Fitch Ratings, a global leader in credit ratings and research, has reaffirmed Egypt’s long-term foreign and local currency default rating with a “B” grade, which signifies a stable economic outlook.
The agency rating evaluates Egypt’s high fiscal deficit, low foreign reserve coverage, and recent volatile political history, with low external debt being levelled against gradual progress in implementing an economic and fiscal reform programme.
“We estimate a budget sector deficit of 11.6% of GDP in the fiscal year (FY) of 2016/2017, which is roughly the same as FY 2015/2016,” the agency noted.
This is larger than the 9.8% estimate, which is due to the government’s failure to introduce the value-added tax (VAT) as planned—estimated to raise revenue of about 1% of GDP—in addition to the Egyptian pound’s devaluation in March and the surge in interest payments.
Fitch expects the budget sector deficit to remain larger than the draft target; however, a reduction to 11% of the GDP is still projected.
“General government debt increased to an estimated 90.3% of GDP in FY 2016/2017. Yet, the external debt is relatively low. We expect debt/GDP to edge up to 90.5% in FY 2017,” the agency noted.
A deficit reduction and GDP growth is forecasted to put the debt/GDP ratio on a gentle downward trend, according to the agency.
Although the Central Bank of Egypt (CBE) responded to the strain on the balance of payments by devaluing the currency in mid-March by 14% against the US dollar, a further devaluation in the exchange rate is likely.
As a result of concessional support from the Gulf Cooperation Council (GCC), the agency forecasted that external debt will rise to around 18% of GDP by the end of 2016.
The net external debt is forecasted to remain just below 7% of GDP, compared with other countries with a “B” median of 26.3%.
GDP growth for FY 2015/2016 slowed to an estimated 3.2%, owing to declines in tourism and the foreign currency crisis. This is after it strengthened to 4.2% in the previous year.
Fitch assumes that growth will strengthen slightly to 3.6% in FY 2016/2017 since energy shortages are being addressed and public and private investment is rising. This is despite government hopes that it will reach 5.2%.
Egypt’s inflation rate is above its peers, and it is forecasted that it will remain in double-digits in FY 2016/2017 (it was 10.4% in 2015), aggravated by the weaker exchange rate.
The report concludes that although serious security incidents have occurred, and remain a risk factor, they are below those of its peers. The Stable Outlook reflects Fitch’s assessment that upside and downside risks to ratings are currently balanced.
