Fitch Ratings has upgraded Egypt’s LongTerm ForeignCurrency Issuer Default Rating (IDR) to ‘B+’ from ‘B’, while maintaining a stable outlook, the credit rating agency announced on Thursday.
According to the issued report, the upgrade of the IDRs reflects the progress in implementing economic and fiscal reforms, which are driving improved macroeconomic stability, fiscal consolidation and stronger external finances.
“It seems likely these reforms will continue to generate better economic outcomes beyond the IMF agreement. General government debt/GDP is on a downward path, underpinned by structural improvements to the budget and the emergence of primary budget surpluses. We expect spending on wages, subsidies and interest to fall by almost 5% of the GDP from June 2016 to June 2020,” the report added.
Fitch forecasts budget deficit to narrow to around 8.6% of the GDP in fiscal year (FY) 2019 (fiscal year ending June 2019), with a primary surplus of 1.6% of the GDP, close to the government target of 2% of the GDP.
According to the report, subsidies and social benefits spending are to fall by 1.1% of the GDP in FY 2019, while interest spending to continue consolidation, on the back of lower interest payments because of the disinflation trend, lower interest rates and lower debt, as well as another round of subsidy reforms, including the introduction of an automatic fuel tariff adjustment mechanism.
Additionally, Fitch believes that further moderation of the wage bill/GDP and continued efforts to improve the tax administration will also contribute to further consolidation, and lowering deficit.
In Fitch’s view, there is political commitment for further fiscal consolidation and there have been significant structural improvements in the budget that are likely to persist.
“In FY 2020 we expect wages and compensation to fall below 5% of the GDP, down from an average of 8% in FY 2015/16, underpinned by the civil service law. We expect subsidies and social spending to fall to 5.3% in FY 20, from 8% in FY 17, following several rounds of tariff hikes across utilities and other regulated prices. Interest payments are likely to peak in FY 19 at 10.2% of the GDP, before falling by at least 1pp of the GDP in FY 20,” the report indicates.
However, the report highlights the return of political instability or a negative shock to economic growth as the main risk to policy slippage.
Macro-picture in the medium term
For the medium term, the report forecasts that consolidated general government debt/GDP will decline to 83% in FY 20 from 93% in FY 18 and a peak of 103% in FY 17.
In regards to inflation, Fitch foresees an average inflation of 12% and 10% in 2019 and 2020 respectively, building in another round of subsidy reforms in June/ July 2019.
The Central Bank of Egypt (CBE) cut its overnight deposit rate by 100bp to 15.75% in February 2019, maintaining positive real interest rates. We forecast that the real GDP growth will remain robust at 5.5% in FY 19 and FY 20, with risks tilted slightly to the downside.
According to the report, Egypt’s current account deficit (CAD) moderated to 2.5% of the GDP in 2018 from 3.5% in 2017, with the CAD plus net FDI close to balance, and it is forecasted to an average 2.3% of the GDP in 2019/20, supported by growth in tourism revenues, nonoil exports, and rising gas production which has eliminated the need to import gas for now.
“We project Egypt’s external debt service to average around $10bn or 12% of the current external receipts in 2019/20, in line with the current ‘B’ peer median. Within this we forecast sovereign external amortisation and interest costs at around $7.5bn on average in 2019/20,” the report added.
Fitch believes that the CBE’s cancellation in December of the profit repatriation mechanism, mitigated potential upward or downward pressures on the currency from portfolio inflows, should herald greater Egyptian pound volatility.
The pound weakened only modestly, by 1.7%, against the US dollar between midApril and endDecember, during the period of portfolio outflows. With the return of portfolio inflows in 2019 (equivalent to a quarter of the previous outflows), the Egyptian pound has appreciated by 3% against the US dollar up to mid-March.