Egypt’s strong and diversified economy, low levels of foreign-currency denominated debt, and the declining domestic cost of borrowing are all factors bolstering its credit-worthiness, according to a recent report by the US ratings agency Moody’s, which gave a stable outlook for the country’s economy.
“This credit outlook reflects the resilience of Egypt’s credit profile against financing shocks despite high exposure, a positive for its credit profile. This is driven by its effective and credible government policies,” said Elisa Parisi-Capone, a vice-president and senior analyst at Moody’s Investors Service.
Egypt’s total external debt stood at $112 .6 billion in the second quarter of 2019-20, which is 16 per cent higher than a year ago.
While debt in a foreign currency, which represents most of Egypt’s foreign debt, can be a heavy burden, the Central Bank of Egypt’s (CBE) efforts to shore up the country’s foreign-exchange reserves mean that it can cover its external financing needs for the next year, according to a recent report issued by Capital Economics, a London-based economic researcher.
“A marked improvement in debt affordability and a reduction in gross financing needs” would lead to a further upgrade of Egypt’s credit rating, according to Moody’s.
Egypt’s foreign reserves nosedived between February and April this year, losing $10 billion on the back of halted tourism activity and the absence of new foreign direct investment (FDI), to reach $36 billion as the CBE tried to cover portfolio outflows.
However, the figure has now been on the rise for three consecutive months to reach $38.3 billion in July, according to CBE figures released on Monday. “A lengthening track record of credible and effective fiscal, economic and debt management would also reflect positively on Egypt’s credit profile,” Moody’s said.
The government’s monetary policy has also so far helped in protecting the Egyptian pound from depreciation despite foreign investors dumping more than half their holdings of Egyptian treasury bills in March and April amid the emerging markets sell-off.
The pound lost only three per cent of its value in the period between the outbreak of the coronavirus in March until the end of June, and it has rebounded and gained two per cent since then.
The CBE’s decision to hold interest rates level since March, when it unexpectedly reduced the rates by three per cent in one shot to stand at 9.25 per cent for deposits and 10.25 per cent for lending, means that Egypt offers the highest rates, when adjusted for inflation, of more than 50 major economies tracked by the US investment service Bloomberg.
Fitch, the US ratings agency, last week said the pound had been one of the best-performing emerging markets currencies, and it expects it to remain stable through the rest of 2020.
While the Purchasing Managers’ Index, a gauge of operating conditions in the non-oil private-sector economy, showed a slight decline in August, the data signalled growth in activity and demand in Egypt’s non-oil economy for the second month in a row.
“Egyptian non-oil companies saw further increases in both output and new orders during August, building on the initial recovery seen in July. Higher activity was registered as businesses saw a pickup in new orders and contract requests, although the rate of expansion was mild and softer than in the previous month,” a note by IHS Markit, the issuer of the Index, said.
More significantly, the Index has risen nearly 20 points from its nadir in April at the height of the coronavirus pandemic, suggesting that the downturn has slowed markedly.
In another pat on the back for the government, the economy grew by 3.5 per cent in the 2019-2020 financial year, in line with government forecasts in June. “The rate would have fallen short by two per cent if the government hadn’t intervened to support the economy,” said Planning Minister Hala Al-Said last week.
Moody’s report came out a few hours after the International Monetary Fund (IMF) released a report prepared in May to explain the reasons it had decided to extend the $2.8 billion rapid financing facility to Egypt.
“The government of Egypt has responded to the crisis with a comprehensive package aimed at tackling the health emergency and supporting economic activity. The authorities acted swiftly to allocate resources to the health sector, provide targeted support to the most severely impacted sectors, and expanded social safety net programmes to protect the most vulnerable,” the IMF said.
The government earmarked LE100 billion for a stimulus package, comprising more spending on health and social spending to deal with the Covid-19 crisis.
Before the outbreak of the coronavirus, Egypt was on track to restore its fiscal strength, but all sectors of the economy were hard hit by the crisis, and this was reflected in the country’s finances. The primary surplus, for example, is expected to grow by 0.5 per cent in 2020/2021, a third of its rate in 2019/2020.
The economy now has various shortcomings, on the top of which, according to Moody’s, is the large “gross financing needs” defined as the sum of the budget deficit and the funds required to roll over debt that matures in the course of the year.
source: Capital Economics
This adds up to between 30 and 40 per cent of GDP. Another problem is the need to create jobs for hundreds of thousands of new entrants to the job market every year, which Moody’s said represents “a long-term social challenge”.
The unemployment rate jumped to its highest levels in almost two years in the second quarter of 2019-2020, ending in June at 9.6 per cent compared to 7.5 per cent a year earlier. However, Al-Said said during the weekly cabinet meeting last week that the rate had started to edge down by the end of the fourth quarter as the economy reopened.
Moody’s also shed light on some other challenges facing Egypt’s economy, including the exposure to the collapse in tourism earlier in the pandemic, a dip in industrial production from March to May, and long-term water challenges exacerbated by the filling of the Grand Ethiopian Renaissance Dam on the Nile in Ethiopia.
*A version of this article appears in print in the 10 September, 2020 edition of Al-Ahram Weekly