Egypt has received good news this week. The international credit ratings agency Standard & Poor's (S&P's) upgraded Egypt's outlook from “stable” to “positive” and the International Monetary Fund (IMF) gave its seal of approval to the country's ongoing reforms and decided to disburse another $2 billion of the $12 billion credit facility agreed in November last year. The positive outlook opens the way to a potential upgrade of the country's credit rating in 2018, according to the international credit ratings agency which maintained Egypt's sovereign credit rating at B-. Although a B- rating still means investing in Egypt is considered risky, the positive outlook gives significant encouragement to investors. According to the S&P's report, raising Egypt's credit rating will take place if the country continues its economic reform measures such as supporting investment and aiming for increased GDP. Egypt's fiscal deficit, high public and external debt, and low-income levels were among the reasons S&P's maintained its credit rating at B-. The budget deficit stood at 12.5 per cent of GDP in the 2015-16 fiscal year, dropping to 10.9 per cent in 2016-17. The government is targeting 9.5 per cent in the current fiscal year. Egypt has been trying to narrow the deficit by adopting a broad-based reform programme that has seen fuel subsidies reduced twice since July 2016 and the introduction of a new value-added tax (VAT). An over-reliance on internal and external borrowing has inflated overall debt to almost 130 per cent of GDP. Amr Hassanein, head of MERIS Ratings, Egypt's only ratings agency, expressed concern over high levels of public debt at almost 103 per cent of GDP. In addition to the IMF loan, Egypt has also borrowed from the World Bank, the African Development Bank and Gulf countries. It has tapped the international financial markets by issuing $7 billion of euro bonds. As a result, foreign debt jumped to $79 billion at the end of June 2017 from $56 billion a year earlier, representing more than 40 per cent of GDP. In an interview with the Hona Al-Asema TV talk show, Hassanein said the government must take into account the country's ability to repay such loans, including the $12 billion IMF loan. “Decreasing the budget deficit and increasing revenues will help ease the burden,” he said. Hassanein said that greater regulation of the informal economy would also help ease the burden, saying that the government should legislate to do so. Egypt's informal sector is believed to account for about 60 per cent of the economy. MERIS Ratings expects the political situation in Egypt to remain stable and believes there will not be any major policy changes ahead of the 2018 presidential elections. Minister of Finance Amr Al-Garhi said in a press statement that S&P's upgrading its country outlook to “positive” was an important step in strengthening confidence in the government's economic reform programme, leading to more foreign investment. The S&P's report came hours after the IMF said on Friday that it had reached a staff-level agreement with the government on the second review of Egypt's economic reform programme, under which the country would receive $2 billion as another installment of the $12 billion loan negotiated last year, bringing the total disbursements to about $6 billion. The IMF visit to Cairo took place from 25 October to 9 November, and the mission said in a statement on Friday that Egypt's economy continued to perform strongly and the reforms that had already been implemented were beginning to pay off in terms of macro-economic stabilisation and the return of confidence. “All the indicators show that the economic reform programme has started to bear fruit,” said Fakhri Al-Feki, an economics professor at Cairo University. Egypt's foreign reserves and foreign direct investment had been increasing steadily compared to last year, Al-Feki said, adding that this would result in a lower price of the dollar against the pound within the next few months, especially after Egypt receives the next installment of the IMF loan. Egypt's foreign currency reserves reached $36.5 billion last month, their highest level since the 25 January Revolution which saw foreign currency revenues sharply drop and resulted in the reserves reaching $13.6 in February 2013. The IMF mission pointed out that Egypt's growth had risen by 4.2 per cent compared to a projected 3.5 per cent, and that investor confidence in Egypt had resulted in increasing foreign direct investment by 13 per cent to $7 billion. It expects inflation to decline to about 13 per cent during the last quarter of 2018, praising the Central Bank of Egypt's commitment to achieving its goal of reining in inflation. The Central Agency for Public Mobilisation and Statistics (CAPMAS) announced last week that the inflation rate had dropped for the third month in a row to reach 30.8 per cent in October compared to 31.6 per cent in September. The rate had reached a record high of 33 per cent in July following increases in the prices of fuel and electricity as part of a government plan to reduce energy subsidies. The IMF mission said in Friday's statement that the overall budget deficit exceeded projections by 0.4 per cent of GDP to reach 10.9 per cent, and that controlling the deficit was necessary to reduce debt and provide financing to improve infrastructure.
