Egypt gets first sovereign credit rating upgrade since 2011 revolution

Ahram Online, Friday 15 Nov 2013

Standard & Poor's raises Egypt's long and short-term foreign and local currency sovereign credit ratings to B-/B from CCC+/C on Friday, with a 'stable' outlook

Rating improved

International credit rating agency Standard & Poor's raised its long- and short-term foreign and local currency sovereign credit ratings for Egypt on Friday from "CCC+/C" to "B-/B" with a "stable" rating outlook. 

The action is the first such positive step for Egypt since the 2011 revolution, which toppled long-time autocrat Hosni Mubarak, triggering a series of credit-rating downgrades for the country by all the major international agencies.

The agency said it was prompted to raise Egypt's rating after the generous aid the country had received from oil-rich Gulf nations following Islamist president Mohamed Morsi's ousting in July of this year. 

"In our view, the July announcements that Kuwait ($4 billion), Saudi Arabia ($5 billion), and the UAE ($3 billion) would provide Egypt with cash, interest-free loans, oil, and oil products amounting to 4.4 percent of 2013 GDP reduces the likelihood that Egypt will face a balance-of-payments crisis," said Standard &Poor's (S&P).

The additional $1.9 billion in aid pledged by the UAE to Egypt in October, and the fact that Egypt has already received three quarters of the promised funds, is an indication of the Gulf Cooperation Council's willingness to support Egypt, said the agency.

Egypt's net international reserves tumbled after the 2011 revolution and reached a record low of $13.4 billion in March of this year -- less than the required amount to cover three months' worth of imports. S&P expects reserves to "stabilise at above two months of current account payments during 2013-2016."

"The upgrade reflects our view that the Egyptian authorities have secured sufficient foreign currency funding to manage Egypt's short-term fiscal and external financing needs," said Standard &Poor's.

"We expect support from bilateral lenders to continue over the medium term as the Egyptian authorities try to address the country's political and economic challenges."

The stable outlook weighs the recent and promising aid against Egypt's "difficult political landscape and significant external financing pressures" said the agency.  

Egypt's new rating is still located in the "junk" status end of the credit rating spectrum. 

The agency's optimism was tempered by structural weaknesses in Egypt's economy, such as "weak" government finances, a central bank which will continue to monetise much of the government's local currency debt. "Central bank claims on the government and public sector increased to about 23 percent of GDP as of July 2013," a trend which would generate "10 percent average annual inflation over the next few years, alongside supply-side constraints," said the agency.

The agency also cited Egypt's high and expensive government debt, which it expects to reach 76 percent in 2013 and peak at 78 percent in 2014, as the government increases its debt "to meet its significant fiscal deficits while using some of its borrowings -- namely from the GCC states -- to support the level of foreign currency reserves at the central bank." 

Standard and Poor's also highlighted the government's limited ability to raise revenues or cut spending, and its inflexible monetary policy given the Central Bank of Egypt's heavy support of the Egyptian pound since 2011 and the banking sector's high exposure to the government. 

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