CAIRO: The recent oil price hike is an important step to reduce subsidies which will contribute to Egypt’s substantial fiscal deficit – a key rating weakness, Fitch Ratings announced in a Tuesday report.
On June 27, the rating agency reaffirmed its ‘B-‘ long-term foreign currency rating for Egypt, noting that “material progress on fiscal consolidation” was one factor that could lead to a positive rating action.
“Tackling subsidies is a key to reduce Egypt’s budget deficit, which we estimate is at 12.1 percent of GDP in 2013/14 [that ended in June 30],” Fitch reported. The subsidy bill, mainly dominated by fuel products, accounted for about one-third of total spending in FY13, or 12 percent of GDP, according to data from the Ministry of Finance.
Previous administrations’ fears and concerns about political stability hindered tackling the cost of subsidies.
“The mandate secured by President Abdel Fatah al-Sisi following his election victory in May and the effective repression of much of the opposition means the political environment is more conducive to fiscal consolidation,” Fitch reported. “A double-digit fiscal deficit in each of the last three years has pushed government debt to over 90 percent of GDP from 76.6 percent at end of FY11 and contributed to a series of downgrades to Egypt’s ratings.”
The price hikes, which ranged between 40 percent to 78 percent for petrol and 175 percent for natural gas, occured shortly after Sisi approved a revised and tightened budget with 10 percent deficit for FY 2014/15 in a move towards a series of tough austerity measures.
Sisi rejected an initial budget proposal with a 292 billion EGP deficit for the next fiscal year and the deficit was reduced to 240 billion Egyptian EGP ($33.57 billion), valued at 10 percent of the GDP.
“Subsidy spending will be held at the FY13 level and tax revenues are budgeted to rise by 26 percent. Several new revenue-raising measures have been introduced, including a capital gains tax,” Fitch added.
Although only minor protests took place in response to the price hike, Fitch noted that “serious political tensions remain and the expected return of inflation to double-digits (from 8.2 percent in May) may cause social strains.”
“Egypt’s public finances are the main weakness for its sovereign credit profile,” Fitch reported on May 30 and that Sisi’s landslide victory in the presidential election does not alter Fitch expectations that the authorities will be cautious in addressing the large fiscal deficit.