Moody’s says Egypt’s economic conditions improving despite financing needs

Reforms have sparked improvements in Egypt’s (B3 stable) public finances and economic conditions, but challenges remain, says Moody’s Investors Service in a report published Tuesday.

The rating agency notes that the challenges include the government’s large financing needs, structural economic issues such as high unemployment and inflation, and elevated political risks.

The rating agency projects real GDP growth of 5.0% for the current fiscal year 2016, up from an expected 4.5% in fiscal 2015. Egypt’s economic growth over the next 12-18 months will likely be supported by both public and private investment, says Moody’s. The stronger growth in capital goods imports connected to the expected increase in investment, coupled with weak global demand, will weigh on net exports’ contribution to growth.

“We expect that the economic and fiscal reform momentum in Egypt will help fiscal deficits and government debt levels to gradually reduce, although government financing needs remain relatively large” says Steffen Dyck, a Vice President – Senior Analyst at Moody’s.

Moody’s data shows that while Egypt’s government debt has slightly reduced to 90% of GDP in fiscal 2015, the level remains elevated as a result of persistent fiscal deficits — which averaged 9.5% of GDP between fiscal 2005 and fiscal 2014. The government targets a slight reduction to 8.9% of GDP in 2016 which Moody’s notes will depend on revenue performance.

“We expect the Suez Canal expansion to make credit-positive contributions to Egypt’s fiscal revenues and balance of payments over the medium-term. So far the government’s track record of implementing revenue-enhancing measures, such as the introduction of new taxes, is mixed,” says Mr. Dyck.

For instance, the introduction of a value-added tax as replacement for the current sales tax was pushed back several times, but the government aims to implement it before year-end.

The rating agency notes that Egypt’s political risks add to a still-fragile security situation, and have led to the weakening of institutional strength.

Source : arabfinance