In its report on Egypt, S&P explained that the action implies that the Egyptian authorities' policy response, alongside significant external support, should prevent a deterioration in external and fiscal positions because of the rising commodity prices.
Yet, the report said that it may downgrade Egypt’s credit ratings over the next 12 months in case the increasing commodity prices has negative prolonged effects on the country’s external position, which could result in a decline in foreign exchange reserves and a reduction in its ability to service debt and interest payments.
On the other hand, the report noted that Egypt’s credit ratings could be upgraded over the medium term in the case that the country’s reform programme manages to narrow government and external financing needs, reduce debt and execute bold governance strategies.
“Egypt is the world's largest importer of wheat. Providing the commodity at affordable prices to the populace is important for maintaining social stability. Among other commodities, the Russia-Ukraine conflict has led to a sharp increase in the price of wheat. Higher commodity prices are likely to increase Egypt's fiscal and external deficits, as well as financing pressures on the country. Financing conditions for emerging market economies were already worsening as global monetary conditions tightened. However, we expect the Egyptian authorities will manage the current situation by maintaining their medium-term commitment to fiscal consolidation, using exchange rate and interest rate policy to manage economic adjustments alongside external funding support from multi- and bi-lateral parties”, the report explained.
According to the report, Egypt’s government needs about 8.5 million metric tonnes of wheat per year to facilitate the supply of subsidised bread and a total of about 22 million metric tonnes of wheat, including the privates sector.
The report expected the government to revisit its strategy of securing wheat, with Russia to remain its key wheat import market.
The report also said that the inflationary wave has a notable impacts on inflows heading to Egypt, as the country witnessed an about $20 billion of capital outflows in March 2022.
“The Central Bank of Egypt (CBE) defended the Egyptian pound (EG£) selling about $13 billion of foreign currency reserves. Such a sharp decline in reserves, which totaled $39 billion in June 2021, is unsustainable and under our base case we do not expect the same reaction to future shocks. However, we understand that, to some extent, the reserve buffers are there to be used,” the report noted.
In this regard, the report predicted Egypt’s international reserves to drop to about $34 billion by end of current FY2021/2022 (ending June 2022) amid the ongoing challenges.
Regarding the impact of the higher oil prices globally, the report expected that it would have only a slight impact on the country’s economy, given that it has broadly reached self-sufficiency in terms of oil and gas, with latest data suggesting a small surplus on the external hydrocarbon balance through the end of the third quarter of FY2021/22 (January-March).
Touching upon the CBE’s recent actions raising the key interest rates by one percent and devaluating the Egyptian pound by around 14 percent, the report asserted that such a policy helps manage inflation expectations and limit capital outflows by increasing real returns on the government's local currency debt.
In this respect, the report expected the CBE to further raise the interest rates in the upcoming Monetary Policy Committee meeting scheduled on 24 May, amid the ongoing inflationary wave.
Meanwhile, the report said that devaluation of the Egyptian pound is unlikely to affect negatively banks' asset quality, as foreign currency lending that represents less than 20 percent of total loans is usually granted to companies that generate revenue in the same currency.
“Liquidity in the banking system is strong, and banks' reliance on wholesale debt is very limited. However, credit losses might still increase as lending to inherently riskier small and midsize enterprises (SMEs) expands. The CBE recently raised the threshold for SME lending to 25 percent of banks' loan books by December 2022, from 20 percent previously, and set a new 10 percent minimum threshold for lending to small enterprises. We nevertheless expect the banking sector's pre-provision income to more than offset the hit from increased loan loss provisions, thus not hindering capital. State-owned banks' decision to offer one-year, 18 percent certificates of deposit might add to the pressure on systemwide profitability, although the magnitude of the effect would depend on the total volume of certificates issued”, the report explained.
On debt, the report said that Egypt's debt burden will remain affected by movements in the exchange rate and monetary policy, among other factors, despite the government plan to attain a primary surplus of 1.6 percent of GDP in FY2022/23, with a target to move back toward two percent after the effects of the ongoing economic crisie fades.
“Egypt was one of the few economies that escaped an economic contraction in 2020, and we expect it to be resilient to the latest external shock”, said the report.
For the country’s real GDP growth outlook amid the ongoing crisis, the report forecast it to slow to 5.7 percent through the end of FY2021/22, down from nine percent attained in the first half of the fiscal year, with activity affected by higher energy and borrowing costs, value chains disruptions, rising commodity prices and weaker tourism inflows.
The report estimated that about 25 percent up to 30 percent of tourists inflows to Egypt comes from Russia and Ukraine.
Over the medium term, the report anticipated Egypt’s real GDP growth to further slowdown to four percent per year.
“This will be supported by the government's various economic reform measures including its national structural reform plan, which looks to improve investments and exports and achieve strong private-sector-led growth. The Hayah Karima programme will also contribute toward developing infrastructure while improving living standards in rural communities,” the report explained.
The report forecast the tourism sector, which contributed to about 12 percent of GDP, 10 percent of total employment, and 16 percent of current account receipts in 2019, to not fully recover through 2023.
Th report also expected the financial support the Gulf Cooperation Council (GCC) extended to Egypt recently to mitigate the pressure of the current crisis on the country’s foreign currency reserves.
For Egypt’s current account deficit, the report anticipated it to remain wide at about four percent of GDP in current FY2021/22.
It also projected the increase in import prices to raise the overall deficit on the goods and services balance, but for this deterioration to be mitigated by higher remittances from Egyptian's living in the GCC, who should benefit from higher oil prices.
Through 2025, government measures to promote non-oil exports should also help narrow the current account deficit to about three percent of GDP, according to the report.
“We estimate that the general government fiscal deficit will remain at about seven percent of GDP in FY2021/22 and FY2022/23. We expect high spending due to the higher commodity price levels to limit the positive impact of tax administration reforms and a broadening of the tax base. On the spending side, growth will be largely spurred by capital investments, subsidies, grants, social benefits and salaries,” the report predicted.
With regards to Egypt’s banking sector, the report said “We expect the direct effects of the Russiain-Ukrainian conflict to remain manageable for the Egyptian banking sector owing to minimal exposure to Russian or Ukrainian counterparties.”