Egypt's long-term foreign currency issuer default rating (IDR) remains at B+ with a stable outlook, according to recent report from Fitch Ratings. Fitch attributed its affirmation to Egypt's recent track record of fiscal and economic reforms, which the authorities are furthering, as well as its large economy, which has demonstrated stability and resilience through the global COVID-19 pandemic. Fitch projected Egypt's real GDP growth to reach three percent in FY 2020/2021, which ends in June 2021, after recording 3.6 percent in FY 2019/2020 and 5.6 percent in FY 2018/2019. However, Egypt's ratings are constrained by large fiscal deficits, high general government debt to GDP ratio, and domestic and regional security and political vulnerabilities, it added. Egypt's economy has outperformed the vast majority of Fitch-rated sovereigns over the past year. A low incidence of coronavirus cases and deaths allowed for a measured public health response and supported resilient domestic demand, even as tourism and other export-oriented sectors sagged. The credit rating agency expected that the recovery of tourism and shipping through the Suez Canal, supported by global economic recovery, will drive an increase in the economic growth to post six percent in FY 2021/2022. Meanwhile, it said that Egypt's inflation has continued to trend down, projecting it to average five percent in the current FY 2020/2021 and to jump to seven percent in FY 2021/2022, well below the FY 2018/2019 rate of over 13 percent. Egypt's bank credit to the private sector is expected to grow by 20 percent year-on-year in FY 2020/2021, up from 12 percent in FY 2018/19, Fitch stated. It also noted that the minimal currency volatility in 2020 reflects a degree of intervention from the Central Bank of Egypt (CBE) as well as public sector banks, making foreign exchange (FX) available at the prevailing exchange rate at the cost of part of their net foreign assets. "In our view, continued exchange rate rigidity poses risks to macroeconomic stability and current account performance in the medium term, although it has supported non-resident inflows into the Egyptian pound government bond market," Fitch reported It added that Real effective appreciation in recent years has eroded a large part of the competitiveness gain from the 2016 devaluation. Continued real appreciation could weigh on growth and the current account deficit and could require another sharp exchange rate adjustment in the future, in turn potentially undermining price stability and domestic confidence. Nevertheless, the CBE maintains that it is committed to exchange rate flexibility, intervening only to mitigate disorderly market movements, Foreign investor participation in Egypt's bond market is a growing point of potential external vulnerability despite the fact it supports fiscal and current account funding flexibility, the agency noted.
