Egypt’s long-term foreign currency issuer default rating (IDR) remains at B+ with a stable outlook, Fitch Ratings announced on Wednesday.
Fitch attributed its affirmation to Egypt's recent track record of fiscal and economic reforms, which the authorities are furthering, as well as its large economy, which has demonstrated stability and resilience through the global COVID-19 pandemic.
However, Egypt’s ratings are constrained by large fiscal deficits, high general government debt to GDP ratio, and domestic and regional security and political vulnerabilities, it added.
Egypt's economy has outperformed the vast majority of Fitch-rated sovereigns over the past year. A low incidence of coronavirus cases and deaths allowed for a measured public health response and supported resilient domestic demand, even as tourism and other export-oriented sectors sagged.
Fitch projected Egypt’s real GDP growth to reach three percent in FY 2020/2021, which ends in June 2021, after recording 3.6 percent in FY 2019/2020 and 5.6 percent in FY 2018/2019.
The credit rating agency expected that the recovery of tourism and shipping through the Suez Canal, supported by global economic recovery, will drive an increase in the economic growth to post six percent in FY 2021/2022.
Meanwhile, it said that Egypt’s inflation has continued to trend down, projecting it to average five percent in the current FY 2020/2021 and to jump to seven percent in FY 2021/2022, well below the FY 2018/2019 rate of over 13 percent.
Egypt’s bank credit to the private sector is expected to grow by 20 percent year-on-year in FY 2020/2021, up from 12 percent in FY 2018/19, Fitch stated.
It also noted that the minimal currency volatility in 2020 reflects a degree of intervention from the Central Bank of Egypt (CBE) as well as public sector banks, making foreign exchange (FX) available at the prevailing exchange rate at the cost of part of their net foreign assets.
“In our view, continued exchange rate rigidity poses risks to macroeconomic stability and current account performance in the medium term, although it has supported non-resident inflows into the Egyptian pound government bond market. Real effective appreciation in recent years has eroded a large part of the competitiveness gain from the 2016 devaluation. Continued real appreciation could weigh on growth and the current account deficit and could require another sharp exchange rate adjustment in the future, in turn potentially undermining price stability and domestic confidence. Nevertheless, the CBE maintains that it is committed to exchange rate flexibility, intervening only to mitigate disorderly market movements,” Fitch reported.
Foreign investor participation in Egypt's bond market is a growing point of potential external vulnerability despite the fact it supports fiscal and current account funding flexibility, the agency noted.
Foreign holdings of government T-bills and T-bonds have recovered to $28 billion by February 2021 (over 10 percent of government domestic debt), in excess of their level at the start of 2020, from a trough of less than $10 billion in June.
“Attractive real interest rates and relatively strong economic performance and reforms to market structure could attract further inflows, but these flows could quickly reverse in response to any confidence shock, putting pressure on Egypt's foreign exchange liquidity, interest rates, and the exchange rate," Fitch explained.
For Egypt’s current account deficit, Fitch forecast a marginal widening of the current account deficit in FY 2021/2022, expecting remittances and tourism receipts to fall further as the full impact of the pandemic shock crystallises in FY 2020/2021.
This will be largely offset by the compression of import demand, nonetheless, Fitch said.
It also expected Egypt's net external debt, including non-resident holdings of local debt (represents 18 percent of GDP in FY 2019/2020) to rise in nominal terms, but to remain contained as a share of GDP.
For Egypt’s public finances, Fitch expected a modest and temporary widening in the general government fiscal deficit to 8.5 percent of GDP in FY 2020/2021 (including net acquisition of financial assets), from seven percent in FY 2019/2020 and 7.9 percent in FY 2018/2019.
“The government's coronavirus support package amounted to about 1.7 percent of GDP spread across FY 2020/2021, with most of it supporting vulnerable sectors through additional and accelerated spending, government guarantees, and reduction and deferral of various fees and taxes. These were offset by additional revenue measures of about 0.5 percent of GDP, as part of the target to raise tax revenue/GDP by two percent over the next four years (outlined in the draft Medium-Term Revenue Strategy approved by the government),” Fitch stated.
Meanwhile, COVID-19 interrupted Egypt's progress on debt reduction, and public finances remain a core weakness of the rating, according to Fitch.
However, Fitch expected Egypt debt to GDP ratio to resume a downward path in FY2021/22, saying that Egypt has significant financing flexibility.
It forecast consolidated general government debt to GDP ratio to jump to 90 percent in FY 2020/2021, up from 88 percent in FY 2019/2020, before resuming a downward path.
On the other hand, relatively weak governance, security, and political risks continue to weigh on the country’s rating, according to Fitch.
“Egypt scores well below the 'B' median on the composite World Bank governance indicator, with recent improvements in some components of the governance score being offset by deterioration in other components. The potential for political instability remains a significant tail risk, in Fitch's view, given ongoing structural problems including deficiencies in governance and high youth unemployment. Intermittent security issues have previously hit the economy via the tourism sector,” reported Fitch.