Fitch Ratings last week revised its outlook on Egypt’s long-term foreign currency debt from stable to positive. The decision came almost six weeks after its peers Moody’s and Standard and Poor’s upgraded their outlook for the country on the back of the floatation of the pound on 6 March.

Fitch’s move also came after reduced external vulnerability and stronger FDIs. According to a Fitch note, the influx of foreign currency following the giant Ras Al-Hekma real estate deal together with generous funding from a number of international partners, including the World Bank and the IMF, helped in making external imbalances less risky. The doubling of foreign holdings of domestic debt from January to $35.3 billion in March was highlighted as one of the key rating drivers.

The rating agency has greater confidence that exchange rate flexibility will be more durable than in the past. Exchange rate flexibility is one of the most important commitments made by Egypt to the IMF as part of its reform programme supported by an augmented $8 billion loan agreement announced in March.

The agreement saw Egypt devaluing the pound by 38 per cent to settle at LE49 on 6 March compared to LE30.9 before floatation. The pound has been moving in the narrow range of LE47-49 since.

While noting that the policy adjustment increases the economy’s resilience, Fitch pointed out that an “external shock would provide a greater test of the authorities’ commitment.”

JP Morgan, the American financial house, gave some bullish expectations for the economy in a report issued last week. Both Fitch and JP Morgan expected Egypt’s net foreign reserves to be on the rise to gain $16 billion in 2024. This is more optimistic than the IMF’s expectations which put the increase at $12 billion. The variation (vs the IMF) is largely on current account deficit expectations, commented the JP Morgan report.

While JP Morgan expects the current account deficit to widen to $15.2 billion (four per cent of GDP) this year, the IMF projection of $21.8 billion (6.3 per cent of GDP) is a near record high following forecasts for higher imports.

Furthermore, the IMF expects only $400 million of net foreign portfolio investment flows, compared to JP Morgan’s expectation of $8.1 billion “which might actually be conservative considering the large net inflows into the domestic market. The local exchange reported $14 billion of foreign inflows into domestic securities between March and April,” it added.

JP Morgan highlighted that positive outcomes are expected to result from the current fiscal consolidations in the coming fiscal year and subsequent years.

After years of shaky fiscal positions due to high interest expenditures, proceeds from the Ras Al-Hekma deal provided a much-needed source of relief as it is increasing revenues for about four per cent of GDP in FY24, according to JP Morgan.

Fitch expects the ratio of interest rate payments to state revenues to peak at close to 68 per cent in FY25, the highest among Egypt’s peers of the same rating before falling to 45 per cent in FY2028 on the back of “a large fall in the interest rate and the short average maturity of domestic debt”.

Egypt is working on a plan to extend the duration of its short-term domestic debt (owed to pension funds, insurance companies and banks) so that the average term to maturity on debt gets closer to five years from the current 3.3 years.

JP Morgan said it is positive on growth as it expects a bounce back to 4.3 per cent in FY2025 from its estimate of 2.8 per cent in FY2023. “The end of a dual exchange rate system and a normalisation of imports and flows of capital should benefit economic activity. Furthermore, the start of development works in Ras Al-Hekma could give a further boost in the second half of FY2025,” it added.

Both financial houses expect a drop of inflation as JP Morgan puts it at 22 per cent by the end of December, from 33 per cent in March. Fitch projects inflation to fall to 12.3 per cent in June 2025, reflecting the eight per cent of interest rate rises this year, broad exchange rate stability, easing supply constraints, and a strong base effect in February, with a positive real interest rate of close to four per cent at year’s end.

However, JP Morgan points out that there are some risks to these optimistic projections. More adjustments to fuel prices in a bid to further reduce the relative subsidy bill (one per cent of GDP) could pose upside risks to the inflation outlook as local pump prices in Egypt remain well below the global average.

* A version of this article appears in print in the 9 May, 2024 edition of Al-Ahram Weekly