An unstable political environment in Cairo has led to policy drift and uncertainty, with credit negative conditions in Egypt prevailing: Ba3 Negative according to Moody’s 28 July credit ratings report.
Prompted by protests in Cairo and Suez to accelerate reforms, Egyptian Prime Minister Essam Sharaf had announced another government reshuffle, replacing 14 ministers on 17 July. This was the second reshuffle this year, the first since the Supreme Council of the Armed Forces assumed power after the ousting of former president Hosni Mubarak. But the new cabinet will neither alleviate popular discontent with the interim government nor shore up confidence in the economy, Moody’s report added
Key changes include Dr Hazem El-Beblawy becoming Egypt’s third Finance Minister this year, following Dr Youssef Boutros-Ghali’s resignation in January and the resignation of Dr El-Beblawy’s predecessor, Dr Samir Radwan, last week.
In June, the previous government presented a new budget for fiscal 2011-12 that would lead to a deficit of 8.6 per cent in GDP, down from 11 per cent in previous plans. But at a time when the population is demanding redistributive policies, fiscal restraint will be difficult to maintain, especially if the key policy positions continue to be a revolving door.
Egypt’s external accounts have also continued to deteriorate. The government has not agreed to conditions accompanying an International Monetary Fund support programme and contingent aid from the World Bank. Meanwhile, in the first six months of 2011, the outflow of foreign capital has led to a 27 per cent decline in official foreign exchange reserves, which reached $26 billion (see exhibit).
If the trend continues through 2012, lower foreign exchange reserves will make it difficult to meet maturing external debt payments. Since the outbreak of the political turmoil the decline in tourism revenue (which makes up 11 per cent of GDP) is putting additional downward pressure on Egypt’s position in this regard.