Fitch rates Egypt outlook ‘stable’, but deems quick recovery ‘unlikely’

 Total spending rose to 33.5% of GDP in FY 2013 (up from 30.3% of GDP in FY 2010), as wages and subsidies spending surged (75% of the total), an issue the report said would be difficult to tackle given its political sensitivity.

The current macroeconomic climate in Egypt points to a likely recovery over the next two years, according to a 12 February report by international credit rating agency Fitch, but the pace of growth will remain sluggish. The agency has maintained its B- rating for the country, as well as its recently earned Stable outlook.

Supporting its stance, Fitch cited “tentative improvements in political and economic stability” amid large inflows of funds from the Gulf following the ouster of former president Mohamed Morsi in July 2013; ongoing crackdowns on opposition activity by security forces; and the recent passing of the 2014 Constitution, ticking off another box on the interim government’s democratic roadmap.

As a primary weakness, the report pointed to the deteriorating state of Egypt’s public finances, with special emphasis placed on the budget deficit, which reached 14.1% of GDP during the 2013 fiscal year, “the largest of any Fitch rated sovereign”. Such budget woes, the agency said, stem largely from a combination of lower revenues – largely on poor tax collection, which it said the interim government planned to address through implementation of a VAT and other property tax reform – and higher expenditures.

Total spending rose to 33.5% of GDP in FY 2013 (up from 30.3% of GDP in FY 2010), as wages and subsidies spending surged (75% of the total), an issue the report said would be difficult to tackle given its political sensitivity.

Added to this expenditure are the two parts of the interim government’s recent economic stimulus package, with tranches in September and February tallying EGP 29.6bn and EGP 33.9bn, respectively.

The report stressed the increasing difficulty of financing the rising deficit, with the government bearing a debt of 89.2% of GDP at the end of FY 2013 and losing its status as a net creditor in the same year. Meanwhile, net foreign reserves have fallen from almost $36bn on the eve of the revolution to $17.105bn at the end of January, enough to cover only three months’ worth of imports. While the aforementioned inflow of Gulf funds may help ease this pressure, the report cautioned that “the underlying reserve burn continues despite foreign exchange rationing”.

Another macroeconomic concern the report cited was “above peer” levels of inflation, which it said stemmed partly from supply chain bottlenecks.

Despite the challenges, Fitch expects growth to pick up over the next few years given “reduced political instability, greater access to foreign exchange, and fiscal and monetary stimulus”. However, although the agency foresees two years of recovery, such growth should be slow and unlikely to return to 2010 levels even by the end of 2015.

On 2 January 2014, Fitch raised the outlook on Egypt’s Long Term Foreign Currency rating of B- from Negative to Stable, the first time out of Negative since the 25 January Revolution in 2011. In the years since, Egypt’s ratings have been downgraded five notches amid periodic spikes of political and economic instability.

Moody’s maintains negative outlook for Egypt

Egypt’s Caa1 sovereign rating kept with negative outlook

 Ongoing economic and political uncertainty since the 25 January Revolution has led Moody’s to maintain its negative outlook and Caa1 sovereign rating on Egypt, the credit-rating agency reported on 3 October.

Moody’s added that any upward movement in the rating is “unlikely over the near term.”

According to the report, political tensions have undermined the implementation of fiscal and economic reforms which could be credit positive.

“Economic growth, political stability and societal consensus are not stable yet, and these are among the components [needed] to increase the rating of Egypt,” said professor of finance Alaa Mostafa, adding that the report is normal and expected.

Mostafa expects that after the first elections in the interim period, Egypt’s credit rating will increase and will have a positive outlook.

“Political uncertainty and turmoil in Egypt since the eruption of the revolution in January 2011 remain a constraint on the country’s credit profile,” the report read, noting that foreign direct investment has collapsed, decreasing real GDP growth.

“Fiscal deficits have widened sharply as heightened social tensions led to higher wage and subsidy expenditures, while weak economic conditions have also depressed [Egypt’s] revenue performance,” the report said, adding that frequent political reshuffles have impaired the government’s ability to gain the support of the IMF for policy reform and balance of payments assistance.

The interim cabinet announced an economic stimulus plan in August, which will aim to create a 3% growth rate over the current fiscal year, “maintain social justice and create new job opportunities.”

On 19 August, Moody’s stated that market-based risk has deteriorated amid the violent dispersal of pro-Morsi sit-ins in Rabaa Al-Adaweya and Nahda squares, adding that investors are “understandably concerned” about the impact of the civil unrest on the already fragile economy.

Earlier in July, Moody’s affirmed Egypt’s Caa1 rating, the sixth downgrade since January 2011. “The maintenance of the negative outlook on Egypt’s Caa1 rating is driven by Moody’s view of the country’s considerable economic and political challenges,” the ratings agency said.

Moody’s previously stated that it considers Gulf aid a credit positive since it “will have the immediate effect of offsetting pressures on Egypt’s balance of payments by substantially bolstering official foreign exchange reserves.”

Following the ouster of former President Mohamed Morsi on 3 July, Gulf countries pledged financial aid packages to help boost the economy, including $5bn from Saudi Arabia, $3bn from the UAE and $4bn from Kuwait, in form of cash grants, deposits and petroleum products.

This March, Moody’s cut Egypt’s credit rating by one notch from B3 to Caa1, which it said meant it sees nearly a 10% chance of Egypt defaulting on its debt over the next year and slightly less than a 40% chance of a default within five years.

In a press conference in August, Minister of Planning Ashraf El-Araby said he considered Egypt’s credit rating downgrading eight times in two years as a “first of its kind in the history.”