CI affirms Egypt’s sovereign ratings at ‘B-‘

Capital Intelligence (CI), the international credit rating agency, announced Saturday that it has affirmed Egypt’s Long-Term Foreign and Local Currency Sovereign Ratings of ‘B-‘ and its Short-Term Foreign and Local Currency Ratings of ‘B’.

The affirmation of Egypt’s ratings takes into account: (a) the country’s comparatively low external debt and favourable maturity profile; (b) the stabilisation of short-term financing risks, in view of the regaining of access – albeit limited − to international markets and the likelihood of financial assistance from friendly states and international donors; (c) the government’s commitment to gradually introducing reforms to rein in current spending and broaden the tax base; (d) the improving security situation in Egypt’s main cities; and (e) the relative resilience of the banking sector during difficult economic and political conditions.

Egypt’s ratings continue to be constrained by institutional weaknesses, low GDP per capita, high socioeconomic imbalances and ongoing foreign currency shortages.

The Egyptian economy continued its positive growth throughout 2015, buoyed by the completion of several infrastructure projects, especially the expansion of the Suez Canal, as well as the improved security situation in major cities. The economy is expected to have grown by about 4 per cent in real terms, compared to 2.2 per cent in 2014. Medium-term growth prospects have improved, with the economy expected by CI to expand by an average of 4.3 per cent in 2016-18, backed by robust remittance flows from the Egyptian diaspora and GCC funded infrastructure projects. The relatively fragile security situation remains a key downside risk however.

Political risk remains high, but is broadly stable at present. The security situation has generally improved in major cities, but the political landscape remains polarised and sporadic violence in Sinai still hinders the full restoration of civil peace. Geopolitical risk factors remain high, fuelled by the instability in neighbouring Libya and other countries in the region. In the policy arena, the government has embarked on a reform agenda aimed at gradually addressing the fundamental weaknesses in the economy, boosting tourism, and reining in the budget deficit.

The public finances remain weak, with the central government budget posting a deficit of 11.8 per cent of GDP in FYE 2015. The budget deficit is expected to remain high, albeit declining to an average of nine per cent of GDP in FYE 2016-17. Central government debt continues to increase, reflecting the sheer size of the budget deficit, and was in excess of 88 per cent of GDP at the end of FYE 2015. Debt levels are projected to surpass 93 per cent of GDP in FYE 2017, but near-term refinancing risks are partially mitigated by Egypt’s limited access to capital markets and by the current appetite of the banking system to invest in sovereign debt issues.

Despite the decline in oil prices, Egypt’s major imported item, the current account deficit increased to 3.2 per cent of GDP in FYE 2015, compared to less than 1 per cent in FYE 2014. However, external debt remained low, at around 15 per cent of GDP, while foreign exchange reserves remained at around USD16 billion. Pressure on reserves is increasing, however, and currency shortages have contributed to exchange rate depreciation and forced the government to tighten its control on foreign exchange transactions in the banking system.

CI notes that Egypt has benefitted from strong external support from GCC member states during the past four years and expects financial assistance to continue in the coming years in view of Egypt’s strategic importance. However, uncertainty concerning the amount and timing of cash support and concessionary loans has increased in view of mounting fiscal pressure in GCC member states following the steep decline in oil prices.

The Outlook for the ratings is ‘Stable’. This means that Egypt’s ratings are likely to remain unchanged over the next 12-24 months, provided key credit metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise.

The ‘Stable’ Outlook balances CI’s current expectation that reforms and international assistance will contribute to a modest improvement in Egypt’s fiscal and external positions over the next year or so, against still comparatively high underlying economic and political vulnerabilities.