Analysts are sharply divided over the outcome of Egypts
torturous negotiations with the IMF over a $3.2bn loan after
the countrys parliament rejected an austerity plan,
heaping on the risk of a current account crisis. The move came
despite comments by the IMF this Saturday that multilateral
lenders will soon make good on their commitment to
provide $20bn of loans to shore up Arab transition economies -
initially pledged in May 2011 - and after mass protests in
Egypt this weekend ended peacefully, seen as a sign of emerging
Economic conditions in the countries hit by the Arab Spring
have generally worsened since multilateral discussions
commenced in June last year and the majority of the Arab
worlds equity markets continue to underperform compared
to other emerging markets. In the case of Egypt, the largest
economy in the region, any agreement to disburse $20bn of
funding to Egypt and Tunisia would need tacit IMF approval,
However, on Tuesday, the Egyptian parliament overwhelmingly
rejected the army-appointed cabinet's plan to slash state
spending, triggering fears that political leaders will fail to
impose politically-sensitive fiscal austerity plans in order to
secure an IMF agreement.
A deal with the global policy lender was suspended last year
as leaders in Egypt predicted the economic situation would
improve. But economic conditions in the countries hit by the
Arab Spring have generally deteriorated and the majority of the
Arab worlds equity markets continue to underperform
compared to other emerging markets. A current account
crisis looms, without urgent redress, said analysts. The
country might be forced to accept IMF conditions less
favourable than before because they are continually finding it
harder to straighten out their balance of payments, says
Said Hirsh, Middle East economist at Capital Economics, a
macroeconomic research consultancy in London.
And a deeper economic crisis which Egypt is on
route for might act as a catalyst for change and a rush
by Egypt to accept IMF conditions, says Hirsh. But
this is not likely to happen in the next month or so."
But another well-connected MENA analyst argued the IMF deal
is likely finally to reach fruition, despite the political
posturing. All sides that are part of this agreement are
waiting for IMF approval which will happen in the next two
weeks. Once this happens, all other loan offers will fall into
place, says the analyst. Indeed, the pending
presidential election will add to political stability and
hopefully encourage all parties involved to come to agreement
over an acceptable fiscal package.
Political infighting between the Muslim Brotherhood and the
ruling military has played a part in a delayed IMF agreement.
Although the IMF must take the lead in negotiations, to
date Egypt has been reluctant to accept any conditions as
leadership there is concerned about being perceived as weak if
a government in transition accepts stringent IMF
conditions, says Hirsh.
Even with an IMF agreement, Hirsh at Capital Economics
calculates Egypts external financing needs for the year
stands at around $11bn.
Nevertheless, analysts are confident over the regions
medium to long term economic performance.
Growth potential in the region is huge, says
Hirsh. The region is starting from a relatively low point
and international funds will come on the condition of fiscal
and institutional reform. As fiscal and institutional reform
continues, confidence in these countries will grow. Foreign and
domestic investment as well as capital inflows will swell.
Its only a matter of time before this happens, he
In Egypt, the banking system lives on lending to the
government and about 40% of banking assets are in treasury
yields. For banks, it is less risky and more profitable
to lend to the government right now, explains Hirsh.
But at the same time, funds are limited for the private
| Source: Capital Economics