Fitch forecasts Egypt’s real GDP growth of 5.5% in FY2022/23
“We expect growth to recover to 5.5 percent in FY22 and to be maintained at just over 5 percent in the medium term, assuming tourism gradually returns, further growth in the energy and manufacturing sectors and gradual improvements in the business environment.” Fitch report read.
“Similarly, we forecast improvements in the budget deficit, government debt and the current account balance in 2021-2022.”
The rating agency has also affirmed Egypt’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a stable outlook.
Meanwhile, Fitch said it forecast Egypt’s real GDP growth to be 2.5 percent in the financial year ending June 2021, well below average growth of 5.5 percent in FY18 and FY19.
“Egypt’s ratings and Outlook are supported by a recent track record of fiscal and economic reforms, policy commitment to furthering the reform programme and ready availability of fiscal and external financing in the face of the COVID-19 pandemic.
“The ratings are constrained by still large fiscal deficits, high general government debt/GDP and weak governance scores (as measured by the World Bank governance indicators), which underline political risks.”
Egypt’s Degree of Flexibility to withstand Pandemic Shock
Fitch referred that the pandemic shock is negatively affecting Egypt’s external finances, GDP growth and fiscal performance. However, the rating agency said the government’s economic reforms in recent years had provided Egypt with a degree of flexibility to weather this shock at its current rating.
“We currently view the shock as a material but possibly temporary disruption to what were previously strong positive trends. The reforms in recent years have provided Egypt with a degree of flexibility to weather this shock at its current rating. Nonetheless, the pandemic still presents risks to Egypt’s credit metrics depending on the duration of the global health crisis.”
According to the rating agency’s report, the pandemic has hit Egypt’s external finances, resulting in $18 billion (5 percent of GDP) of outflows from the local currency debt market, loss of tourism revenues (which were $13 billion in 2019) and likely some decline in remittance inflows (which were close to $27 billion in 2019).
“The worst of the portfolio outflows appears to be over, with some renewed inflows reported in July.”
Fitch also said the Central Bank of Egypt’s (CBE) foreign reserves and the net foreign assets of the banking sector declined by a combined $18 billion (5 percent of GDP) between February and June, despite net inflows of $8.6 billion (2.5 percent of GDP) from Eurobond issuance and International Monetary Fund (IMF) funds.
The North African country received $2.8 billion under the IMF’s Rapid Financing Instrument and a $2.0 billion disbursement under the USD5.2 billion 12-month Standby Arrangement agreed with the IMF in June.
“The decline in reserves partly reflects some exceptional FX intervention by the CBE to moderate the impact of the portfolio outflows on the exchange rate.”
Fitch also forecasts Egypt’s current account deficit (CAD) to widen to 5.0 percent of GDP in 2020 from 3.1 percent in 2019, with a decline in imports partially offsetting slashed tourism revenue and an assumed 20.0 percent decline in remittances. Net FDI will also decline, the rating agency added.
“In 2021-2022 we assume smaller CADs averaging 3.6 percent as receipts recover from the coronavirus-induced trough.”
“We forecast the CBE’s official gross foreign reserves to fall to $37 billion at end-2020, slightly down from their current levels ($38 billion end-June), and from $44 billion at end-2019.
“In 2021-22 we forecast reserves to edge up in dollar terms, but to decline to around five months of current external payments, from close to six months in 2019.”
Exchange rate policy and the duration of the crisis are two risk factors to these external forecasts, especially in combination, for example, if current account receipts remain depressed for longer than anticipated and exchange rate flexibility remains limited, Fitch noted.
“Currency volatility has been minimal so far in 2020, likely because of support from CBE and public sector banks making FX available at the prevailing exchange rate. Real effective appreciation in recent years has eroded much of the competitiveness gain from the 2016 devaluation.
“Over the medium term, continued exchange rate rigidity could lead to further pressure on Egypt’s CAD and undermine the sustainability of its external finances, in our view.”
Interest Rate Policies
Overall, Fitch viewed that policymaking in Egypt has remained conservative, with only modest fiscal and monetary loosening since March. The CBE cut its policy rate by 300bp to 9.25 percent early in the crisis in March, but real interest rates remain firmly positive given the trend of disinflation.
“We forecast average inflation of 6.0 percent in 2020 and 7.5 percent in 2021. In response to the pandemic, CBE rolled out a number of measures including for banks to extend customer loan maturities until mid-September and to waive a range of fees. Some deterioration in banks’ asset quality is likely. Capital adequacy metrics appear to provide some buffer, although leverage ratios are materially lower.”
“Fiscal stimulus has been limited so far and we expect Egypt to remain committed to its reform programme.
Since March, Egyptian government has announced fiscal stimulus totalling 180 billion Egyptian pounds (2.8 percent of GDP). At the same time, the government has increased a range of fees and is aiming to make some savings within the budget. The FY21 budget was targeting a 2.0 percent of GDP budget sector primary surplus, and now the government is aiming for a surplus of 0.5 percent of GDP.
“Our forecast is more cautious (including weaker nominal GDP), for a small budget sector primary deficit of 0.4 percent of GDP and for the budget deficit to widen to 9.5 percent of GDP from 8.8 percent in FY20.
“We expect a primary surplus to re-emerge in FY22 and for the overall deficit to narrow to around 8 percent. The temporary widening of the deficit will interrupt the strong downward trend in general government (GG) debt/GDP, which we project to increase to 86 percent in FY20 and 88 percent in FY21 before resuming a downward path. GG debt/GDP fell from 103 percent in FY17 to 84 percent in FY19.”
Fitch said public finances remain a core weakness of the rating. “Government debt/GDP levels are significantly higher than the current ‘B’ median of 65 percent, as are debt/revenue and interest/revenue metrics. However, more than 50 percent of GG external debt is owed to multilateral institutions, with which Egypt has good relations, and the domestic banking sector provides considerable domestic financing flexibility.”
Moreover, Fitch recommended a number of key factors that could, individually or collectively, lead to positive rating action/upgrade. These factors are;
– Structural factors: Fitch recommends significant improvement across structural factors over the medium term, such as governance standards, the business environment and income per capita, to levels closer to ‘B’ and ‘BB’ rated sovereigns.
– Factors related to public Finances: Fitch said sustained progress on fiscal consolidation leading to a further substantial reduction in the gross general government debt/GDP ratio to a level closer to the ‘B’ median over the medium term.
The rating agency also mentioned some main factors that could, individually or collectively, lead to negative rating action/downgrade:
– External Finances: Fitch referred to renewed signs of external vulnerability, including persistent downward pressure on international reserves and the emergence of financing strains.
– Macro: Fitch explained that the prolonged hit to economic growth from the COVID-19 shock and/or backsliding on the country’s economic reform programme, which could result in greater risks to macroeconomic stability and cause the removal of the +1 QO notch on Macro.
– Public Finances: Fitch called for resuming “a path of narrowing the fiscal deficit and reducing government debt/GDP following the negative impact of the coronavirus pandemic.”