US aid cut to have "limited impact" on Egypt

Fitch Ratings has published a review of the cut to the massive annual aid package worth $1.5 billion which the US announced on Wednesday that it would reduce in light of Egypt’s "lack of progress" in achieving a democratic government.

"The decision by the US government to suspend part of its military aid to Egypt has limited overall impact on the country's external finances, and is therefore not significant for its credit profile," Fitch said Thursday.

The credit agency cited the form of the US military aid, in hardware or grants to the army, as one reason why its reduction would not affect the Egyptian economy.

"A reduction in military aid from a key international ally is symbolically important, but will not affect key indicators of creditworthiness such as FX (foreign exchange) reserves," it said.

US State Department Spokesperson Jen Psaki said Wednesday the country would hold delivery of certain large scale weapons systems and cash assistance until "credible progress toward an inclusive, democratically elected civilian government through free and fair elections" was made.

The US will maintain its support for counter-terrorism and border security, as well as for education and health.

Fitch credit agency indicated the recent aid pledges by Gulf states would offset the adverse effects of a US aid cut.

"We do not anticipate any knock-on effect on other sources of direct fiscal support. A cash transfer of USD260m to the government is being withheld as part of the US move, but this has been dwarfed by bilateral transfers from the Gulf that have eased pressure on reserves and the Egyptian pound in recent months, in line with our expectations."

The agency said Saudi Arabia, Kuwait, and the United Arab Emirates had committed nearly $14 billion in aid to Egypt following the military coup there three months ago that deposed a democratically elected president.

Almost half of this aid was released by the end of last month, the statement added.