Fitch Ratings affirms Egypt's IDR at B+ with stable outlook

Doaa A.Moneim , Thursday 21 Apr 2022

Fitch Ratings has affirmed Egypt's long-term foreign-currency issuer default rating (IDR) at B+ with a stable outlook, the credit rating agency announced on Thursday.

Tawfiqiya shopping market in downtown Cairo. Ahram Online
Tawfiqiya shopping market in downtown Cairo. Ahram Online

In its report on Egypt, Fitch attributed its decision to the country’s macro performance, reforms and international support.

“Egypt's ratings are supported by its recent record of fiscal and economic reforms, its large economy with robust growth and strong support from bilateral and multilateral partners. The ratings remain constrained by weak external liquidity metrics amid still substantial reliance on non-resident investments in the local bond market, large fiscal deficits, high general government debt to GDP, and domestic and regional security and political risks,” the report explained.

On the outflows issue, Fitch said that Central Bank of Egypt (CBE) reserves fell in March by $4.7 billion to $35 billion, following portfolio outflows and CBE interventions to smooth exchange-rate volatility.

These actions following the Russian war in Ukraine, which began in late February.

“At an estimated 3.7 months of current external payments, reserve coverage is now weaker than the 'B' median. CBE's foreign-currency (FC) assets not in reserves, mostly deposits at local banks, which used to be an important backstop, also declined by $7.6 billion to $1.5 billion,” the report revealed.

Moreover, foreign holdings of Egyptian pound-denominated government debt dropped to $17.5 billion by mid March, a decline of $11 billion from end of 2021 and $16 billion from their all-time high in September 2021, according to the report.

For CBE’s net foreign assets, Fitch noted that they remain significantly weaker than gross reserves, inching down to a negative $5.1 billion at end of March from $8.6 billion posted in February, the lowest level since 2016.

“However, CBE's liabilities are medium- to long-term in nature and have repeatedly been rolled over, and we continue to view gross reserves as the most relevant indicator of Egypt's external liquidity. Aside from GCC deposits, CBE liabilities include a currency swap with the People's Bank of China and repurchase agreements with international banks,” the report pointed out.

Fitch also said that CBE external position is weaker, as its net foreign assets had weakened markedly prior to the Ukraine war as public-sector banks in effect funded Egypt's current account deficit and maturities, keeping CBE reserves stable.

According to the report, CBE’s net foreign assets fell to a negative $12 billion in February 2022, down from a position of nearly $7 billion in February 2021.

“Local banks appear to have drawn down on their external assets in part to increase their holdings Egypt's FC bonds, which have increased by more than $9 billion in the current FY2021/2022, which ends in June 2022,” Fitch explained.

As Saudi Arabia and the UAE have accelerated their investments in Egypt to support its economy against the harsh impact of the Russian war, Fitch said that total GCC deposits in March recorded $20 billion.

It also highlighted Abu Dhabi wealth fund’s recent $2 billion transitions in listed local stakes from Egypt's government as well as Qatar and Saudi Arabia commitment of $5 billion each in a combination of deposits and investments to inject in the country.

Regarding portfolio flows, the report showed that non-resident portfolio holdings stabilised in the final week of March.

In this respect, the report expected a recovery to $20 billion by end of current FY2021/2022 and $25 billion by end of upcoming FY2022/2023, helping restore Egypt's gross external buffers.

The report anticipated that the loan deal with the International Monetary Fund, the CBE’s actions to depreciate by 14 percent the Egyptian pound against the US dollar in March, a policy rate rise of one percent, and GCC support will support investor confidence in the country.

On the macroeconomic level, the report forecasted Egypts current account deficit to GDP ratio to narrow to four percent in the current FY2021/22 (amounting to $18 billion) and 3.5 percent in FY2022/23, down from 4.6 percent in FY2020/21.

“The deficit improved in 2H21 helped by growth in shipping through the Suez Canal, a rebound in travel receipts and a widening hydrocarbon trade surplus. Travel receipts will likely still be higher in FY22 than FY21, despite the loss of tourists from Russia and Ukraine (less than a fifth of receipts). The increase in global food prices and disruptions to wheat imports from Russia and Ukraine will weigh on the trade balance,” the report estimated.

Moreover, Fitch projected general government fiscal deficits of 7.4 percent of GDP in current FY2021/22 and seven percent of GDP in FY2022/23, compared to 7.2 percent in FY2020/21.

“These forecasts are conservative and imply further spending to mitigate the effects of inflation and enhance social protection beyond announced initiatives, which the government expects to accommodate within existing spending allocations and contingency reserves. The central government deficit was 7.1 percent of GDP in July 2021 through March 2022,” the report demonstrated.

The report also expected domestic demand in the Egyptian market to grow by six percent in the current FY2021/22 and 4.5 percent in FY2022/23, although global and local tighter monetary policies pose significant risks.

For tax revenue, the report said that Egypt’s government continues to work on boosting it, yet it is expected to grow at a slow pace.

In this regard, the report projected Egypt’s tax revenue to GDP to drop to 12.8 percent in current FY2021/22, down from 13.2 percent recorded in FY2020/21, which is below the government target of raising the ratio by two percent between FY2020/21 and FY2023/24.

“Amendments to the VAT law passed this year will expand the tax base to include e-commerce activities. A new customs law came into force in October 2021. Previous subsidy reforms have been resilient in the face of higher inflation,” the report highlighted.

On the other hand, the report projected government debt to GDP ratio to decline to about 91 percent in current FY2021/22, down from 92 percent in FY2020/21 and to keep its slight downturn, despite the impact of currency devaluation.

“Egypt has an established record of surpluses in recent years, but weaker growth presents a risk to the debt dynamics, particularly amid higher interest rates. Debt metrics are well above 'B' medians. However, more than half of government external debt is owed to multilateral institutions, with which Egypt has good relations, and the large domestic banking sector is a captive investor in local-currency debt,” the report explained.

On inflation, the report predicted it to accelerate further after exchange-rate depreciation in March, lifting overall inflation to 10 percent in current FY2021/22 and 12 percent in FY2022/23.

At the same vein, the report expected CBE to raise key interest rates by additional three percent (300 basic points) by FY2023/24 to maintain positive real policy rates, tame inflation, and support the Egyptian pound and attractiveness of local-currency assets.

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