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Delivering results
Published in Al-Ahram Weekly on 25 - 04 - 2019

The US ratings agency Moody's upgraded its ratings for Egyptian government bonds to B2 from B3 this week in a move that is important in determining the creditworthiness of a country and an important factor in deciding the cost it pays to borrow from abroad.
Last month, the ratings agency Fitch Ratings upgraded Egypt's long-term foreign-currency issuer default rating to B+ with a stable outlook.
The move was supported by expectations that the government's current economic reforms will yield a steady improvement in Egypt's fiscal indicators and give real GDP growth a push, according to a Moody's statement.
Moody's projects real GDP growth of 5.5 per cent in the 2019 fiscal year, converging to six per cent in the next few years supported by economic reforms and renewed credit extensions to the private sector.
Egypt's growth rate has been improving during the last couple of years thanks to solid performances by the gas, information technology, and construction sectors. Preliminary figures released at the end of January suggest that growth over the first half reached 5.4 per cent.
Higher growth will help reduce the unemployment rate, which has been declining from 13.2 per cent in 2011 to 8.9 per cent in December 2018 and close to its lowest readings since 2003.
Moody's highlighted the fact that lowering employment is “essential to shore up acceptance of a relatively tight fiscal and monetary policy stance in the next few years”.
Egyptians have been shouldering the burden of unpopular austerity measures that started with energy subsidies cuts and have included the introduction of a value-added tax (VAT) and the devaluation of the pound.
With the aim of preparing people for the fourth increase in prices of fuel over the past four years, scheduled to happen in June, the government earlier this month offered bonuses to civil servants. The minimum wage for them will be increased to LE2,000 a month, a 66 per cent increase over the LE1,200 applied since 2014.
All state employees will receive a raise of seven per cent in July, or a minimum increase of LE75 per month compared to LE65 last year, while those not subject to the civil service law will get a 10 per cent rise, also receiving at least an extra LE75 per month.
Moody's praised the fiscal reforms implemented in Egypt in the last few years as they had “led to better targeting of income support, higher investment, and a reduced wage bill. This will allow the government to maintain the primary budget balance in surplus in the next few years.”
However, Egypt's fiscal metrics will remain “very weak”, and interest payments will continue to absorb nearly 45 per cent of revenue. Weak debt affordability, Moody's said, was the mean reason it had changed its outlook on the economy from positive to stable.
A draft of this year's budget acquired by Reuters on Monday showed that the government expects its borrowing needs to reach LE820.7 billion in the 2019/20 fiscal year, a 26 per cent increase from the previous year.
It expects interest payments to climb by 23.8 per cent to LE541.7 billion from LE437.4 billion a year earlier.
In addition to issuing local treasuries, the government plans to plug the financing gap with bond issuances and receiving $2 billion from the IMF, representing the final tranche of a four-year facility. It will also issue $5 billion of eurobonds and LE7 billion of green bonds. The receipts of the latter are to be used for eco-friendly projects.
Moody's expects the budget deficit to decrease to 8.4 per cent of GDP from a peak of 12.9 per cent in 2013 together with a primary surplus of 0.8 per cent after a history of primary deficits that peaked at 5.6 per cent of GDP in 2013.
The primary budget shows the difference between the government's revenues and expenses after taking out interest payments.
The improvement in these indicators should help lower the vulnerability of treasury issues to financing shocks, as happened last year. Together with other emerging markets, Egypt experienced large capital outflows in the second half of 2018 with almost $10 billion leaving the country due to the increase in dollar interest rates and a trade war between China and the US.
The reduced demand for treasuries has pushed the government to increase yields and thus push up the cost of borrowing.
Moody's statement noted that the stable outlook signals that upward and downward ratings pressures are balanced. On the downside, debt affordability will remain weak and financing needs large at around 30 to 40 per cent of GDP in the next few years.
On the upside, the track record of the last few years denotes strong reform commitments that could deliver higher sustained growth, it said.


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