Fitch: Egypt’s Ratings Stabilised But Rapid Recovery Unlikely

Fitch Ratings says in a new report on Wednesday that Egypt’s ratings have stabilised on tentative political and economic improvements, but rapid upgrades are unlikely.

In early January 2014 Fitch took Egypt’s Long-Term Foreign-Currency rating off Negative Outlook for the first time since January 2011. Over this period Egypt’s ratings were downgraded by a cumulative five notches. We expect economic performance to improve over our two-year forecast period but by end-2015 the economy will still be much weaker than in 2010, illustrating the damage to Egypt’s credit profile caused by political and economic turmoil.

Tentative improvements in political and economic stability were the reasons for the stabilisation of the Outlook. This reflects large inflows of bilateral funds following the removal of President Morsi that have eased the pressure on reserves, the exchange rate and the budget, and a crackdown on opposition activity by the military and security services. Approval of a new constitution in January 2014 puts the country on the path to new elections later in the year.

Egypt’s Long-term ratings of ‘B-‘ are low and reflect substantial risks and challenges. Although political turbulence has been contained, serious tensions remain and Fitch believes that the clampdown on the Muslim Brotherhood brings a greater risk of radicalisation than before 2011. Donor inflows will not be sufficient to end foreign-exchange rationing and making major inroads into the large fiscal deficit will be tough.

Public finances have long been the main weakness for Egypt’s ratings. The fiscal deficit and debt were much worse than for peers before 2011 and have since deteriorated significantly. Some fiscal consolidation and a pick-up in revenues are expected, although a larger improvement would be contingent on tackling politically sensitive subsidies. With a Fitch-forecast budget deficit close to double digits as a percentage of GDP in FY15 (year ending June 2015) and a debt/GDP ratio of over 90%, the distance from peers will be large.

External finances have moved from being a rating strength to a neutral factor since 2010.Egypt has lost, and is not expected to regain, its net creditor position by 2015, though net and gross external debt will be low compared with peers. Greater availability of foreign exchange is likely stimulate an increase in outflows, reflecting current unmet demand, meaning that import coverage will stay in line with the ‘B’ median through to 2015.

Macroeconomic factors are a weakness for Egypt’s rating. Performance is much weaker than before 2011. Growth is significantly lower, unemployment is higher and inflation is still around double digits. Although Fitch expects a modest strengthening of growth, it will be insufficient to prevent a further rise in unemployment. By 2015 growth and inflation are still expected to be weaker than peers.

Egypt’s ranking for structural factors has improved to “neutral” from “weakness” since 2010, though this reflects the change in the peer group as the country has moved down the rating scale. An earlier clean-up of the banking sector means it has been relatively unscathed in recent years. World Bank governance and Doing Business indicators and GDP per capita have worsened, though are not far below the ‘B’ median. The World Bank political stability index is well below this median. These are unlikely to improve much by 2015.

A comparison of our 2015 forecasts for Egypt with those for peer medians shows the damage to the credit profile and highlights the difficulty in generating outcomes that could return the rating to its end-2010 level.