The slowing pace of the fall in Egyptian foreign exchange (FX) reserves in February is encouraging, but the continuing erosion of reserves remains a source of concern, according to Fitch Ratings. Net official reserves were US$15.72bn at the end of last month, the Central Bank of Egypt said, representing a fall of around US$630m from January. That compares favourably with the much larger declines in preceding months, but it would be premature to interpret it as a sign that FX reserves have stabilised. The continuing fall in reserves is ratings negative.
The substantial and continuous erosion of international reserves in 2011, from US$36bn in December 2010 to just over US$20bn in November, was a major reason for our downgrade of Egypt by one notch to BB- late last year.
The reserve loss was driven by a drying up of foreign direct investment (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 stabilising international reserves and the rating.
Egypt’s request for a US$3.2bn International Monetary Fund (IMF) standby facility in January was therefore encouraging, but as Fitch said at the time, assistance on this scale would need to catalyse additional support from international investors to have a meaningful impact on the country’s finances. Press reports in February 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.
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