Report praises accounting modifications for greater transparency CAIRO: Moody s Investors Service downgraded Egypt s government bond ratings to Baa3 with a negative outlook in local currency and Ba1 with a stable outlook in foreign currency, the organization reported earlier this week. The annual report, Egypt: 2006 Credit Analysis, rates the country on the risk of government default based on a variety of micro and macro-economic, social and political factors. The report is issued for more than 100 countries. Despite economic reforms undertaken by Prime Minister Ahmed Nazif s government that have pushed the economy s growth rate to 6.8 percent and foreign direct investment to 5.8 percent of GDP, the report says the country faces the risk of becoming unable to implement further reforms because of political instability and growing public discontent. The report also points to accounting modifications made by Egyptian government officials earlier this year that finally brought their procedures inline with international standards, but revealed the large discrepancy between previous government reports on the budget deficit as a percentage of GDP and the now internationally recognized figure. The move, says Pierre Cailleteau, Moody s senior vice president and author of the report, raised the deficit from 3.5 percent of GDP to 8.5 percent. Although the reclassification has led to major upward revisions in deficit and debt numbers, Moody's believes that the clarification, along with other structural budgetary reforms, suggests that the Ministry of Finance is bringing public finances under control in a context of greater transparency, says Cailleteau. Indeed, the government target of reducing the deficit by 1 percent per year up to 2010-11, bringing the general government deficit below 4 percent of GDP, does not seem out of reach. Public debt has ballooned from LE 246 billion in 2000, representing 72 percent of GDP, to LE 550 billion by Q3, 2006, representing 88 percent of GDP, according to the Ministry of Trade and Industry (MFTI). Still the government points out that the 2006 number is a vast improvement as it only grew by 8 percent over 2005, compared with 17 percent growth the previous year and LE 511 billion making up 95 percent of GDP. Analysts point out that the numbers may look bleak in the short term because of reforms to the government s accounting procedures, but have the potential to help officials construct more effective economic policies now that the real numbers have been revealed. One analyst compares the accounting modifications to floating the Egyptian pound in 2002 as it lowered the currency s value initially, but later stabilized it, which helped attract more FDI in the following years. Cailleteau says reforms, including floating the Egyptian pound and establishing a monetary policy committee have raised the country s economic credibility with the international community. After years of erratic targeting of the exchange rate, a pragmatic policy has been put in place and the Central Bank s main objective is now price stability, says Cailleteau. This does not preclude opportunistic interventions in the event of misalignment, but the Central Bank appears committed to allowing the rate of the Egyptian pound to be largely determined by market forces. On the political front, the report says it is still unclear whether the limited liberalization introduced by President Hosni Mubarak has strengthened the system by allowing pressure to be released in a controlled manner, or whether it will strengthen the organization of destabilizing political forces. Still, the report rates the risks of chaos in the case of political succession or destabilization in the case of regional conflict as very low. The Egyptian economy has traditionally been vulnerable to external shocks with growth constrained by the structure of the economy, says Cailleteau. Although many bottlenecks remain, evidence of a decisive break with the past is mounting.
