The Egyptian economy got a well-deserved pat on the back earlier this week with Standard & Poor's upgrading its rating to B from B-. The significance lies in the fact that it is the first positive raise from a rating agency in seven years and is considered an acknowledgment of the success of the economic reform programme. A country's rating reflects its creditworthiness and is thus very important for foreign borrowing and foreign investment inflows, two main resources for covering Egypt's foreign currency needs. Since November 2016, Egypt embarked on a wide-range economic reform programme that included a devaluation of its currency, cutting subsidies and introducing new taxes. This has reduced external imbalances and boosted remittances and investments in securities, leading to higher foreign reserves reaching $44 billion in April compared to $19 billion when the pound was devalued. The devaluation has also boosted exports and revived tourism. Though the cost of the reforms has been high on Egyptian households due to shooting inflation, which reached an all-time high of 33 per cent in July 2017, things started to cool down earlier this year with the rate hovering around 13 per cent in April. In addition to raising the rating, S&P gave the economy a “stable” outlook. The stable outlook is based on a balance between achievements represented in improvement in the current account deficit (CAD) due to the increase in exports revenues and shrinking imports, the decline in inflation levels as well as stronger growth prospects against risks from still-high fiscal deficits and a high stock of government debt, according to the S&P commentary. Egypt's growth rate, according to S&P, will improve in 2018-2021, averaging 5.4 per cent over the next four years compared to 2.4 per cent during the five years following the January 2011 Revolution. Positive growth prospects are based on the strong rebound in activity over the last six months of 2017 in several sectors, including natural gas, tourism, construction and manufacturing. More importantly, this growth is expected to be fuelled mainly by investments and not by consumption, according to the rating agency. Over the fiscal years 2018-2021 there will be a strong growth in investment, driven by investment projects and growing natural gas production. “The current pipeline of infrastructure spending, including the New Suez Canal Economic Zone, new administrative capital city, and expansion of the national road network, is also expected to sustain growth in the construction sector,” noted the commentary. Moreover, the rating agency expects strong growth in domestic gas production from the Zohr gas field and others to tighten the energy import bill. Also, the resumption of Russian flights to Cairo in April should support growth in foreign currency receipts. So, the economy is growing, more investments are coming, reserves are increasing, and inflation is decelerating. Is everything well on the economic front? No. Or at least, not yet. The economy still suffers from persistent shortcomings: wide fiscal deficits, high public debt, and low income levels, noted the rating agency. Despite subsidies and interest rate cuts, the budget showed a deficit averaging around 12 per cent of GDP over the past five years. Also, government debt increased to above 100 per cent of GDP. More worrying, low income levels together with the above 10 per cent unemployment rate and expected rise in inflation on the back of planned fuel subsidies cuts in the coming quarter means that the socio-political environment in Egypt remains fragile. “We believe 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,” S&P noted. The discontent shown by subway commuters this week should ring a bell. Austerity measures should be paralleled by social compensation to the vulnerable.
