For the first time since the 25 January Revolution, Egypt's credit rating has been upgraded. Standard & Poor's (S&P), an international credit-rating agency, has raised Egypt's long and short-term foreign and local currency sovereign credit ratings from CCC+/C to B-/B with a stable outlook. Egypt's interim government welcomed the agency's move as recognition of its efforts to stabilise the hard-hit economy over recent months. The three main ratings agencies, S&P, Moody's and Fitch, had all slashed Egypt's evaluation eight times over the last three years due to the country's unstable political circumstances. In a statement issued last Friday, S&P stated that “the upgrade reflects our view that the Egyptian authorities have secured sufficient foreign currency funding to manage Egypt's short-term fiscal and external financing needs.” It said that “bilateral donors will continue to provide funds to Egypt, reducing balance-of-payments pressures and giving the Egyptian authorities more time to address political and economic challenges.” The credit-rating agency also bestowed upon Egypt a stable outlook, due to the generous aid it had received from rich Arab states, which is expected to match up to significant external financing pressures. “We expect Egypt's net international reserves to stabilise,” the statement continued. Egypt has been pledged a total of $12 billion in aid from Saudi Arabia, the United Arab Emirates (UAE) and Kuwait since former president Mohamed Morsi was deposed last July. In October, the UAE pledged an additional $2.9 billion in aid to Egypt. Saudi Arabia and Kuwait have also promised more funds to prop up development programmes in the country. Alia Mamdouh, an economic analyst at investment bank CI Capital, saw the credit rating move as a positive step related to the inflow of Gulf aid, with the incoming foreign currency supporting Egypt's balance of payments, enabling it to finance its external obligations, and being reflected in returns on treasury bills and the cost of debt and debt servicing. “A better rating is very important to Egypt's economy,” Mamdouh said. “We have to take into account that it is the first thing investors look at when they decide to put money into any country.” The upgrade also means that the government has received a boost in its commitment to the previously announced economic roadmap. “A big part of the financial aid is directed to investment in labour-intensive projects, which enhance potential economic growth as well as providing many job opportunities and confirm the government's interest in supporting social issues,” Mamdouh added. The financially strapped government has not been able to afford to invest in new projects on its own, and the Gulf money has helped the government to boost its economic stimulus plan. Mamdouh said that the ending of the state of emergency and curfew had given the impression of political stability. “More investment could be attracted when we don't have concerns related to political instability and insecurity,” she said. Mamdouh expected that Egypt would earn another upgrade after the planned constitutional referendum. “Getting majority approval of the constitution means that there is conformity, compliance and agreement within the society and the road map is on track,” she added. Mohsen Adel, deputy head of the Egyptian Association for Finance and Investment Studies, shared Mamdouh's optimism about the rating upgrade, pointing out that Egypt's credit rating could see a further improvement before next year, especially after the adoption of the new constitution and the holding of parliamentary and presidential elections. Adel stressed that the country's regained political stability would be reflected in the economy and thus could push Egypt's credit rating up to an even higher level, giving a more positive outlook in the near future. “Many factors have contributed to giving positive messages to foreign investors, including the agreement between the political forces on establishing a civil state and financial aid from Saudi Arabia, the UAE and Kuwait,” he added. On the other hand, the new rating has failed to move Egypt out of the “junk” end of the scale, as it is still a full six grades below investment grade. What the government had chosen to ignore in the S&P statement, he said, was that it had also stressed that Egypt's “political tensions will persist, its policymaking will be short term, and structural weaknesses in its fiscal and external positions will continue.” The agency had assessed Egyptian government finances as “very weak” and estimated the change in general government debt to average 12 per cent of GDP in 2013-2016. The interim government has been implementing an expansionary package that focuses on reactivating the economy and improving social justice. “We understand that the authorities will also try to increase the tax base,” the S&P statement says. S&P analysts anticipate that the Central Bank of Egypt will continue to “monetise much of the government's local currency debt,” which means the CBE will print more bank notes. This, according to them, could generate 10 per cent average annual inflation over the next few years. “The government's stock of debt is relatively high and expensive. General government interest payments increased sharply to above 35 per cent of revenues in 2013, from 27 per cent in 2012,” the statement adds. “We expect net general government debt to reach 76 per cent this year and peak at 78 per cent in 2014, having risen sharply from 69 per cent in 2012.” The statement continues its somewhat bleak assessment of the economy by saying that the government is increasing its debt to meet significant fiscal deficits, while using some of its borrowings from the Gulf states to support foreign currency reserves at the Central Bank. S&P analysts estimate that the government's ability to raise revenues or cut spending is “limited”, particularly given Egypt's deficit in basic services. They estimate monetary policy flexibility to be “low”, reflecting their negative view of the CBE's close management of the Egyptian pound and the banking system's exposure to government debt. “S&P analysts continue to use biased language in assessing the domestic political situation despite their seemingly positive decision, which was backed by Egypt's external position,” Hani Genena, head of research at Pharos Securities Brokerage, wrote in a note. “What shocked us most was the analysts' assessment of the upcoming parliamentary and presidential elections as being ‘likely to lack legitimacy' in the eyes of a ‘significant proportion' of the population,” Genena added. The use of such prejudiced language, not the first time after the 25 January Revolution, “leads us to believe that the agency's decisions are highly politicised in nature and hence carry little weight for investment analysis and recommendations,” according to Genena. The writer is a freelance journalist.
