International credit ratings agency, Capital Intelligence Ratings (CI Ratings or CI), has upgraded Egypt's Long-Term Foreign and Local Currency Ratings to ‘B+’ from ‘B’ and affirmed its Short-Term Foreign and Local Currency Ratings at ‘B’.
The Outlook for Egypt's ratings is revised to ‘Stable’ from ‘Positive’.
The economic situation continued to improve in FYE 2018 (which ended in June), supported by the implementation of reforms agreed in the EFF programme. Real output growth exceeded expectations, unemployment fell slightly, the inflationary pressures that emerged after the transition to a flexible exchange rate regime began to abate, and investor confidence picked up.
The Egyptian economy is expected to have expanded by about 5.2 per cent in real terms in FYE 2018, compared to 4.2 per cent in FYE 2017, due to a pickup in domestic demand and a solid rebound in the tourism sector. Medium-term growth prospects have improved, with the economy expected to grow by an average of 5.6 per cent in FYE 2019-20, assisted by efforts to restore confidence in the economy, as well as support from regional neighbours and the IMF. While consumer price inflation decreased to a still high annual average of 20.8 per cent, the year-end rate was much lower (12.6 per cent in June) and more in line with expectations for FYE 2019 (13.1 per cent).
External vulnerabilities declined further, with foreign exchange reserves reaching a record level of $44.3 billion (around 8.5 months of import cover) in June 2018, compared to $17.6 billion (three months of import cover) just two years earlier. This increase is a result of a significant improvement in international competitiveness and a solid rebound in tourism flows, revenue from the Suez Canal, and renewed access to international markets. The transition to a flexible exchange rate regime and consequent devaluation has put an end to the parallel market. In turn, this has helped channel foreign currency liquidity to the banking system. Moreover, the current account deficit halved from 5.8 per cent of GDP in FYE 2017 to 2.8 per cent of GDP in FYE 2018. Meanwhile, external debt remained manageable at 36.8 per cent of GDP in FYE 2018 and is expected to increase to 39.5 per cent of GDP in FYE 2020.
The public finances are on a firmer footing, partly due to government efforts to rein in the budget deficit and reverse expensive fuel subsidies. The budget deficit remains high but is expected to have declined to 9.7 per cent of GDP in FYE 2018, compared to 10.9 per cent of GDP in FYE 2017. The fiscal outlook has improved, with the budget deficit expected to gradually decline in accordance with IMF targets to about 8.1 per cent of GDP in FYE 2019. The primary budget position also strengthened in FYE 2018 and is expected to have recorded a small surplus for the first time this decade (the primary deficit was 1.8 per cent of GDP in FYE 2017). The primary budget balance is expected to remain positive in the coming years, with the surplus increasing to 2 per cent of GDP in FYE 2019 and 4 per cent in FYE 2020.
Because of improving budget metrics and in tandem with the increase in nominal GDP, central government debt is expected to have declined to 92.4 per cent of GDP in FYE 2018 from around 103 per cent in FYE 2017. Near-term refinancing risks are mitigated by the current appetite of the banking system to invest in sovereign debt and by Egypt’s improved access to capital markets. The authorities recently issued a $4 billion Eurobond on favourable terms, of which $1.25 billion matures in 30 years.
The Egyptian government appears committed to gradually introducing reforms in order to secure timely EFF disbursements and has continued to introduce socially-sensitive reforms aimed at reducing the large budget deficit, including increases in value added tax (VAT) and improvements to the income tax collection system. However, implementation risk remains significant and reform slippage, should it occur, could potentially jeopardise future EFF disbursements, thereby resulting in renewed financing risks.
Egypt’s ratings continue to be supported by the low level of external public debt (below 20 per cent of GDP in 2018), the ongoing commitment to reforms, and the relatively resilient banking sector, which has managed to weather the turmoil in the economy since 2011.
CI notes that while the security situation has been broadly stable in major cities, the political landscape remains polarised and sporadic violence in Sinai still hinders the full restoration of civil peace. Geopolitical risk also remains high, fuelled by instability in neighbouring Libya and other countries in the region.
Egypt’s ratings remain constrained by substantial socioeconomic imbalances, namely high (albeit declining) unemployment, and widespread poverty, in addition to a weak budget structure, fragile political situation, and other institutional constraints.