Egypt bolstered by growth

Egypt-Flag-Map-200x200.png

Egypt’s long-term foreign-currency issuer default rating (IDR) has been affirmed at B+, by Fitch Ratings, on economic growth.

The rating agency has also kept Egypt’s outlook at stable, due to its recent track record of fiscal and economic reforms, which the government is furthering.

Egypt’s economy has outperformed the vast majority of Fitch-rated sovereigns over the past year, according to the rating agency.

Fitch forecasts real gross domestic product (GDP) growth of 3% for the fiscal year ending June 2021, after 3.6% in 2020 and 5.6% in 2019.

The recovery of tourism to Egypt and shipping through the Suez Canal, supported by a global economic recovery, will drive an increase to 6% growth in the 2022 fiscal year.

Meanwhile, inflation has continued to trend down, and Fitch expects it to average 5% in 2021 and 7% in the 2022 fiscal year. This is broadly in line with the 2020 fiscal year but well below the 2019 rate of over 13%.

Moderating inflation and exchange rate stability allowed the Central Bank of Egypt (CBE) to ease policy in support of economic and credit growth.

The CBE cut its headline overnight deposit rate by 300 basis points (bp) in March 2020 and 100bp in November 2020, to 8.25%. It also guaranteed  approximately $6.3 billion (E£100 billion), or 1.7% of GDP of lending by banks to targeted sectors at preferential interest rates, alongside a raft of regulatory forbearance measures.

Fitch expects bank credit to the private sector to grow 20% year-on-year in 2021, in line with the 2020 fiscal year and up from 12% in 2019.

Egypt’s current account deficit narrowed to 3.1% of GDP, just over $11 billion in 2020 from 3.6% in the 2019 fiscal year. This is as an increase in remittance flows from Egyptians working abroad and a mild increase in non-oil exports offset a decline in tourism receipts.

Fitch forecasts only a marginal widening of the current account deficit in the 2021 to 2020 fiscal year.

Foreign holdings of government treasury bills and bonds had recovered to $28 billion by February 2021, over 10% of government domestic debt. This is in excess of their level at the start of 2020, from a trough of less than $10 billion in June.

Egypt’s external funding conditions have remained broadly favourable. The government has issued about $4.6 billion in external bonds in 2021, following $5 billion in the 2020 fiscal year. About $3.3 billion remains to be disbursed under the $5.2 billion stand-by arrangement (SBA) agreed in June last year. This includes the $1.7 billion disbursement approved by the International Monetary Fund (IMF) in December 2020.

In the 2020 fiscal year, Egypt also received $2.8 billion through the IMF’s rapid financing instrument.

Net foreign direct investment (FDI) remained relatively resilient at $7.1 billion in 2020, and Fitch forecasts $5.5 billion for 2021.

Egypt’s net external debt, including non-resident holdings of local debt, at 18% of GDP in the 2020 fiscal year is significantly smaller than the current or forecast B category median.

Government borrowing and a return of non-resident portfolio investors allowed the CBE and commercial banks to partly rebuild their net foreign asset positions.

The CBE’s official gross foreign reserves had recovered to over $40 billion by February 2021, about five months of external payments. This is after dipping to $35 billion in May 2020 as the CBE intervened to support the exchange rate. Nevertheless, reserves remain well below their high of nearly $45 billion in early 2020.

CBE’s net foreign assets, at just over $13 billion in January remain significantly lower than its gross reserves. However, CBE’s liabilities, which stood at $26 billion in January 2021, are medium to long-term in nature and have repeatedly been rolled over.

Continued economic growth and a modest coronavirus disease 2019 (COVID-19) support package have limited the crisis’ fallout on Egypt’s public finances.

Fitch expects a modest and temporary widening in the general government fiscal deficit to 8.5% of GDP in the 2021 fiscal year. This is including net acquisition of financial assets, from 7% in 2020 and 7.9% in the 2019 fiscal year.

Egypt’s government’s COVID-19 support package amounted to about 1.7% of GDP spread across the 2020 and 2021 fiscal years.

The COVID-19 crisis interrupted Egypt’s progress on debt reduction, and public finances remain a core weakness of the rating.

However, Fitch expects debt-to-GDP to resume a downward path in 2022, and Egypt has significant financing flexibility.

The rating agency forecasts consolidated general government debt-to-GDP to peak at 90% in 2021, having risen from 88% in 2020 and 84% in the 2019 fiscal year. This is before resuming a downward path.

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 World Bank governance indicator, with recent improvements in some components of the governance score being offset by deterioration in other areas.

The potential for political instability remains a significant tail risk, in Fitch’s view, given on-going structural problems including deficiencies in governance and high youth unemployment. This is despite the headline overall unemployment rate falling to about 7% in the fourth quarter of 2020, after approaching 10% in the second quarter.

Fitch would consider upgrading the rating if there is sustained progress on fiscal consolidation leading to a further substantial reduction in the gross general government debt-to-GDP ratio.

A significant improvement across structural factors over the medium term, such as governance standards, the business environment and income per capita would also lead to an upgrade, according to Fitch.

The rating agency may downgrade 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 towards the target of 80% would also lead to a downgrade, according to Fitch.

This comes after S&P Global Ratings affirmed Egypt’s long-term and short-term ratings at B/B in 2020, as the country has adequate reserve buffers to cover external and fiscal financing needs.

See full rationale here