Egypt’s sovereign credit rating upgraded (but still junk) with a stable outlook siting $12 billion in aid from GCC countries
- Published on Friday, 22 November 2013 13:59
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Photo source: Think Progress
Standard & Poor’s raised Egypt’s long and short-term credit rating from real junk to junk siting $12 billion in aid pledged by GCC countries as one of the main reasons for the improvement. The firm also says it has a stable outlook on the country going forward. What has changed since Morsi left and the outlook was negative? The economy has not improved. Some would even say it’s getting worse. The $12 billion pledgde is still a pledge, not much has been delivered yet and there are no guarantees that Egypt will get this money… its merely a pledge and not a legal promise as Kuwait is finding out.
International credit rating agency Standard & Poor’s raised its long- and short-term foreign and local currency sovereign credit ratings for Egypt on Friday from “CCC+/C” to “B-/B” with a “stable” rating outlook.
The action is the first such positive step for Egypt since the 2011 revolution, which toppled long-time autocrat Hosni Mubarak, triggering a series of credit-rating downgrades for the country by all the major international agencies.
The agency said it was prompted to raise Egypt’s rating after the generous aid the country had received from oil-rich Gulf nations following Islamist president Mohamed Morsi’s ousting in July of this year.
“In our view, the July announcements that Kuwait ($4 billion), Saudi Arabia ($5 billion), and the UAE ($3 billion) would provide Egypt with cash, interest-free loans, oil, and oil products amounting to 4.4 percent of 2013 GDP reduces the likelihood that Egypt will face a balance-of-payments crisis,” said Standard &Poor’s (S&P).
The additional $1.9 billion in aid pledged by the UAE to Egypt in October, and the fact that Egypt has already received three quarters of the promised funds, is an indication of the Gulf Cooperation Council’s willingness to support Egypt, said the agency.
Egypt’s net international reserves tumbled after the 2011 revolution and reached a record low of $13.4 billion in March of this year — less than the required amount to cover three months’ worth of imports. S&P expects reserves to “stabilise at above two months of current account payments during 2013-2016.”
“The upgrade reflects our view that the Egyptian authorities have secured sufficient foreign currency funding to manage Egypt’s short-term fiscal and external financing needs,” said Standard &Poor’s.
“We expect support from bilateral lenders to continue over the medium term as the Egyptian authorities try to address the country’s political and economic challenges.”
The stable outlook weighs the recent and promising aid against Egypt’s “difficult political landscape and significant external financing pressures” said the agency.
Egypt’s new rating is still located in the “junk” status end of the credit rating spectrum.
The agency’s optimism was tempered by structural weaknesses in Egypt’s economy, such as “weak” government finances, a central bank which will continue to monetise much of the government’s local currency debt. “Central bank claims on the government and public sector increased to about 23 percent of GDP as of July 2013,” a trend which would generate “10 percent average annual inflation over the next few years, alongside supply-side constraints,” said the agency.
Standard and Poor’s also highlighted the government’s limited ability to raise revenues or cut spending, and its inflexible monetary policy given the Central Bank of Egypt’s heavy support of the Egyptian pound since 2011 and the banking sector’s high exposure to the government.
Read the full story from Ahramonline.
There are no signs that the economy is improving. The average person in Egypt is still struggling to put food on the table. Tourism, which was improving before Morsi was thrown out is now deteriorating again. Extremists groups have become more agitated since Morsi’s ouster and are becoming more violent. The sovereign upgrade is without merit or real justification. In Kuwait, for example, the $4 billion pledged in aid has come under scrutiny by the new incoming parliament.
A Kuwaiti judicial source, in an exclusive statement to the Anadolu news agency on Sunday, revealed that the $4 billion aid package that Kuwait is offering to Egypt must first be approved by the National Assembly (the Kuwaiti parliament) to fall within the country’s legal framework.
A Kuwaiti court has postponed the case until 12 January 2014, to offer the government a chance to present a copy of the bill that it is supposed to have presented to the National Assembly.
The judicial source, who requested anonymity, noted that the National Assembly’s approval of the grant will end the judicial controversy, and he expected it to be approved very soon.
If the National Assembly refuses of the grant, he explained that, “the court will make its decision in accordance with the constitution,” referring to the possibility of stopping the grant because the Kuwaiti constitution prohibits granting funds and resources without a legal approval.
Earlier, the government had requested that the National Assembly refuse the case because it does not have the jurisdiction, as the grant is considered to be a matter of sovereignty.
Lawyer Abdullah Al-Kandari told Anadolu in a telephone interview: “what I have done in terms of initiating a lawsuit to stop the billion dollar grant to Egypt is based on my duty as a Kuwaiti citizen to save public money. We are not against financial aid and we understand Egypt’s plight, but the government doesn’t recognize that the Kuwaiti people deserve the grant even more.”
The indictment that he presented to the court states that the cabinet’s decision to grant Egypt $4 billion constitutes a waste of public funds and it also violates the law and the constitution, rendering the decision invalid. He pointed out that neither the Kuwaiti constitution nor any valid law in force in Kuwait allows the government to offer other countries grants that are not to be paid back. Kuwait’s laws also don’t give the government the right to give up natural resources.
Legal observers expect the lawsuit to be rejected based on other assistance packages that Kuwait previously offered to other countries, including the aid it offered to the US during Hurricane Katrina and what it offered to Japan during the nuclear reactor crisis.
Read the full story from Middle East Monitor.
The above story highlights the fact the S&P pay have come to its decision too soon. In any case, the ratings agency should not have based its upgrade on government pledges, but rather on solid economic fundamentals. As far as we’ve seen, nothing has materially changed in Egypt’s economy since 2011. We still believe that Egypt is headed for disaster and will eventually end up like Greece or even worse. See our previous post on the top 10 reasons Egypt is headed for economic disaster.