CAIRO: Egypt’s credit ratings, which have been downgraded to negative outlooks twice over the past month, are expected to impact the country’s banking sector as well as the economic recovery in the political transition.
“Ratings keep going down because the budget deficit increases along with the government debt and at the same time the economy is not growing,” said Monette Doss, senior analyst at Prime Group. “The revenue from taxes is also not coming because there is low production.”
According to Doss, the government has to spend despite plummeting revenues. It continues to finance subsidies to keep up with the soaring poverty rate.
Doss pointed out that as a result, the government will continue to borrow locally at higher interest rates.
“Forty percent of deposits in local banks are going to government treasuries, which is a huge risk,” said Doss. “The government’s situation is going to affect the banks, if the government realizes one day that they cannot pay this money back, the banks will default.”
According to this risky outlook, people as well as investors, will be reluctant to put their money in Egyptian banks.
With increased risks and higher interests rates, the cost of borrowing will increase for everyone, from small and medium enterprises to large businesses.
“It is normal for banks to say they are doing fine, but we have to look at the facts. When you have more than 40 percent of deposits going out to government treasuries with no liquidity, increase in government expenses, these are all negative indicators,” she stressed.
According to Doss, the current external and internal debt stands at about 90 percent of the country’s total GDP.
The interest on one-year treasury bills is currently at 14 percent. Government bonds, on the other hand, five-year and seven-year bonds, have interest rates of 14.25 and 14.5 percent respectively.
Since bonds are long-term, they are not facing the same risks as treasury bills.
Most recently, global ratings agency, Moody’s Standard & Poor (S&P) gave Egypt a BB- rating citing “weak” prospects for improvement as well as rising risks to the country’s overall economic stability during the political transition.
The country’s long-term foreign currency sovereignty credit rating was also lowered.
In Early October, Fitch Ratings downgraded Egypt’s long-term default and currency outlook to “negative” stating that the nation “cannot begin its long-term recovery until there is more certainty about its political future,” which has lagged over the past nine months.
Doss predicted that if the situation does not improve, another hit to the Egyptian economic can be expected in the next year.
“There is a political uncertainty in Egypt and this is a result of mismanagement by the current government, the way they handle protests and the way they approach the unrest causes more anger,” she added.
“Politically, they can easily win over investors, increase production, but they have to successfully alleviate the people’s anger.”
Similarly, Karim Helal, board member of Cairo-based holding company, CI Capital asserted that as the political transition prolongs, the country’s recovery would stall, causing greater problems in the long run.
“These downgrades are a delayed reflection of prevailing economic conditions, it is not really a surprise,” said Helal. “In theory, a corporate credit rating will always hit the ceiling of the country; you will not see an Egyptian issuer having a rating higher than the corporate credit ratings.”
While Helal said that the outlook is negative until the country sees political certainty, he believes that the possibility of defaulting banks is a myth.
“I think banks defaulting might be a far-stretched scenario. The government is currently negotiating loans from the Gulf as well as a $3.2-billion package from the IMF,” he added. “That is what they need, which is a cheaper when it comes to interest and they can afford longer term loans with better conditions.”
According to Helal, the cost of borrowing will increase to reflect the downgrade in the credit rating.
Despite this, however, he pointed out that the IMF and other global finance institutions will continue to give loans to Egypt, although the terms and conditions may be affected by downgrades.
As Egypt reserves have been deteriorating over the past months, according to the Central Bank of Egypt, Helal stressed that economic change must come and it needs to come fast.
Most recently, the international reserves cited by the Central Bank for September dropped to $24.01 billion.
“Foreign currency reserves are still dwindling, tourism has been falling, and productivity as well,” said Helal.
“If things continue the way they are, we are going to be in a spot of trouble for sure, default is quite unlikely, but the fact remains that we needed to get our act together yesterday.”
