Moody’s Investors Service has asserted that Egypt’s credit rating for the issuer and senior unsecured bond is at B3 and maintained their view of stable outlook, according to a report published on Friday.
Moreover, the rating affirmation is based on Moody’s view that the B3 rating is a fair representation of Egypt’s credit risk profile. Very weak government finances will continue to compel the rating pending further clarity on the sustainability and impact of the reform programme.
On the other hand, the report indicates that Egypt’s external liquidity position has significantly improved over the past 12 months. The increase in international reserves has been mainly driven by debt-creating inflows, thus raising the level of external debt and the denominated debt of foreign currency.
The stable rating outlook is based on the balance between the upside and downside risks of the rating. Although reform progress has been impressive, despite that some political stability was witnessed, reform momentum may face headwinds, such as the presidential election set to take place in May 2018. The extent to which the reform programme will positivity affect the sovereign credit profile in the coming years remains limited.
Furthermore, Moody’s expects Egypt’s credit profile to remain heavily influenced by the government’s very weak finances for a sustained period, with already high fiscal deficits continuing to grow in nominal terms over the coming years and declining only gradually as a percentage of GDP.
Moody’s preliminary estimates indicate that the general government fiscal deficit reached around 11% of GDP in fiscal year (FY) 2017, decreasing from 12.1% in FY 2016, and it is forecasted to decline to around 10% in the current FY. Moody’s estimates that the general government’s primary deficit shrank to 1.8% of GDP in FY 2017 from 3.7% the year before, and it will start to show small surpluses from 2019 onwards.
Consequently, Egypt’s government financial strength will remain very weak for the short-term, with debt and debt affordability metrics continuing to exceed by some margin the median for B3-rated sovereigns. The debt-to-GDP ratio reached a peak of 100% in FY 2017, and Moody’s expects that it will decline to about 90% by 2019, which the report considers it at a high level.
Moreover, the monetary tightening strategy adopted by the Central Bank of Egypt (CBE) in order to tame soaring inflation has driven up the government’s domestic funding costs, with the cumulative 700 basis points rise in CBE’s policy rate having driven one-year T-bill rates to above 20%. Moody’s expects interest payments to remain very high, accounting for close to 40% of revenues over the coming two to three years.
On 6 July 2017, CBE’s Monetary Policy Committee (MPC) decided to raise the overnight deposit rate, the overnight lending rate, and the rate of the Central Bank of Egypt’s (CBE) main operation by 200 basis points to 18.75%, 19.75%, and 19.25% respectively. The discount rate was also raised by 200 basis points to 19.25%.
According to the report, Moody’s projects that real GDP growth has performed well, at 4% in FY 2017, and its forecast to continue to pick up in the coming years.
Despite the improvement witnessed in external liquidity, reduced uncertainty about the exchange rate policy, elimination of the parallel market, and unlocking of multilateral funding following currency flotation have led to an increase in the CBE’s net international reserves to $36bn at the end of July from $15.5bn in 2016.
However, the increase in reserves was largely the result of debt-creating inflows, with external debt almost doubling to an estimated 33% of GDP in FY 2017 compared to around 17% a year earlier. Yet, repatriation of private remittances through the formal banking system and, to a lesser extent, foreign investor participation in the stock market and FDI inflows also contributed to the increase.
Moody’s forecast that the ongoing structural economic reforms should, if implemented as intended, improve the business environment and lift domestic and foreign direct investment. The report indicates that despite the sky-rocket high inflation as a result of the currency devaluation and fiscal reforms, there were no large-scale protests, and the broadly stable security situation bodes well for the tourism sector.
However, downside risks exist. The presidential election set to take place by May 2018 could create uncertainties around future reform momentum, Moody’s think that there is a risk that Egypt’s large young population, which is facing high unemployment and inequality, could exert pressure that slows or even reverses reforms.
The report cites that the current government expenditure items including subsidies, social benefits, and compensation to public sector employees, together with interest payments, represent more than 90% of total spending.
Moreover, the progress that the authorities have made in energy subsidies is threatened by any increase in food or energy prices that could reverse all the decrease in subsidies.