S&P affirms Egypt’s B rating with stable outlook

Ratings agency Standard & Poor’s (S&P) on Sunday maintained its ‘B’ rating on Egypt’s short and long-term sovereign debt with a stable outlook, despite elevated external risks to the economy due to the coronavirus pandemic.

Egypt’s economy, like other countries in the world, has suffered due to the pandemic. However, S&P said in its report that the impact has been “less severe” than that faced by many emerging market sovereigns due to the limited lockdown measures taken and a ramping up of healthcare capacity.

“The stable outlook reflects our expectation that the weakening of external and government debt metrics will be temporary, and gradually improve from 2022, supported by higher gross domestic product and current account receipts (CARs),” S&P Global report read.

“Egypt’s foreign exchange reserves and access to domestic and external debt markets will allow it to cover higher external and fiscal financing needs and upcoming maturities over the next 12 months,”
“Although we project that external debt will rise sharply as a proportion of CARs in the fiscal year ending June 30, 2021, this ratio should gradually decline thereafter.”

S&P also predicts strong medium-term growth prospects for Egypt, barring the near-term impact of the pandemic, “underpinned by the ongoing implementation of fiscal and economic reforms.”

“In our view, the Egyptian authorities’ plan to generate a central government primary surplus of at least 2 percent of GDP from fiscal 2022 is ambitious.”

“Nonetheless, we expect primary surpluses of about 1 percent of GDP over fiscals 2022-2023, combined with recovering growth and lower domestic interest rates, should put debt-to-GDP back on a downward path.”

The rating agency also forecasts that Egypt’s debt will surge to 88.1 percent of GDP this year and top 90 percent next year, before dropping back down towards 85 percent by 2023.

Egyptian government earlier this year obtained two facilities from the International Monetary Fund (IMF) to help address the economic repercussions of the pandemic and meet higher financing requirements.

These facilities include a Rapid Financing Instrument (RFI) of $2.8 billion and Stand-By Agreement (SBA) of $5.2 billion.

IMF’s SBA programme targets higher social and health spending, while pushing for lower accumulation of debt and implementation of structural reforms on governance and transparency.

According to the IMF, Egypt is the only country in the Middle East and North Africa region that is expected to maintain economic growth throughout 2020.

The Washington-based lender expects the country’s economy to grow at 3.5 percent this year and 2.8 percent next year. Overall, it is forecasting a 4.4 percent contraction for the region’s GDP this year, rebounding by 2.9 percent by next year.

Moreover, S&P forecasts a recovery in public and private investment will support growth in Egypt throughout the second half of fiscal 2021.

Egyptian government’s ongoing efforts to improve the business climate, such as the settlement of arrears to exporters, new industrial land allocation mechanisms, and the privatisation of state-owned enterprises will support growth in the medium term, S&P said.

Egypt’s central bank also introduced other measures to support the economy, including lowering interest rates to 8 percent from 10 percent on loans to small and mid-size enterprises (SMEs), industrial and tourism sectors and social housing schemes, as well as providing credit guarantees of 100 billion Egyptian pounds ($6.38 billion), which is equivalent to 1.7 percent of GDP. It also offered deferred payment schemes.

“We could consider a positive rating action over the medium term if Egypt’s economic expansion significantly outperforms our forecasts, or if Egypt’s reform programme materially narrows government and external financing needs, thereby reducing debt and reflecting a track record of stronger governance,” S&P report said.