International credit rating agency Fitch has affirmed Egypt's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at a 'B' with a Stable Outlook.
The issue ratings on Egypt's senior unsecured foreign and local currency bonds have also been affirmed at 'B'. The Country Ceiling has been affirmed at 'B' and the Short-Term Foreign-Currency IDR at 'B', the agency said in a statement released on Monday.
Fitch cited Egypt's high fiscal deficit and general government debt/GDP ratio, low foreign-reserve coverage of imports and recent volatile political history, against its low external debt and gradual economic and fiscal reform, as the main drivers behind the decision to neither upgrade nor downgrade the country.
The agency estimated a budget deficit of 11.6 percent of GDP for the fiscal year ending in June, on par with the previous year, due to the government’s failure to introduce the Value-Added Tax as planned, which is estimated to raise revenue by about 1 percent of GDP, a sharp devaluation of the Egyptian pound in March and “surging interest payments.”
Fitch expects the budget deficit to narrow to 11 percent of GDP in the coming fiscal year, due to the late introduction of the VAT and further fuel and electricity subsidy cuts, rather than the 9.8 percent in the draft budget presented by the government for parliamentary approval.
“General government debt increased to an estimated 90.3 percent of GDP in FY16, well above the peer median,” the agency said.
Fitch expects general government debt to grow to 90.5 percent of GDP in FY17, on the assumption that the pound will continue to weaken given the “modest deficit reduction,” after which it will gently ease as the deficit sees more significant reduction and the economy sees “robust” nominal GDP growth.
Gross external debt “remains below peers,” despite rising due to concessional support to Egypt from the Gulf countries.
“We forecast it will rise to around 18 percent of GDP by end-2016,” said Fitch.
Net external debt will remain just below 7 percent of GDP in this period, compared with a 'B' median of 26.3 percent, the agency said.
The bulk of external debt is on a concessional basis, and while Egypt's external liquidity ratio has been worsening it remains stronger than its peers.
Fitch predicts that GDP growth, which slowed in FY16 to an estimated 3.2 percent due to declining tourism revenues and a foreign currency shortage, will pick up to register 3.6 percent in FY17 and speed up further in the next year.
“Inflation is above peers, and we forecast that it will remain in double-digits in 2016-2017, with structural rigidities aggravated by the weaker exchange rate,” said Fitch.
Egypt's urban consumer inflation jumped in April to 10.3 percent, the first increase since last November, following a 14 percent devaluation of the local currency in March.
Factors that could lead to a negative rating action include failure to firmly put the fiscal deficit on a downward trend “towards levels closer to the peer median,” strains on the balance of payments, which affect international reserves, and serious security incidents, the agency added.
On the other hand, progress in fiscal consolidation leading to a reduction of the debt to GDP ratio and sustained economic growth sustained by reforms to facilitate investment and employment could lead to a positive rating action, said Fitch.
Earlier this month, rating agency Standard and Poor’s revised its Egypt outlook to negative, citing a view that the country’s current account deficit will widen and that fiscal consolidation was proceeding too slowly.
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