In January, Fitch Rating Agency restored Egypt’s outlook to stable for the first time since it was downgraded to negative nearly three years ago. This reflects an improvement in an economy hammered by years of violence and political instability that had a massive toll on foreign reserves and many industries. The ratings firm, however, confirms that there is still a lot more that needs to be done.
Paul Gamble, the director of sovereign group Fitch, answered Daily News Egypt’s questions on what the Egyptian administration needs to do in order to secure an upgrade in the upcoming evaluation, and what the chances are of this happening.
1- Egypt’s B-credit rating was affirmed in Fitch’s most recent revision on 27 June. When will the next evaluation be?
The next evaluation will be issued on 19 December.
2- What does Egypt’s government need to do in order to achieve an upgrade? Do you believe the government moving in the right direction? If yes, how so?
The triggers we have identified that could collectively or individually lead to upgrade are: “Material progress on fiscal consolidation” and “Improved political stability, potentially supported by efforts to accommodate currently marginalised groups”. There has been some progress on fiscal consolidation, such as the recent increases in fuel prices and the introduction of new taxes. We will monitor the data between now and our review time to see how material this progress has been.
3- What is your evaluation of the measures taken to reduce subsidies and raise certain forms of taxes? Is that enough to fix the country’s expanding deficit?
These measures will help reduce the deficit. The combined savings and extra revenue are likely to cut the deficit by 2-2.5% of GDP. This compares to a deficit in 2013/14 of 12.1% of GDP, so there is still a long way to go. It is also not clear whether some of the savings and additional revenue will be spent elsewhere. Strengthening economic activity will help lower the deficit, but it is expected to stay large for some time.
4- What do you see are elements that can possibly keep Egypt’s rating as is for a third consecutive evaluation?
This would probably involve Egypt not [exerting] sufficient [effort] to hit the triggers for an upgrade outlined above, and the [current] situation [must remain stable] so that one or more of the triggers for a downgrade are hit. The triggers we have identified for a downgrade are: “Disruption to GCC inflows that strains the balance of payments and fiscal position”, “A failure to reduce the fiscal deficit significantly or a weakening of the willingness or ability of local banks to finance the deficit” and “A serious breakdown of public order or a severe and sustained period of political violence that further damages the economy”.
5- The new president and government have announced multi-million dollar national mega projects, which they say will reduce unemployment rates and draw investors. How do you view such steps?
If these projects go ahead they are likely to cut unemployment and potentially draw in investors. The question for us is how they will be financed. The government runs a very large budget deficit, so a large amount of foreign government and private sector investment would probably be necessary to get these off the ground. Measures to improve the business environment would be much less costly.
6- What are your expectations for the influx of GCC aid and the value of the Egyptian pound given strategies of new leadership?
GCC support will continue to underpin Egypt’s economy for the near term. The form of this support is likely to change from direct deposits in the central bank and budgetary support to spending on projects, though short-term assistance from the GCC will be available if it is needed. The GCC private sector is also likely to take an increasing role.
7- Local newspapers have reported a growing expansion of the army’s economic empire, which raises concerns that it will compete with the private sector over future projects. How do you view such concerns?
We think that the military will use private sector contractors for large elements of the projects.
Date foreign currency long term rating outlook
28 January 2011 BB+ Negative
3 February 2011 BB Negative
28 June 2011 BB Rating Watch
30 December2011 BB- Negative
15 June 2012 B+ Negative
5 July 2013 B- Negative
4 January 2014 B- Stable
Standard and Poor’s
On 16 May 2014, Standard & Poor’s Ratings Services affirmed its ‘B-/B’ long-and short-term foreign and local currency sovereign credit rating assessment on Egypt. The ratings service added that the country has a “stable” outlook, signifying an improvement in economic conditions.
During the current fiscal year, Saudi Arabia, United Arab Emirates and Kuwait have pledged and provided around $15bn.
Trevor Cullinan, director of sovereign rating at the agency, explained to Daily News Egypt the affirmation reflects S&P’s view that the Gulf’s lifeline will continue to flow and finance economic recovery. He also emphasised that more political stability is needed to secure an upgrade.
When will the S&P next evaluate Egypt’s rating?
Our next scheduled rating publication on Egypt is 14 November.
You were previously quoted by reports as saying the B- rating is likely to last for this current year – is this correct? If so, why?
Our outlook speaks to the next 12 months for non-investment grade ratings. The stable outlook indicates that we do not expect to change the rating. The stable outlook balances our view of Egypt’s difficult political landscape and significant external financing pressures against our expectation that official donors will continue to provide support to the country.
Have recent economic measures including a reduction in energy subsidies, a rise in taxes and launch of new projects, increased the likelihood of possible upgrade? If yes, how so? If not, why not?
We understand that the authorities have begun restructuring the energy subsidy system and have increased some taxes. We will assess the effectiveness of implementation of these measures over the coming fiscal year ending 30 June 2015.
What does Egypt’s government need to do in order to achieve an upgrade? What is it missing in order to reduce credit risk?
We could raise the ratings in the next 12 months if political developments in Egypt strengthen relations between the government and wider society, and improve external performance, including net international reserves, thereby easing external pressures.
What is your evaluation of the measures taken to reduce subsidies and raise certain forms of taxes? Is that enough to fix the country’s expanding deficit?
We will assess the effectiveness of implementation of these measures over the coming fiscal year ending 30 June 2015.
What does Egypt need to do in order to increase international reserves?
Further stabilising the domestic political situation and improving economic growth should improve investor confidence in Egypt and increase demand for the Egyptian pound, supporting the purchase of foreign currency by the central bank. Achieving a current account surplus, which seems unlikely at present, would also result in a positive balance of foreign currency being received by the country rather than the current outflow.
What are your expectations for Egypt’s ability to meet financial obligations? Although risks to the government’s medium-term credit standing are high, we do not see a risk of imminent default.
Is the launching of new national projects enough to draw FDI? President Abdel Fattah Al-Sisi and his government have announced multi-billion dollar national mega projects, including the Suez Canal expansion, with the aim of reducing unemployment rates and draw investors. How do you see such steps?
The challenge to reinvigorate the economy is significant. We will assess the effectiveness of implementation of the government measures over the medium-term.
What are your expectations for the influx of GCC aid and value of Egyptian pound given strategies of new leadership?
The B- rating reflects our view that official donors will continue to provide the Egyptian government sufficient foreign currency funds to manage the country’s short-term fiscal and external financing needs. We expect ongoing support from official lenders over the next 12 months as the Egyptian authorities try to address the country’s political and economic challenges.
- Timeline of Egypt’s Economic Rating
– 28 January 2011: Fitch ratings revised its outlook for Egypt to negative.
– 31 January 2011: Moody’s downgraded Egypt’s government bond ratings to BA2 from BA1 and changed the outlook from stable to negative.
– 1 February 2011: Standard & Poor’s cut Egypt’s long-term foreign and local currency ratings by one notch to BB and BB+ respectively, both with a negative outlook.
– 3 February 2011: Fitch Ratings lowered Egypt’s debt ratings by one notch to BB from BB+.
– 16 March 2011: Moody’s downgraded Egypt’s foreign and local currency government bond ratings by one notch to Ba3 from Ba2. The outlook on these ratings remains negative.
– 18 October 2011: S&P Ratings cut Egypt’s long-term foreign currency sovereign credit rating to BB- from BB and its long-term local currency rating was cut to BB- from BB+. It maintained a negative outlook on the rating.
– 27 October 2011: Moody’s downgraded Egypt’s government bond ratings by one notch to B1 from Ba3. The outlook remains negative.
– 24 November 2011: S&P said it cut Egypt’s long-term foreign and local currency sovereign ratings to B+ from BB-, with a negative outlook.
– 21 December 2011: Moody’s downgraded Egypt’s government bond ratings to B2 from B1.
– 30 December 2011: Fitch ratings cut Egypt’s long-term foreign currency debt to BB- from BB with a negative outlook.
– 10 February, 2012: S&P downgraded Egypt’s long-term rating from B+ to B. It affirmed the negative outlook.
– 15 June, 2012: Fitch downgraded Egypt’s long-term foreign currency rating to B+ from BB-, with a negative outlook.
– 24 December 2012: S&P cut Egypt’s long-term credit rating to B- from B, with a negative outlook.
– 30 January 2013: Fitch Ratings cut Egypt’s sovereign credit rating to B from B+.
– 12 February, 2013: Moody’s Investors Service downgraded Egypt’s government bond ratings to B3 from B2, and maintained the negative outlook.
– 21 March, 2013: Moody’s Investors Service downgraded Egypt’s government bond ratings to Caa1 from B3. The rating outlook is negative.
– 9 May, 2013: S&P lowered Egypt’s long-term credit rating to CCC+ from B-.
– 6 July, 2013: Fitch cuts Egypt’s credit rating to B- from B.
– 17 July, 2013: S&P maintained Egypt’s long-term sovereign credit ratings on Egypt at CCC+/C, with a “stable” outlook.
–24 July, 2013: Moody’s affirmed Egypt’s CAA1 government bond rating, while maintaining the ‘negative’ outlook.
– 15 November, 2013: S&P raised its long-term foreign currency sovereign credit rating for Egypt to B-/B from CCC+/C, with a ‘stable’ outlook.
– 3 January, 2014: Fitch raises Egypt’s economic outlook from ‘negative’ to ‘stable’. The rating firm, however, maintained its rating for the long-term foreign sovereign credit ratings at B-.