LONDON, June 19 (Fitch) Fitch Ratings has affirmed Egypt’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ with a Stable Outlook.
The issue ratings on Egypt’s senior unsecured foreign and local currency bonds have also been affirmed at ‘B’. The Country Ceiling and the Short-term foreign currency IDR have been affirmed at ‘B’. KEY RATING DRIVERS Egypt’s ratings balance a high fiscal deficit and debt/GDP ratio, low import cover and recent volatile political history with low external debt and recent commitment to a wide-ranging economic reform programme.
Fiscal consolidation, stronger growth and lower commodity prices will reduce the budget deficit, although it will remain large compared with peers, at a forecast 11.1% of GDP in FY15 (to end June), down from 12.8% of GDP in FY14.
Excluding grants, the deficit is forecast to drop to 11.6% of GDP in FY15 from 17.5% of GDP in FY14. Fuel subsidies have been cut, new taxes introduced and existing taxes reformed in a largely front-loaded reform programme.
The introduction of VAT has been delayed, but is expected during FY16. Fitch expects fiscal consolidation throughout the forecast period, but with savings partially offset by higher social spending and spending commitments in the new constitution the deficit is forecast to remain high.
Moderate deficit reduction and stronger nominal GDP growth are forecast to put the debt/GDP ratio on a downward trend, ending a multi-year deterioration. Nonetheless, debt/GDP is around double the peer median, at an estimated 89.6% at end FY15 and is only expected to fall to 84.3% of GDP by end-FY17.
Domestic banks, including the Central Bank, account for the bulk of deficit financing.
Reserves are around three months of current external payments after USD6bn of new deposits in the Central Bank from the GCC, although foreign exchange rationing continues.
Prospects for the balance of payments look more stable over the next couple of years, but Fitch expects only a marginal improvement in reserve coverage, as stronger inflows of foreign exchange will be used to satisfy unmet private sector demand.
GCC inflows in the form of deposits at the Central Bank, have pushed up gross external debt, but it remains below peers at 17.2% of GDP at end-2015. The new funds are on a concessional basis, so external debt stock and service indicators are still stronger than peers.
Egypt also has market access, issuing its first Eurobond since 2010 in June 2015, raising USD1.5bn. Net external debt is well below peers at just 3% of GDP. The rating is supported by the absence of a recent history of debt restructuring.
Economic momentum has been maintained. Although the 4Q14 reading of 4.3% year-on-year GDP growth was down on the 6.8% recorded in 3Q14, the base effect was lower and it compares well with the average of 1.9% since end-2010.
Fitch assumes that growth will stay above 4% as the rebound stemming from greater political stability and reform momentum is bolstered by investment and improved power supply.
Inflation is above peers, averaging 11.2% over the first five months of 2015, and is forecast to remain near 10%. Political stability has improved under President Sisi. In Fitch’s opinion, this reflects a desire for stability, a strong clampdown on political opposition and an improving economy.
Parliamentary elections have been delayed, but could take place before the end of the year. Nonetheless, significant sections of the population are disaffected, there are widespread grievances over some public services and there is serious sporadic violence in North Sinai.
World Bank governance indicators have deteriorated in recent years and are below peers. RATING SENSITIVITIES The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced.
The main factors that could lead to a positive rating action, individually or collectively, are: – A track record of progress on fiscal consolidation leading to a decline in debt/GDP. – Improved economic growth supported by reforms to the business environment that lead to increased investment.
The main factors that, individually or collectively, could lead to negative rating action are: – Failure to anchor the fiscal deficit on a downward trend or an unwinding of recent fiscal consolidation measures.
– Prolonged disruption to GCC inflows that strains the balance of payments. – Serious and sustained security incidents that undermine economic activity. KEY ASSUMPTIONS Fitch assumes the government remains committed to its programme of fiscal consolidation and local banks remain willing and able to finance the deficit.
Egypt is assumed to continue to receive GCC financial support, in a variety of forms, over the forecast period. Fitch has not factored an IMF lending programme into its forecasts, but believes one would be easily achievable if required by the authorities.
The political environment is assumed to be more stable than 2011-2013, although sporadic and at times serious attacks on security forces are assumed to continue and underlying political tensions will remain.
Fitch forecasts that Brent crude will average of USD65/b in 2015 and USD75/b in 2016. In both cases these are below the government’s assumptions in its five-year fiscal plan, meaning Fitch assumes savings on the budgeted subsidy bill.