Egypt retains the region’s highest economic strength assessment, despite a series of negative shocks, according to an outlook published by credit ratings agency Moody’s on Monday.
The report stated that this reflects the country’s growth outlook, compared to others. Moody’s forecast that the Egyptian economy will grow by 4.0% and 4.5% in 2017/2018, supported largely by private consumption, as well as increasing public and private investment.
“We expect investment incentives from the recent devaluation of the Egyptian pound to outweigh the short-term challenges stemming from higher inflation and reduced purchasing power for domestic consumers,” said Moody’s.
Egypt has implemented a number of credit-positive reforms in 2016 as part of its three-year $12bn loan programme with the International Monetary Fund (IMF) in November 2016. These included the introduction of a value-added tax (VAT) in August 2016 and the switch to a flexible exchange rate system, in addition to further fuel subsidy reforms in November.
Subsidies and transfers account for 35% of expenditures, while interest expenses account for 22%.
Other key aspects of the IMF programme include comprehensive energy subsidy reform to free up resources for health, education, and social protection, as well as efforts to contain the public sector wage bill. That said, “social stability considerations in the face of unpopular subsidy reforms could slow the government’s reform momentum,” Moody’s claimed.
Moody’s estimated a fiscal deficit equal to 13.0% of GDP in fiscal year (FY) 2016, followed by 12.0% and 11.3% in FY 2017 and 2018, respectively. The debt ratio is expected to peak at 105.9% of GDP in 2017, before declining to 105.5% in 2018.
Egypt’s current account deficits have marginally deteriorated over 2012-2016 to 4.6% of GDP. “We project current account deficits of 7.5% and 6.0% in Egypt for 2017 and 2018,” Moody’s said.
The devaluation and switch to a flexible exchange rate system will support export competitiveness, preserve foreign exchange (FX) reserve levels, and remove foreign investment and import barriers that have built up over the past few years. Foreign exchange reserve inflows have already increased since June, when import coverage stood at 2.5 months.
Mounting socioeconomic discontent in Egypt, fuelled by high inflation and reduced purchasing power, could result in growing anti-government sentiment in 2017 and 2018. Although the army has been relatively successful in neutralising opposition, security risks persist, as evidenced by scattered terrorist attacks targeting security forces and government officials as well as civilians.