Fitch sees Egypt fiscal deficit narrowing to 6.4% in FY2019/20

Fitch Solutions said it expects Egypt’s fiscal deficit to continue to shrink to 7.8 percent and 6.4 percent in the financial years 2017/2018 and 2018/2019, respectively.

The decline id due to robust economic growth and fiscal reforms that bolster revenues and help to temper expenditure growth, Fitch said in a statement on Tuesday.

Egypt has implemented significant fiscal reforms in recent years including the introduction of valued added taxes (VAT), increases in tobacco taxes and metro fares, and cuts to fuel and electricity subsidies. As a result, Egypt recorded a primary surplus of 0.2 percent of GDP in the financial year 2017/18, running from July 2017 to June 2018, the first time the country has run a primary surplus since the financial year 2003/04.

Hence, Fitch said it also expects the country’s primary surplus to rise to 2.1 percent of GDP in financial year 2018/19 and 2.3 percent of GDP in financial year 2019/20.

“While elevated debt servicing costs mean that Egypt will continue to run overall fiscal deficits in the coming years, we expect these to shrink from 9.4 percent of GDP in FY2017/18 to 7.8 percent of GDP in FY2018/19 and 6.4 percent in FY2019/20.” Fitch statement showed.

In addition, Fitch said it forecasts real GDP growth of 5.0 percent in financial year 2018/19 and 5.1 percent in financial year 2019/20 which will support VAT, income and other tax collections.

Egypt’s gas output is also seen to increase by 20.0 percent in 2019 and 5.6 percent in 2020 – will further grow the government’s tax intake, Fitch added.

Fitch also forecasts Egypt’s total public debt to fall from an estimated 89.4 percent of GDP in financial year 2017/18 to 84.3 percent of GDP in financial year 2018/19 and 78.6 percent of GDP in financial year 2019/20.

“Currency risk is limited as 60.0 percent of the debt is EGP-denominated, though we do see scope for this to rise in the coming years as the government continues to issue substantial amounts of FX-denominated debt.”

Fitch also expects further subsidy cuts to be forthcoming and public sector wage growth to be contained. This will help limit expenditure growth going forward. Egypt’s IMF-stipulated fiscal reform programme implies a fourth round of fuel and energy subsidy cuts in mid-2019, and various officials’ statements suggest that the government remains committed to this timeframe for implementation. The government aims to fully align local fuel prices with global fuel price fluctuations. Meanwhile, it is also signalling that it will look to limit public sector hiring and wage increases in the coming quarters, Fitch stated.

Earlier last November, Egyptian President Abdel Fattah al-Sisi said at a World Youth Forum conference in Sharm el-Sheikh that public sector workers may not receive their traditional annual wage increase at the end of financial year 2018/19.

“We caution, though, that should there be significant popular pushback against such a move, then we could see the implementation delayed or watered down substantially.”