The slowing pace of the fall in Egyptian foreign exchange reserves in February is encouraging, but the continuing erosion of reserves remains a source of concern, according to Fitch Ratings.
Net official reserves were $15.72illion at the end of last month, the Central Bank of Egypt said on Monday, representing a fall of around $630milion 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 $36billion in December 2010 to just over $20billion in November, was a major reason for our downgrade of Egypt by one notch to ‘BB-‘ late last year. The Outlook is Negative.
“The reserve loss was driven by a drying up of 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,” Fitch in a statement said.
“Egypt’s request for a $3.2billion IMF standby facility in January was therefore encouraging, but as we 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 last month 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,” it added.