Fitch Ratings has affirmed Egypt's long-term foreign-currency issuer default Rating (IDR) at 'B+' with a Stable Outlook, 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 amid the COVID-19 crisis.
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, Fitch said on Monday.
The COVID-19 shock is negatively affecting Egypt's external finances, GDP growth and fiscal performance, but, Egypt’s economic reforms have provided the country with a degree of flexibility to weather this shock at its current rating, according to Fitch.
Nonetheless, COVID-19 still places risks to Egypt's credit metrics depending on the duration of the global health crisis.
Fitch projected Egypt’s real GDP growth to record 2.5 percent in the current FY2020/2021, well below the average growth of 5.5 percent achieved in FY2018/2019 and FY2019/2020.
It also expects growth to recover to 5.5 percent in FY2021/2022 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 expects Egypt’s budget deficit, government debt and the current account balance to see improvements in 2021-2022 after the their deterioration in 2020.
The pandemic has hit Egypt's external finances, resulting in $18 billion (5 percent of GDP) of outflows from the local currency debt market, the 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, according to Fitch.
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 2020, despite net inflows of $8.6 billion (2.5 percent of GDP) from Eurobond issuance and IMF funds, Fitch said.
Fitch projects Egypt’s current account deficit (CAD) to widen to 5 percent of GDP in 2020, up from 3.1 percent in 2019, with a decline in imports partially offsetting slashed tourism revenue and an assumed 20 percent decline in remittances.
It also expected Egypt’s net foreign direct investment (FDI) will also decline.
Moreover, the CBE's official gross foreign reserves are expected to fall to $37 billion at end of 2020, slightly down from their current levels of $38 billion recorded by end of June, and from $44 billion at the end of 2019, while it will edge up in 2021-2022 in dollar terms, but to decline to around five months of current external payments, from close to six months in 2019.
Fitch said that the fiscal stimulus Egypt has extended to contain the COVID-19 implications has been limited so far, expecting Egypt to remain committed to its reform programme.
“Since March, the government has announced fiscal stimulus totalling EGP180 billion (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 FY202/2021 budget was targeting a 2 percent of GDP budget sector primary surplus, while the government is now aiming for a surplus of 0.5 percent of GDP”, said Fitch.
Yet, Fitch projects the small budget sector primary deficit of 0.4 percent of GDP and for the budget deficit to widen to 9.5 percent of GDP in current FY2020/2021, up from 8.8 percent in FY2019/2020, expecting a primary surplus to re-emerge in FY2021/2022 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 FY2020/2021 and 88 percent in FY2021/2022 before resuming a downward path,” Fitch said.
Fitch also said that public finances remain a core weakness of the rating, as government debt to GDP levels are significantly higher than the current 'B' median of 65 percent.
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, according to Fitch.
In May, Egypt received a one-time 2.4 billion tranche under the International Monetary Fund’s (IMF) rapid financing instrument and a first tranche (out of three tranches) worth $2 billion under the $5.2 billion 12-month stand-by arrangement agreed with the IMF in June.