While Egypt is benefiting from a strong momentum for reform, weak government finances remain a challenge, according to the international credit ratings agency Moody's annual report on the country issued last week. “Although economic growth is still below pre-revolution levels, it has started to pick up, and investor sentiment has also improved on the back of strengthened reform momentum,” said Steffen Dyck, co-author of the report. While preliminary figures suggest real GDP growth of 4.2 per cent in 2017, Moody's expects a further acceleration to five per cent in 2019 supported by the government's structural reforms. The report is an update for the markets and does not constitute a formal rating. Egypt's rating with Moody's is B3 stable, six levels below investment grade. The Moody's report came out amidst a high tide of investment interest in Egypt when hardly a day has passed without news of meetings between interested foreign investors and senior government officials, mainly Minister of Investment Sahar Nasr, making the headlines. A delegation headed by British Trade Envoy Sir Jeffrey Donaldson was in Cairo last week to negotiate new investments in infrastructure, health, transport and other labour-intensive sectors. The Americans are also coming: during President Abdel-Fattah Al-Sisi's visit to the US last week, Nasr had a meeting with 19 American businessmen. After the meeting, Nasr told reporters that representatives of US companies interested in sectors including energy, infrastructure, healthcare, food production, tourism, engineering and IT were coming in droves to expand their investments in the country. On another positive note, the German engineering and electronics firm Bosch is looking to open new factories producing a number of different goods with an eye towards exporting to Africa, said Trade Minister Tarek Kabil. Mercedes-Benz has agreed in principle to resume car assembly in Egypt after it closed its assembly line two years ago amid the dollar crunch crisis. The Chinese have also finalised a series of deals in the Suez Canal Zone. Moreover, Egypt topped the list of the “Where to Invest in Africa in 2018” report issued by the Rand Merchant Bank (RNB), a Pan-African financial services company. RNB analyst Celeste Fauconnier told Bloomberg last week that Egypt came ahead of South Africa because of its better economic growth prospects, despite lagging behind in terms of the business environment. Morocco, Ethiopia, Ghana and Kenya were all in the top six in the report. Egypt has embarked on a wide-ranging reform programme based on the liberalisation of its foreign-exchange system and resulting in its currency depreciating by almost 50 per cent. It has slashed fuel and electricity subsidies, imposed a new value-added tax (VAT) and introduced a number of social-friendly policies to cushion the effects of these moves. This has calmed investor worries about the country, which witnessed political unrest and economic upheaval following the 25 January Revolution. On the sidelines of investment bank Arqaam Capital's Fourth MENA Investor Conference last week, Radi Al-Helw, the managing director of the bank, said that since the devaluation took place in November 2016 a marked improvement in Egypt's economic indicators had been noticed, with the balance of payments netting almost $11 billion and net flows of foreign direct investment (FDI) and portfolio investments registering $6 billion and $17 billion, respectively, in the same period. Egypt's current international reserves are at their highest levels ever at $36.1 billion. The country is perceived as a good investment destination for portfolio investments. “In spite of perceived economic and political challenges, the reality is that Egypt still represents one of the most active markets in terms of new initial public offerings [IPOs] and the number of mergers and acquisitions transactions executed, both of which reflect strong convictions by local, regional and international financial and strategic investors in the future of the country,” Al-Helw said. Topping such challenges are government finances, which are a major concern, according to Moody's report. The ratings agency forecasts a 10 per cent of GDP budget deficit for the 2018 fiscal year, slightly higher than the 9.2 per cent projected by the budget, but down from an estimated 12.1 per cent in 2016. Egypt also has a huge debt profile nearing 90 per cent of the country's GDP. Moreover, the government has a financing gap, the difference between its requirements for foreign exchange to finance its debts and imports and its income from overseas, of about $10 billion for the current fiscal year. It plans to cover this by foreign borrowing. The IMF is expected to provide the second $4 billion installment of its $12 billion loan to Egypt. In the pipeline, there is also the last $1 billion installment of a three-year World Bank loan and the last $500 million from the African Development Bank. Egypt is planning to tap the international markets through a third Eurobond offering in January 2018. It raised $7 billion in the fiscal year ending in June from two other offerings. Moody's noted that faster-than-expected progress on the reform programme and more rapid fiscal consolidation and improvements in debt metrics were needed to up Egypt's credit rating. “Early signs of the successful implementation of structural economic reforms that boost foreign direct investment inflows and continued strengthening of external buffers would also be credit positive,” it said. “Conversely, any signs of reform slowdown or renewed social and political instability or a material deterioration in the security situation could also lead to a negative rating action.” Reforms assessed THE GOVERNMENT has made a strong start to the reform programme set out as a result of the IMF's $12 billion loan facility to the country, according to an IMF review of the programme released on Tuesday. “This was accomplished by the Central Bank of Egypt's [CBE] decision to refrain from intervention and allow a foreign exchange market to develop, as well as the Ministry of Finance being steadfast in containing discretionary expenditure and exercising restraint in wage policies, which are crucial for the adjustment process,” the report said. The reform programme, granting Egypt the $12 billion loan facility over three years, started in November by liberalising the exchange rate as well as slashing energy subsidies. It aims at addressing external and fiscal imbalances and achieving macroeconomic stability, promoting inclusive growth and supporting job creation, along with ensuring that the poor are protected during the adjustment. Egypt is expected to receive the third installment of the loan of around $2 billion after a second review at the end of this year. So far, it has been granted $4 billion of the overall facility. According to the report, two performance criteria have been missed. The target on tax revenues was missed because of delays in issuing the executive regulations for the introduction of the new value-added tax (VAT). Because of the depreciation of the pound, inflating the imports bill, performance criteria for primary balances and fuel subsidies were also missed by about one per cent of GDP. The report did not mention other performance criteria. “The programme objectives remain achievable and the slippages in 2016/17 will be made up in the next two years,” it said. It expected gross public debt to decline from 98 per cent of GDP in 2016/17 to 88 per cent in 2017/18 and 78 per cent in 2020/21. This will be achieved due to planned fiscal consolidation, higher nominal GDP, and a negative growth-interest differential. The report underscored that the main factor driving the increase in debt stock in 2016/17 was the larger-than-anticipated depreciation in the exchange rate. Revaluation of foreign-exchange denominated debt and the success of the authorities in raising foreign financing have resulted in an increase in foreign debt from 13 per cent of GDP in 2015/16 to 22 per cent this year. This more than offsets the reduction in domestic debt from 84 to 76 per cent. As a result, total debt stock for 2016/17 is expected to increase to 98 per cent from 97 per cent last year. Entrenched high inflation could pose a threat to macroeconomic stability, the report said, impeding the credibility of the new monetary policy framework. However, the inflation rate eased last month to 30 per cent, and the CBE said it had peaked. Echoing these expectations, Subir Lall, IMF mission chief for Egypt, the Middle East and Central Asia, expected Egypt's inflation to fall to “slightly above” 10 per cent by the end of 2017/2018 and to single digits by 2019.
