Fitch:Egypt Vote Timetable, Boycott Likely To Delay IMF Deal

Further delay to an agreement on an IMF programme resulting from the extended timetable for Egypt’s parliamentary elections and boycott plans by the main secular opposition grouping would heighten risks to the country’s fiscal and external financing positions, Fitch Ratings says.

We had expected a new deal to be agreed in Q213. But voting is now set to continue until late June, shortly before the start of Ramadan and the summer holiday season. This need not hold up negotiations, but finalizing a programme would probably be more straightforward after contested elections that produced a government with a clear mandate to conclude a deal. So a deal might now be delayed until well into Q313 and may prove tougher to sell to the Egyptian people.

An IMF deal is vital for a sustained improvement in the balance of payments, and to prevent uncontrolled currency depreciation. A sustained period without IMF support could result in tighter capital controls and a sharper fall in the pound. The need for an IMF deal is becoming more pressing in the absence of further pledges of bilateral support beyond a reported agreement by Qatar to buy USD2.5bn of Egyptian T-bonds in March.

Ad hoc bilateral inflows have hitherto helped the central bank manage a gradual depreciation while keeping reserves around three months of CXP. However, reserves fell to USD13.6bn at end-January, below the level needed to cover three months of imports – although there is scope for net FDI to increase in 2013 under deals already agreed in the oil exploration, banking and construction and fertilizer sectors. Political stability would further support private inflows of FDI and portfolio investment.

We downgraded Egypt by one notch to ‘B’/Negative on 29 January, due to weakening public finances, pressure on reserves and ongoing political upheaval, which contributed to the postponement of an IMF programme.

This month President Mohamed Morsi called parliamentary elections to start in late April. They will be held over four stages and a new parliament will convene in July. However, the National Salvation Front, a multi-party grouping that took shape last year to oppose a new constitution, said on Tuesday it would boycott them due to concerns that they would not be free and fair.