Egypt's economic growth 'going forward,' fiscal reform supports B3 rating: Moody's

Ahram Online , Wednesday 28 Sep 2016

The government's main focus should be on reducing the high fiscal deficits; more flexible exchange rate will encourage investment, says Moody's official

Moody's main headquarter (Reuters)

Egypt's economic growth has started to pick up, investor sentiment has improved and its fiscal reforms support the B3 rating of global credit rating agency Moody's, the agency said on Wednesday, adding that the economy has a stable outlook.

“Going forward, in addition to private consumption, Egypt's economic growth will be predominantly supported by public and private investment," the agency said in a press release on its official website.

Steffen Dyck, a senior credit officer at Moody's, expects Egypt’s high fiscal deficits and the public debt levels to be gradually reduced, saying that this should be the government's main focus.

Since 2014, Egypt's government has embarked on a fiscal reform programme through which energy subsidies will be phased out gradually and new taxes are introduced to curb the growing state budget deficit – estimated at 11.5 percent of GDP in fiscal year 2015/16.

However, the US-based rating agency has listed certain challenges that are faced by Egypt such as export growth, which is expected to remain negative for the coming years “due to the expected increase in investment and connected stronger growth in capital goods imports, as well as weak global demand for Egypt’s exports.”

Egypt’s headline inflation “will decline only gradually, posing macroeconomic risks and keeping government funding costs high,” the rating agency noted. “But low levels of foreign currency denominated and externally held general government debt mitigate external vulnerabilities.”

Egypt’s annual headline inflation jumped to 16.4 percent in July 2016 to its highest in at least seven years, according to state statistics body CAPMAS.

“High unemployment rates – especially amongst the youth – are a sign of underlying structural economic challenges,” Moody’s said.

The reform programme has been endorsed by the International Monetary Fund, and has led to an initial agreement between the government and the global lender in August on a $12 billion fund facility over three years, which is expected to be approved by the fund's executive board in the coming weeks.

“I would expect a decision by [next week during the IMF and World Bank general meetings] or within the next two weeks,” said Dyck in a media briefing held in Cairo on Tuesday, according to Enterprise Ventures’ daily publication.

A more flexible exchange rate is believed to encourage investment, which helps in reducing the budget deficit and debt levels, according to Dyck.

“What we [Moody’s] are looking at now by end of current fiscal year is EGP 10.50-11.00 to the US dollar as a working assumption.” he added, according to Enterprise.

In March, Egypt, which relies heavily on imports of wheat and other staples to feed its population of 90 million, weakened the Egyptian pound by 14 percent of its value against the dollar in an attempt to eliminate the black market.

Another devaluation is expected by many analysts and investment banks.

“The exchange rate is not a key concern for us; the share of foreign currency denominated general government debt is very low, so is the share of externally held government debt. So devaluation would not create a huge spike in debt service payments in foreign currency, which is a strength of the debt structure here,” Dyck said. 

Egypt's external debt rose to $53.4 billion in the third quarter of the fiscal year 2015/16, which ended in June, up from $47.7 billion in the quarter before, the central bank data showed on it's website.


*The current official exchange rate for $1 = EGP 8.78.

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