Fitch: the slowing fall of Egypt FX reserves is “encouraging”

The slowing pace of the fall in Egyptian foreign exchange reserves in February is encouraging, but the continuing erosion of reserves remains a source of concern, Fitch Ratings says.

Net official reserves were USD 15.72bn at the end of last month, the Central Bank of Egypt said on Monday, representing a fall of around USD630m from January.

That compares favorably with the much larger declines in preceding months, but it would be premature to interpret it as a sign that FX reserves have stabilized. The continuing fall in reserves is ratings negative.

The substantial and continuous erosion of international reserves in 2011, from USD36bn in December 2010 to just over USD20bn in November, was a major reason for our downgrade of Egypt by one notch to ‘BB-‘ late last year. The Outlook is Negative.

The reserve loss was driven by a drying up of FDI and withdrawal of foreign portfolio investment following the political uprising at the beginning of the year, coupled with the central bank’s efforts to defend the Egyptian pound. The provision of external support and a turnaround in foreign investment remain critical to stabilizing international reserves and the rating. Egypt’s request for a USD3.2bn IMF standby facility in January was therefore encouraging, but as we said at the time, assistance on this scale would need to catalyze additional support from international investors to have a meaningful impact on the country’s finances. Press reports last month said that Egypt’s transitional government had announced plans to sign a loan agreement with the IMF, but the continuing absence of an agreement is negative for the rating.

The prospects for Egypt will be one of the topics discussed at Fitch’s “Middle East & North Africa Outlook: Oil in Troubled Waters” conferences being held in London, Paris, and Frankfurt this week.