Moody’s expect progress on reforms observed over the past three years and improvements in the private sector’s access to credit underpin our expectations of a return to 5.5% of the GDP growth in
2019 and further acceleration to 6% by 2021, the credit rating agency announced on Wednesday.
In a research note issued by the credit rating agency, they expected in the longer-term, Egypt’s potential growth will hinge on reforms which foster absorption of large numbers of new labour market entrants over the next decade in light of the public sector’s balance sheet constraints. Long-standing vested interests in the public sector are likely to slow these efforts.
Furthermore, the note indicates that higher labour participation rates which support social stability in the future will hinge on further liberalisation in markets that have traditionally been protected by long-standing vested interests in the public sector. The structural reforms implemented under the extended fund facility (EFF) are geared toward strengthening competition, improving governance, limiting the scope for corruption, while reducing the role of the state.
These are fundamental changes in the economic fabric the results of which will only become apparent over time.
“In the short term, we estimate that the likelihood of renewed social instability and/or reform reversal is low given improved economic prospects and in light of the high costs of social upheaval already incurred after 2011. However, Egypt’s low ranking for “voice and accountability” and “control of corruption”, which can be seen as proxies for, or related to wider trust in institutions and the ease at which firms can enter and exit the market, inform our assessment that a threat to social instability remains a constraint on potential growth in the medium- to long-term,” the note added.
The report cites that, the macroeconomic and fiscal reforms the government of Egypt (B2 stable) has
implemented in the run-up to and under the umbrella of its three-year EFF with the International Monetary Fund (IMF) since November 2016 have helped move the economy toward a higher trend growth path and strengthened its shock-absorption capacity.
Furthermore, Moody’s expect the government will sustain fiscal discipline after the IMF programme ends this year the completion of reforms to energy subsidies, together with earlier reductions in the wage bill to an expected 5% of the GDP from 8.5% in 2013 support our expectations of a return to a general government primary surplus in fiscal year 2019.
The credit rating agency believes that the extension of the consumer price indexation formula to most fuel types—supported by the adopted oil price hedging mechanism as backstop against oil price spikes—will shield the fiscal trajectory from oil price shocks and allow the fiscal deficit to decline in line with a gradually diminishing interest bill.
Regarding Egypt’s credit profile resilience to liquidity risks and capital market outflows, the report indicates that Egypt’s high interest bill is at about 9% of the GDP and the short average maturity of its domestic debt stock (two to three years) results in annual gross financing needs worth 30%-40% of the GDP over the next few years.
“Although sharp capital outflows in the second half of 2018 and the consequent widening in spreads highlight the sensitivity of Egypt’s debt costs to shifts in foreign investor demand, this period also underscores the shock-absorption capacity of the domestic financial sector and its role as a primary funding source for the government during times of stress. We believe the period of very tight domestic financing conditions and low foreign exchange reserve buffers in the run-up to the flotation in late 2016 represented the domestic financial system’s close to maximum government funding capacity in case foreign investors would completely withdraw from the domestic treasury bills (T-bills) market. Since then, gross financing requirements have declined from over 50% of the GDP in June 2016, and foreign exchange reserves have increased to six months of import cover from 2.5 months,” Moody’s concludes.
