CAIRO: “Egypt’s public finances are the main weakness for its sovereign credit profile,” Fitch Ratings said in a Friday report and that the victory of Abdel Fatah al-Sisi in the presidential election does not alter “expectations that the authorities will be cautious in addressing the large fiscal deficit.”
In January, Fitch Rating reviewed the Outlook on Egypt’s long-term rating to “stable” after three years on Negative and affirmed it at ‘B-‘ due to tentative improvements in political stability and economic conditions.
The report noted that turnout was around 46 percent, down from 52 percent in the 2012 presidential election won by former Islamist president Mohamed Morsi, according to the initial results.
The leading credit rating foundation said “Sisi’s victory was not in doubt…The very high turnout might have enhanced the legitimacy of the return to military rule in domestic and international eye.”
Fitch ruled out that Egypt’s economic policy or relations with GCC countries that have pledged grants and loans following Morsi’s ousting after the June 30 demonstrations backed by the military, will be affected.
“Sisi did not set out a detailed economic program. But the interim government’s actions, and Sisi’s broad pronouncements on the need to maintain growth and make Egyptian society more equitable, suggest that authorities are mindful of the risks of popular opposition to fiscal consolidation, which would initially focus on subsidies,” according to the report.
The interim government planned to cut spending on petroleum subsidies in the final draft of the 2014/15 fiscal year budget submitted to Mansour on May 26.
“But the budget deficit to widen in fiscal year ending June 2015, to 12 percent of GDP, from 11.5 percent forecast for 2014 fiscal year,” Fitch Rating added and that authorities will probably continue the small steps towards subsidy reform taken by the interim government.”
The report noted an improvement in budgetary performance in the first nine months of the 2014 fiscal year since the fiscal deficit narrowed to 7.1 percent of GDP from 10 percent in the same period in 2013. Fitch said this mostly reflects higher government revenues driven by grants.
“The improvement therefore may not be sustainable, while the sensitivities around reducing subsidy spending means the deficit will stay in or close to double digits over our ratings horizon,” Fitch said.
Egypt’s fiscal and economic performance has stabilized “but at a low level,” Fitch said and that the next review of the rating is scheduled on June 27.
“The low rating reflects substantial risks to Egypt’s credit profile, chiefly its weak public finances,” according to the report, reiterating that without significant fiscal reform, general government debt will remain above 90 percent of GDP.