Egypt Government Resignation Offer Credit Negative: Moody’s

Ratings agency Moody says that political instability in Egypt (Ba3 negative), epitomized in the recent, tendered resignation of its interim government on 11 October, is credit negative amid the country”s deteriorating economic conditions, rising pressure on government finances and an increasingly urgent need for the government to shore up external assistance for the balance of payments.

“Interim Prime Minister, Essam Sharaf, and the Vice Premier for Economic Affairs and Finance Minister, Hazem El-Beblawi, offered to resign last Tuesday to protest, in the words of the vice premier, the “severe breach of community security” in the military”s handling of the 9 October Coptic Christian demonstration in southern Egypt,” Moody’s noted in a statement.

“The clash between the protesters and military police, which left at least 25 dead, was incited by the destruction of a church by Islamist radicals. However, the two leaders withdrew their resignations after the de facto head of state, Field Marshal Hussein Tantawi, chairman of the Supreme Council of the Armed Forces (SCAF), reportedly convinced them that resigning would be bad for Egypt and its economy.

Moody’s argues that sectarian strife further undermines investor confidence in Egypt. The benchmark stock index declined 2.3% on 10 October to its lowest level since March 2009.

“The economy is struggling to find its footing. GDP contracted 4.2% in first-quarter 2011, although it stabilized somewhat in the April-June period. Direct investment in Egypt by foreigners completely collapsed in the first half of 2011, recording a small net outflow, and tourist arrivals were down 42.3% in the March-June period from the same months in 2010. The IMF sees growth remaining at an anaemic 1%-2% annual rate this year and next.

In such a scenario, a change in government would probably add to the existing delay and uncertainty surrounding external financial assistance offered by the IMF (a $3 billion stand-by arrangement) and the governments of Saudi Arabia and the UAE (reported at $4 billion).

“Securing such support is increasing critical because Egypt”s official foreign reserves fell sharply in September and now stand at $24 billion, down from $36 billion at end-2010. Although Egypt still has ample foreign exchange reserves to meet external debt payments due in the next 12 months, continued foreign currency reserve declines at the current pace would significantly weaken the country”s external payments position,” Moody’s said.