Egypt to witness setback in domestic growth rates in short term to under 3% in FY2020/2021: Moody’s

Doaa A.Moneim , Tuesday 12 May 2020

Moody
Moody's main headquarter (Reuters)

Egypt’s total budget deficit-to-GDP ratio is expected to reach 7.9 percent in the current FY2019/2020 and to increase to 8.5 percent in FY2020/2021, with the ability of attaining initial surpluses in lower numbers than the targeted rates that were expected before, according to Moody’s recent report. 

On Sunday, Ratings Agency Moody’s kept Egypt’s credit rating at B2 with a stable outlook, which is the same rating announced in April.

According its recent report, Moody’s said that Egypt’s government has the ability to pursue the economic and structural reform process within the upcoming years.

Moody’s also expected that Egypt will witness a setback in its domestic growth rates in the short run to under 3 percent in FY2020/2021, with pressures placed on public finance, debt, and payments balance performance.

Yet, the report noted that Egypt has so far been able to contain the COVID-19 crisis and its implications, adding that Moody’s experts expected that public finance and debt indices will improve by the beginning of FY2020/2021.

According a statement issued by Egypt’s Ministry of Finance on Monday, Moody’s report touched positively upon the government’s efforts in achieving initial surpluses and forming significant foreign reserves which is sufficient to counter the flights of capital.

In this regard, Moody’s said that Egypt’s government has several alternatives to finance its external and fiscal needs through bond markets and international institutions.

It also added that the measures that control Egypt’s credit rating are in good position, making the state capable of dealing with the economic shocks.

It noted that continuing to implement effective public debt management guarantees keeping the public debt’s downward trajectory, continuing the improvement of workforce market indices, increasing non-petroleum exports, and raising Egypt’s economic competitiveness, adding that all these elements are likely to step up Egypt’s credit rating over the coming years.

Egyptian Minister of Finance Mohamed Maait said that Moody’s experts praised the notable upgrade in governance, follow-up systems for economic performance, the improvement of the business climate, and the existence of a comforting level of foreign reserves that cover the state’s financial needs and curtail the implications of capital volatilities in light of the uncertainty that dominates the global financial markets at this time.

He added that despite the increasing of financing cost in all emerging countries amid the crisis, Moody’s pointed out that the fiscal and monetary reforms that have been successfully carried out have left ample room for manoeuvring thanks to the strength of the Egyptian banking system and the availability of sufficient liquidity to meet the governmental finance and other economic sectors’ needs.

Keeping Egypt’s credit rating at B2 with a stable outlook reflects the international institutions and credit ratings corporations’ confidence in the ability of the Egyptian economy to cope positively with the COVID-19 crisis thanks to the economic, fiscal and monetary reforms that have been implemented over the past years and have been backed from the people, which provide a great deal of strength and flexibility for the Egyptian economy.

On April, Moody’s published a report which said that the credit profile of Egypt (issuer rating B2) is supported by "A3" economic strength.

A3 is the seventh highest rating a debt issuer can receive, denoting that Egypt’s financial and banking system is solid with a low risk of default.

The rating reflects the country's large and diversified economy with robust growth prospects. Yet, Moody’s classified Egypt with B1 for institutions and governance strength balances, adding that they are relatively weak but improving, with important progress in fiscal and economic reforms.

The B1 rating means that the issuer is relatively risky, with a higher than average chance of default.

The company also classified Egypt at CA level for fiscal strength, which reflects weak public finances with a high, albeit declining, government debt burden and weak debt affordability at BA level, which refers to susceptibility to risk, both political risks and persisting security risks in certain areas, as well as banking sector risk, reflecting the relatively large size of the system and the potential for contingent liabilities accruing to the government's balance sheet, mitigated by the sector's stable funding structure, large liquidity buffers and resilient deposit growth performance.

The previous Moody’s credit rating for Egypt released in September 2019 was B2, which was the same rate as April 2019, when Moody’s upgraded Egypt’s credit rating from B3 to B2.

Moody’s said that ongoing fiscal and economic reforms will support gradual but steady improvement in Egypt's fiscal metrics and raise real GDP growth. Yet it said the decision to keep Egypt's credit profile at B2 reflects concerns over weaknesses in Egypt’s credit profile.

Beforehand, Standard and Poor's kept Egypt’s credit rating in domestic and hard currencies at B level and maintained its stable outlook.

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