although without a parliament or constitution Egypt will remain in political limbo for some time yet.
“As we noted in June, when we downgraded Egypt to ‘B+’, uncertainty around the political transition from military to civilian rule has complicated politics and policy making, and delayed the implementation of comprehensive macroeconomic and structural reforms needed to kick-start the economy and ease budget and external financing strains. Parliamentary elections still have to be re-run after the Supreme Constitutional Court annulled last year’s results. It remains unclear how and when Egypt will get a new constitution and the process would be likely to take at least three months. Therefore our concerns are unlikely to be resolved this year, keeping downward pressure on the rating. This is reflected in the Negative Outlook.
“Egypt’s dealings with the IMF have been symptomatic of the impact of political uncertainty on policy making, as the IMF requires any programme to have political legitimacy. Bloomberg reported last month that the $3.2bn IMF loan package is unlikely to be finalised this year, citing a senior government official. However, President Morsi’s newly appointed government has requested an IMF mission to travel to Egypt as soon as possible to renew negotiations. An IMF loan would be an important catalyst for further support from other sources.
“More positively, international reserves stabilised in the second quarter, although they remained close to the three-month imports level. A renewed drop in reserves in July reflected heavy debt service payments. Further support is crystallising from other Middle East sovereigns, most recently Qatar, which has said it will deposit USD2bn in Egypt’s central bank, including USD500m this week.
“Tantawi and Annan’s removals were among those announced on state television on Sunday, alongside the cancellation of the June constitutional declaration that would have limited the president’s legislative and budgetary powers. The appointment of Judge Mahmoud Mekki as vice-president was also announced.”
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