Egypt boosted by reforms

Egypt’s long-term foreign-currency issuer default rating (IDR) has been affirmed at B+ by Fitch Ratings, on the back of its track record of fiscal and economic reforms.

The outlook has also been kept at stable, on the country’s commitment to its’s reform programme and ready availability of fiscal and external financing. This is on the back of the coronavirus disease 2019 (COVID-19) crisis.

Policymaking in Egypt has remained conservative, with only modest fiscal and monetary loosening since March 2020.

The Central Bank of Egypt’s (CBE) cut its policy rate by 300 basis points to 9.25% in March 2020. However, real interest rates remain firmly positive given the trend of disinflation. Fitch forecasts inflation to average 6% in 2020 and 7.5% in 2021.

In response to the pandemic, CBE rolled out a number of measures including for banks to extend customer loan maturities until mid-September and to waive a range of fees.

Since March 2020, the government has announced fiscal stimulus totalling approximately $11.2 billion (EGP180 billion) or 2.8% of gross domestic product (GDP).

At the same time, the government has increased a range of fees and is aiming to make some savings within the budget.

The 2021 fiscal year budget was targeting a 2% of GDP budget sector primary surplus, while the government is now aiming for a surplus of 0.5% of GDP.

Fitch forecasts a budget sector primary deficit of 0.4% of GDP – and for the budget deficit to widen to 9.5% of GDP from 8.8% in 2020 fiscal year.

The rating agency expects a primary surplus to re-emerge in the 2022 fiscal year and for the overall deficit to narrow to around 8%.

This temporal widening of the deficit will interrupt the strong downward trend in general government (GG) debt to GDP ratio.

Fitch expects the GG debt to GDP ratio to increase to 86% in 2020 and 88% in the 2021 fiscal year, before resuming a downward path. GG debt to GDP ratio fell from 103% in 2017 to 84% in the 2019 fiscal year.

The coronavirus shock is negatively affecting Egypt’s external finances, GDP growth and fiscal performance.

Fitch forecasts real GDP growth to be 2.5% in the fiscal year ending June 2021, well below average growth of 5.5% in 2018 and 2019.

The rating agency expects growth to recover to 5.5% in the 2022 fiscal year and to be maintained at just over 5% in the medium term.

Egypt’s external finances have been hit by the pandemic, resulting in $18 billion or 5% of GDP of outflows from the local currency debt market.

This has also led to loss of tourism revenues, which stood at $13 billion in 2019 and a decline in remittance inflows – which were close to $27 billion in 2019.

CBE’s foreign reserves and the net foreign assets of the banking sector declined by a combined $18 billion or 5% of GDP, between February and June 2020.

This is despite net inflows of $8.6 billion or 2.5% of GDP from Eurobond issuances and International Monetary Fund (IMF) funds.

Egypt received $2.8 billion under IMF’s rapid financing instrument and a $2 billion under the $5.2 billion 12-month standby arrangement signed in June 2020.

The current account deficit (CAD) is expected to widen to 5% of GDP in 2020 from 3.1% in 2019. A decline in imports will partially offset slashed tourism revenue and an assumed 20% decline in remittances.

Fitch expects smaller CADs averaging 3.6% as receipts recover from the coronavirus-induced trough – between 2021 and 2022.

CBE’s official gross foreign reserves are expected to fall to $37 billion at the end of 2020. This is slightly down from their current levels of $38 billion at the end of June – and from $44 billion at the end of 2019.

Fitch expects reserves to edge up in dollar terms, but to decline to around five months of current external payments, between 2021 and 2022, from close to six months in 2019.

Government debt to GDP levels is significantly higher than the current B median of 65%, as are debt to revenue and interest to revenue metrics.

However, over 50% of GG external debt is owed to multilateral institutions, with which Egypt has good relations, and the domestic banking sector provides considerable domestic financing flexibility.

Relatively weak governance, together with security and political risks, continue to weigh on Egypt’s rating. Egypt scores well below the B median on the composite World Bank governance indicator.

Fitch would consider upgrading the rating if there is significant improvement across structural factors over the medium term, such as governance standards, the business environment and income per capita.

Sustained progress on fiscal consolidation leading to a further substantial reduction in the gross GG debt to GDP ratio would also lead to an upgrade in the rating.

Fitch would consider downgrading the rating if there are renewed signs of external vulnerability, including persistent downward pressure on international reserves and the emergence of financing strains.

Failure to resume a path of narrowing the fiscal deficit and reducing government debt to GDP following the negative impact of the coronavirus pandemic could also lead to a downgrade.

This comes after S&P Global Ratings affirmed Egypt’s long-term and short-term ratings at B/B, with a stable outlook, in part due to adequate external liquidity buffers.

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