Fitch affirms Egypt's positive outlook, B rating

Public finances remain Achilles heel of Egypt's credit profile, yet Fitch estimates debt/GDP to drop to 88% in FY 2019

Fitch Ratings has affirmed Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) at "B" with a "Positive Outlook", the rating agency announced in a report on Monday.
According to Fitch, the main drivers behind the country's ratings are progress in implementing an economic and fiscal reform programme, greater macroeconomic stability, and improvement witnessed in external finances.
However, the ratings remain restrained by large fiscal deficits, high general government debt to the GDP ratio, and weak governance scores as measured by the World Bank governance indicators. Yet, the Positive Outlook reflects the improving trends across a number of Egypt's credit metrics in response to the reform programme.
Fitch forecasts that the real GDP growth will accelerate to 5.5% in fiscal year (FY) 2019 (ending in June 2019) and FY 2020, while average inflation will drop to 11.6% in 2019, from 13.0% in 2018. The real GDP growth steadied at 5.2% in the first half (H1) of FY 2018, driven by tourism, construction, and gas extraction, while inflation increased to 14.4% in July following energy subsidy cuts.
In regard to the current account deficits (CAD), the report forecasted a smaller CAD from 2018-2020, averaging 2.5% of the GDP, and maintenance of adequate FX reserves, covering on average six months of current external payments (CXP), up from 2.8 months of CXP from 2012-2016.
On the other hand, the external debt to the GDP ratio increased sharply in 2017, yet the rating agency forecasted that it will moderate in 2018-2020. At the end of 2017, there was $26bn multilateral debt, $13.9bn Paris Club debt, and $17.9bn of GCC deposits—accounting for more than half of total external debt.
The report cites that the government has demonstrated an unrelenting commitment to its reform agenda and remains broadly on track with the $12bn three-year Extended Fund Facility (EFF) signed with the IMF in November 2016. In July 2018, the IMF board approved the third review of the EFF and disbursed $2bn, bringing total disbursements to $8bn, with $4bn to be disbursed in 2018/19.
Commenting on the report in a press statement on Monday, Minister of Finance Mohamed Moeit stressed the authorities' keenness to continue the reforms, boost growth, and invest more capital in human resources.
Moreover, tourism, remittances, and restrained, albeit strengthening, import growth led to around a 50% decrease in the CAD in 2017 and was 38% smaller year-over-year in Q1 2018. Tourism credits and remittances grew by almost 300% and 20%, respectively, in 2017 and made further gains in Q1 2018 by 80% and 12% y-o-y, respectively, while non-oil exports achieved a 19% increase y-o-y in Q1 2018, reaching their highest level in at least seven years. Import growth has been picking up in 2018 in part because of higher oil prices. However, gas production from the Zohr offshore field is expected to increase to 2bn cubic feet/day by September and may eliminate Egypt's need to import gas.
In 2017, the net FDI inflows covered 77% of the CAD, up from 39% in 2015-2016. In Q1 2018, the net FDI covered more than 100% of the CAD. In addition, there has been a surge in non-FDI inflows into the financial account, given substantial bond issuance, multilateral and bilateral loans, and other commercial loans and portfolio inflows.
Public finances remain frail
The report indicates that public finances still act as the Achilles heel of Egypt's credit profile, but the trend is positive, with the budget deficit and government debt improving in FY 2018, as the for the first time in 15 years, the budget sector recorded a primary surplus (albeit marginal at 0.1% of the GDP), driven by rising tax revenues and spending restraints on wages and subsidies. The wage bill dropped to 5.4% of the GDP from a peak of 8.4% in FY 2014.
The report estimated that general government debt/GDP fell to 93.6% in FY 2018 from 103.1% in FY 2017, and that it will drop to 88% in FY 2019, and in the longer term, to around 75% by FY 2023, close to the level of government debt at the time of the Arab Spring uprisings.
The government is targeting a budget deficit of 8.4% of the GDP in FY 2019 and a primary surplus of 2% of the GDP (Fitch's forecasts are slightly worse, at 8.8% and 1.6%, respectively).
Moreover, the agency stated that relatively weak governance and security and political risks continue to weigh on the rating. The report indicates that the potential for political instability remains a risk, in Fitch's view, given the economic reform programme and ongoing structural problems, including high youth unemployment and deficiencies in governance, as well as intermittent security issues, which have previously harmed tourism.
Yet, the report concludes that the government has sought to mitigate the risk of discontent by bolstering social safety nets, maintaining food subsidies, and boosting electricity provision however, the space for political opposition and freedom of expression is restricted, in Fitch's view.