Egyptian economy improving amid challenges: Moody's

Although government financing needs remain large, Moody's expects economic reform will help reduce fiscal deficits and government debt

The reforms applied to the Egyptian economy showed improvements in Egypt's public finances and economic conditions, Moody's Investors Service said in a report entitled Credit Analysis – Government of Egypt issued Tuesday.
The ratings agency noted that there are still challenges, including the government's large financing needs, structural economic issues such as high unemployment and inflation, and elevated political risks.
In the report, Moody's projections reveal a GDP growth of 5% for the current fiscal year (FY) 2015/2016, up from an expected 4.5% in FY 2014/2015.
"Egypt's economic growth over the next 12-18 months will likely be supported by both public and private investments," Moody's said.
The report also expects the growth in capital goods imports connected to the expected increase in investments, besides the weak global demand, which will affect net exports' contribution to growth.
"We expect economic and fiscal reform momentum in Egypt will help fiscal deficits and government debt levels to gradually reduce, although government financing needs remain relatively large," said Steffen Dyck, Vice President and Senior Analyst at Moody's.
Moreover, the report highlighted that while the government's debt slightly decreased to 90% of GDP in FY 2014/2015, the debt's level is still high as a result of persistent budget deficit, which averaged 9.5% of GDP between FY 2004/2005 and 2013/2014.
The report said the government is targeting a reduction to 8.9% of GDP in 2015/2016 that will depend on revenues performance, according to Moody's.
Meanwhile, the budget deficit for FY 2014/2015 amounted to approximately 11.5% of GDP, according to the general budget final account.
The government previously announced it is targeting a budget deficit of 10% to 10.5% during last FY. Minister of Finance Hany Kadry Dimian announced Monday that the deficit decreased, recording 11.5% compared to the 12.2% recorded over FY 2013/2014 and 13.7% in 2012/2013.
"We expect the Suez Canal expansion to make credit-positive contributions to Egypt's fiscal revenues and balance of payments over the medium-term. So far the government's track record of implementing revenue-enhancing measures, such as the introduction of new taxes, is mixed," Dyck said.
The report said the introduction of the value-added tax, as a replacement for the current sales tax, was delayed several times although the government aims to implement it before the end of 2015. Egypt's political situation has also led to the weakening of institutional strength.