Observers were in for a disappointment this week when Moody's Investors Service, the global credit ratings agency, kept Egypt's rating unchanged at B3 with a stable outlook. “We were foreseeing some sort of an upward re-rating given noticeable improvements that are already reflected in the balance of payments in terms of the narrowing trade deficit,” Allen Sandeep, director of research at investment bank Naeem Brokerage, told Al-Ahram Weekly. Moreover, he pointed to other improvements on the fiscal front manifesting in subsidy cuts and the narrowing deficit. “The pace of change is definitely positive,” he said. Pharos Holding, a Cairo-based investment bank, had also seen potential for an upgrade based on Egypt's higher economic growth rate and outlook, narrowing fiscal deficit, and improved external position. This can be seen in a 46 per cent narrowing in Egypt's trade deficit for the first half of 2017. Furthermore, the Bloomberg news agency reported that tourism revenues rose to $1.5 billion in the fourth quarter that ended on 30 June from $510 million in the same period a year ago. Full-year receipts rose 16 per cent to $4.4 billion, but they remain the 2010 record revenues of around $12 billion. Remittances also rose two per cent to $17.4 billion for the year, Bloomberg said. Although Pharos said it expected fiscal consolidation to be a lengthy process, “the recent fiscal reform measures confirm the government's commitment to bringing down the budget deficit to a more sustainable level in the future.” The overall budget deficit fell from 12.5 per cent of GDP in fiscal year 2015-16 to 10.8 per cent for 2016-17. The government is targeting 9.5 per cent in the current fiscal year. According to Ministry of Finance preliminary figures, the real GDP growth rate recorded 4.1 per cent in fiscal year 2016/17. Pharos further “expects the economic growth rate to pick up gradually over the next two years.” But the ratings agency also had reservations. While acknowledging that Egypt's external liquidity position has significantly improved over the past 12 months, it lamented that it had been mainly driven by debt-creating inflows, raising the level of external debt and foreign-currency denominated debt. Egypt's net international reserves rose to $36 billion at the end of July from $15.5 billion a year earlier. Moody's said that “the increase in reserves was largely the result of debt-creating inflows, with external debt almost doubling to an estimated 33 per cent of GDP in fiscal year 2017 from around 17 per cent the year before.” “Very weak government finances will continue to constrain the credit rating pending further clarity on the sustainability and impact of the reform programme,” it said. Stronger credit ratings add comfort to foreign direct and portfolio investors, as they reflect a lower risk profile in terms of default risks, political stability, exchange rate and monetary policy visibility and fiscal position, Sandeep explained. “In some cases, foreign investors invest only in countries that have a minimum credit rating threshold,” he said. The government is going to great lengths to attract investment to the country. Reform measures launched 10 months ago have seen an influx of portfolio investments, especially in domestic and foreign debt instruments. According to Sandeep, Egypt's stock exchange is already witnessing increasing interest from foreign portfolio investors across sectors such as industrials, consumer goods and building materials. Foreigners, excluding Arabs, accounted for 18 per cent of total market turnover in January to July 2017 versus 11 per cent last year, he said. Demand for Egypt's domestic debt has increased since Egypt signed on for the three-year extended fund facility with the International Monetary Fund (IMF) in November 2016. Head of public debt at the Finance Ministry Sami Khallaf recently told Reuters that foreign holdings of Egyptian treasury bills had reached LE270.5 billion ($15.25 billion) as of the auction on 8 August. Meanwhile, foreign direct investment is expected to have risen to about $8.7 billion in the 2016-17 fiscal year that ended last June, compared to about $6.9 billion the previous year, according to figures released by the Ministry of International Cooperation. It will exceed $10 billion in the current fiscal year, said Minister of International Cooperation Sahar Nasr. To attract more domestic and foreign direct investment, the cabinet last week approved the executive regulations of its new investment act. The new law offers incentives that include a 50 per cent tax discount on investments made in lagging areas and government support for the cost of connecting utilities to new projects. Under the law, investors receive a 50 per cent discount on the cost of land for industrial projects if production begins within two years. Also last week the executive regulations of the new industrial licensing law were issued. The new law specifies the Industrial Development Agency (IDA) as the sole agency authorised to grant industrial licences. It fast tracks approvals of industrial licences in fewer than seven and up to 30 days, depending on the type of industry, as opposed to an average of 600 days previously. The speed at which the executive regulations were issued is an indicator that the government is serious about implementing the new laws, Bahaa Al-Adli, head of the Badr Investors Association, told the Weekly. He praised the fact that the two laws were ready together because they complemented each other. And the fact that the two laws were issued indicates that the government is intent on tackling age-old problems of bureaucracy, he said. However, he also stressed that what would really make a difference to the investment climate would be the implementation of these laws. He stressed that a decision to invest or to expand current investments does not depend on a law, but considers domestic and external market conditions. Nonetheless, the issuance of the laws has changed investors' perspectives, he said. “Investors are beginning to consider expansions or possible new investments, whereas a couple of months ago some investors were downsizing.” The government is hoping that increased domestic and foreign investments will propel growth and create jobs. The unemployment rate improved slightly in the second quarter of 2017. It fell to 11.98 per cent compared to 12 per cent in the first quarter, marking the first time since 2011 that unemployment had fallen below 12 per cent, Minister of Manpower Mohamed Saafan said. Lower unemployment rates, higher investment and increased exports could see Moody's making the expected upgrade in its credit rating for Egypt. “Further rebalancing of the net international reserve structure away from deposits in Egyptian bank branches abroad, and moving away from reliance on concessional financing and external debt towards foreign direct investment and higher value-added goods and services exports as main sources of foreign exchange inflows would also support a positive rating action,” the agency said. Sandeep of Naeem Brokerage is hoping that with some time left before January when the government is scheduled to go for another Eurobond issue, there could be revisions by other credit ratings agencies such as Fitch and Standard &Poor's. “The higher the rating, the lower the spread demanded by investors,” he said, referring to interest rates.
