Fitch affirms Egypt at ‘B’, with ‘Stable’ outlook
Fitch Ratings affirmed Friday Egypt’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ with a Stable Outlook.
The issue ratings on Egypt’s senior unsecured foreign and local currency bonds have also been affirmed at ‘B’. The Country Ceiling has been affirmed at ‘B’ and the Short-term foreign currency IDR at ‘B’. 
KEY RATING DRIVERS
Egypt’s ratings balance a high fiscal deficit and debt/GDP ratio, low foreign reserves coverage of imports and recent volatile political history, with low external debt and progress in implementing a wide-ranging economic reform programme.
Front-loaded fiscal consolidation cut the deficit excluding grants to a preliminary 12.5% of GDP in FY15 (to end June) from 17.6% of GDP in FY14. Further deficit reduction is anticipated in FY16, with various new measures implemented and restraint in public sector pay awards. However, the introduction of VAT, the largest single revenue-raising measure, has been delayed. Fitch expects fiscal consolidation throughout the forecast period, but with savings partially offset by higher social spending and spending commitments in the new constitution the deficit is forecast to remain high.
Moderate deficit reduction and stronger nominal GDP growth are forecast to put the debt/GDP ratio on a downward trend, ending a multi-year deterioration. Nonetheless, debt/GDP is around double the peer median, at an estimated 93.7% at end FY15 and is only expected to fall by around five percentage points by end-FY17.
Domestic banks, including the Central Bank, account for the bulk of deficit financing. Reserves have declined to less than three months of current external payments and foreign exchange rationing continues. Prospects for the balance of payments have been set back by a shock to the tourism industry and, although declining, unmet demand for foreign exchange remains significant.
FDI has increased and is expected to rise and some multilateral support is arriving. Fitch believes an IMF programme is within reach if required by the authorities. There is a lack of clarity on exchange rate policy, but Fitch assumes that further devaluation of the pound is inevitable, regardless of any additional bilateral support. Gross external debt has been rising, but it remains below peers at an estimated 17.5% of GDP at end-2015.
Net external debt is just 3.4% of GDP. The bulk of external debt is on a concessional basis and service indicators are stronger than peers.
Egypt also has market access, issuing its first Eurobond since 2010 in June 2015, raising US$1.5 billion. The rating is supported by the absence of a recent history of debt restructuring.
Economic momentum has slowed recently, due to shortages of foreign exchange and the impact of fiscal consolidation. However, energy shortages are being addressed and public and private investment is rising. Fitch assumes that growth will be weaker in FY16 and will average around 4% over 2016 and 2017.
Inflation is above peers and is forecast to remain near 10%, with structural rigidities aggravated by exchange rate deprecation. A new parliament starts its term in late December, following elections that formally completed the political transition. Supporters of the president appear to dominate the parliament, which is constitutionally mandated with significant powers. Voter turnout was around 30%, reflecting a mixture of voter fatigue and disaffection in some quarters. Nonetheless, the regime of President Sisi retains broad consent and in Fitch’s view, political stability has improved under his rule. However, serious insecurity incidents have occurred in the Sinai and remain a risk factor. World Bank governance indicators have deteriorated in recent years and are below peers.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. The main factors that could lead to a positive rating action, individually or collectively, are:
– A track record of progress on fiscal consolidation leading to a decline in debt/GDP.
– Improved economic growth supported by reforms to the business environment that lead to increased investment and employment.
The main factors that, individually or collectively, could lead to negative rating action are:
– Failure to anchor the fiscal deficit on a downward trend or an unwinding of recent fiscal consolidation measures.
– Prolonged strains on the balance of payments and an inadequate policy response.
– Serious and sustained insecurity incidents that undermine economic activity.
KEY ASSUMPTIONS
Fitch assumes local banks remain willing and able to finance the deficit. The political environment is assumed to be more stable than in 2011-13, although sporadic and at times serious attacks on security forces are assumed to continue and underlying political tensions will remain. Fitch forecasts that Brent crude will average US$55/b in 2015 and 2016, before rising to US$65/b in 2017.
