S&P main­tains Egypt’s ‘B-B’ credit rat­ing, sta­ble out­look

Rat­ings re­main con­strained by wide fiscal deficits, high pub­lic debt, low in­come lev­els, gross ex­ter­nal fi­nanc­ing needs

The Daily News Egypt - - Front Page - By Mo­hamed Samir

Stan­dard & Poor’s (S&P) Global Rat­ings on Fri­day main­tained Egypt’s out­look at sta­ble, af­firmed the ‘B-B’ long- and short­term for­eign, and lo­cal cur­rency sov­er­eign credit rat­ings.

Ac­cord­ing to the re­port pub­lished by S&P, the out­look re­flects the po­ten­tial of rais­ing the rat­ing next year, if larger-thanan­tic­i­pated struc­tural re­forms that sup­port in­vest­ment, growth, and de­crease in­fla­tion con­tinue.

“We also be­lieve that Egypt’s mon­e­tary frame­work is grad­u­ally im­prov­ing, al­beit from a weak base,” the re­port states.

Nev­er­the­less, S&P states that the rat­ings re­main con­strained by wide fiscal deficits, high pub­lic debt, low in­come lev­els, and still­high gross ex­ter­nal fi­nanc­ing needs.

More­over, the credit agency be­lieves that rat­ings could be low­ered, if Egypt’s plan is to grad­u­ally re­duce govern­ment debt to GDP is de­railed by fiscal slip­pages, higher bor­row­ing costs, more pro­nounced cur­rency de­pre­ci­a­tion than ex­pected, or if for­eign ex­change re­serve lev­els were to fall sig­nif­i­cantly.

In terms of eco­nomic growth, S&P fore­cast the strong GDP growth mo­men­tum to con­tinue, at an aver­age of 5.4% over the next three years, sup­ported by broad-based growth across sev­eral sec­tors, par­tic­u­larly man­u­fac­tur­ing, nat­u­ral gas, tourism, and con­struc­tion.

Ac­cord­ing to the re­port, th­ese pro­jected fig­ures are ex­pected to fur­ther in­crease, if Rus­sia and the UK re­sume com­mer­cial flights to Sharm El Sheikh, boost­ing tourist ar­rivals, or if Egypt is able to again be­come a sig­nif­i­cant net ex­porter of gas.

How­ever, down­side risks to growth could arise, in case of in­creases in se­cu­rity risks, higher oil prices than what the agency cur­rently as­sumes, a sig­nif­i­cant de­crease in world trade vol­umes, or fiscal slip­pages.

“The so­cio-po­lit­i­cal en­vi­ron­ment in Egypt re­mains frag­ile, in our view, though we note that the un­em­ploy­ment rate has fallen to 9.9% in June 2018 from of 13% in July 2014” the re­port cites, ex­plain­ing that so­cial dis­con­tent, es­pe­cially from vul­ner­a­ble groups as a re­sult of the ris­ing cost of liv­ing, re­mains a risk to the fiscal con­sol­i­da­tion pro­gramme and re­forms.

Egypt’s ex­ter­nal po­si­tion has im­proved, pub­lic fi­nances re­main chal­leng­ing

The re­port in­di­cates that Egypt’s gross ex­ter­nal fi­nanc­ing needs re­main high, de­spite the cur­rency flota­tion, and higher do­mes­tic gas pro­duc­tion.

More­over, ac­cord­ing to the re­port, Egypt’s cur­rent ac­count deficits (CADs) de­clined sharply to close to $6bn or 2.4% of GDP in fiscal year (FY) 2018, from more than $14bn or 6% of GDP in the pre­vi­ous year.

S&P fore­cast CAD to aver­age 2.4% of GDP over the next three years, sup­ported by re­duced en­ergy im­port costs, in­crease in tourism, and re­silient re­mit­tances.

Yet, they be­lieve that higher oil prices in the FY 2019 will offset gains from lower im­ported hy­dro­car­bon vol­umes.

Fur­ther­more,the credit rat­ing agency fore­cast that for­eign direct in­vest­ments (FDI) in­flows av­er­ag­ing 2.6% of the GDP over FY 2019-2021 will be suf­fi­cient to fi­nance the smaller CADs.

The re­port states that S&P view Egypt’s ex­ter­nal liq­uid­ity po­si­tion as more re­silient, due to var­i­ous fac­tors such as: Net in­ter­na­tional re­serves reached $44.5bn at end-Septem­ber, other for­eign cur­rency as­sets stood at about $7bn as of end-Septem­ber 2018, down from $11bn in April, and that the govern­ment’s gen­eral govern­ment fiscal deficit nar­rowed to 9.7% of the GDP in FY 2018, from 10.6% in 2017.

“We project that Egypt’s gen­eral govern­ment fiscal deficit will de­cline to 6.8% of GDP by FY 2021.” the re­port states.

The debt ques­tion re­mains

Ac­cord­ing to the re­port, one of Egypt’s key fiscal chal­lenges is the govern­ment’s in­ter­est bill, which makes up slightly more than all of the cen­tral govern­ment bud­getary deficit,at 9.9% of the GDP for FY 2018.

S&P ex­pect the ra­tio of gen­eral govern­ment in­ter­est costs to rev­enues will in­crease fur­ther to 48% in fiscal year 2019, from 45% in the pre­vi­ous year.

Re­flect­ing the reis­suance in 2018 of debt owed to the CBE, at higher mar­ket rates, and higher yields on re­cently is­sued govern­ment se­cu­ri­ties partly due to port­fo­lio out­flows by non-res­i­dents.

“The medium-term chal­lenge for Egypt will be to move away from its re­liance on high in­fla­tion to erode the value of debt, thereby un­der­pin­ning debt sus­tain­abil­ity.”

How­ever, the agency fore­cast that gov­ern­men­tal debt lev­els will fall grad­u­ally on the back of fall­ing fiscal deficits, reach­ing 85% of the GDP by the end of FY 2021.We project net govern­ment debt will fall to about 78% by the end of FY 2021.

To ease or not to ease?

Al­though Egypt’s mon­e­tary pol­icy flex­i­bil­ity is im­prov­ing from a weak base, ac­cord­ing to S&P, yet, fi­nan­cial ser­vices’ pen­e­tra­tion of the econ­omy is re­mains lim­ited – for in­stance, the stock of banks’ credit to the do­mes­tic pri­vate sec­tor is low, es­ti­mated at less than 30% of the GDP in FY 2018.

Con­se­quently, the re­port con­cluded that price changes are more likely to be dom­i­nated by ex­ter­nal fac­tors – such as im­ported in­fla­tion from a de­pre­ci­at­ing Egyp­tian pound – rather than changes in key Cen­tral Bank of Egypt (CBE) pol­icy rates.

Egypt’s head­line in­fla­tion has in­creased over the past two months to 16% in Septem­ber 2018 – and 17.7% in Oc­to­ber up from 15.4% in Septem­ber ac­cord­ing to CAPMAS –, as a re­sult of higher prices for fruit and veg­eta­bles,and fiscal mea­sures in­clud­ing en­ergy sub­sidy cuts.

How­ever, the agency ex­pect in­fla­tion will re­main in line with the CBE’s in­fla­tion tar­get an­nounced in May 2017, of 13% (+/-3%) dur­ing the fourth quar­ter of FY 2018.

Ac­cord­ing to the re­port,a cau­tious stance to­ward mon­e­tary eas­ing is ex­pected, as the CBE seeks to bal­ance in­fla­tion ex­pec­ta­tions and volatil­ity in port­fo­lio flows, against sub­dued pri­vate con­sump­tion and high govern­ment debt ser­vic­ing costs.

S&P fore­cast the strong GDP growth mo­men­tum to con­tinue, at an aver­age of 5.4% over the next three years

S&P view Egypt’s ex­ter­nal liq­uid­ity po­si­tion as more re­silient

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