Moody’s Investors Service has affirmed on Friday Egypt’s long-term issuer and senior unsecured bond ratings at B3 and it said the outlook remains stable for the country.
The rating affirmation is based on Moody’s view that the B3 rating appropriately captures Egypt’s credit risk profile, which faces a number of deep structural challenges reflected in very weak government finances, a fragile external payments position, and continued security risks. The factors combine to weigh on the investment climate and on the economic performance of the country, it said.
The stable rating outlook reflects Moody’s view that despite the somewhat slower-than-expected
implementation of fiscal and economic reforms over the past 12-18 months, upward and downward pressures on the rating are balanced. Importantly, the rating agency views the staff-level agreement with the IMF which was announced on August 11 as credit-supportive, because it will alleviate some of Egypt’s external liquidity pressures and also promote the reform agenda.
Moody’s has also affirmed the provisional (P) B3 MTN programme rating. Egypt’s country ceilings stay unchanged at B2/Not Prime (NP) for the foreign-currency bond ceiling, Caa1/NP for the foreigncurrency deposit ceiling, and Ba2/NP for the local-currency country risk ceilings.
The decision to affirm Egypt’s B3 rating reflects Moody’s view that it appropriately captures the country’s ongoing credit challenges in a number of key areas, mainly the very weak level of government finances, a vulnerable external liquidity position and the presence of elevated security risks, all of which are contributing to a poor business climate and constrain Egypt’s growth potential.
Public finances are characterised by sizeable fiscal deficits of more than 12 per cent of GDP, high general government debt levels close to 100 per cent of GDP, and weak debt affordability ratios which will all continue to exceed the median for B3-rated peers.
While reform momentum has slowed somewhat since April last year, the government has recently introduced another round of electricity price hikes, which together with the civil service law will help to keep current spending in check. The expected introduction of value-added tax and measures to improve tax compliance will help increase government revenues and support a gradual reduction in the government’s large fiscal deficit to 10 per cenet of GDP by fiscal year 2019, according to Moody’s estimates.
Moody’s notes that Egypt’s low levels of foreign-currency denominated and externally-held government debt mitigate fiscal risks. The Egyptian banking system’s demonstrated ability to provide funding even in times of stress alleviates the immediate risks of a fiscal crisis.
Egypt’s external liquidity position remains vulnerable in Moody’s view. The rating agency forecasts that the current account deficit will widen to more than 5 per cent of GDP in fiscal year 2016, driven by a persistently high trade deficit, the negative impact on tourism from recent security incidents, and weaker Suez Canal revenues.
Also, due to the economic slowdown in Gulf Cooperation Council (GCC) economies and the divergence between official and parallel exchange rates, private remittances have come under pressure lately. In addition, external support from GCC government in the form of public transfers has slowed.
Despite a recovery in financial account inflows since early 2015, FDI inflows are below the levels seen in the second half of the 2000s. Uncertainty over the Central Bank of Egypt’s exchange rate policy and restrictions on access to hard currency have had a dampening effect on both direct investment and portfolio inflows from abroad. Although foreign exchange reserves have stabilised somewhat they have done so at a low level, covering less than three months of imports of goods and services, and external debt repayments in July have sent net international reserves to only $15.5 billion.
Moody’s notes that government effectiveness has improved, risks to policy making have diminished, and the overall political situation appears to be broadly stable.