Fitch Revises Egypt's Outlook to Positive; affirms at 'B'

CAIRO – 16 January 2018: Fitch Ratings has revised the Outlook on Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'B', according to a report released on Tuesday.

Fitch’s report clarified that the Egyptian government has made significant progress with its reform program in 2017 and remained on track with the $12 billion three-year Extended Fund Facility (EFF) signed with the IMF in November 2016.

“Fiscal consolidation is proceeding, although it will require a multi-year effort to reverse the increase in general government debt/GDP witnessed since the Arab Spring uprisings. The Central Bank of Egypt's (CBE) exchange rate reform has proved a turning point for the economy and Egypt's external finances; and macroeconomic stability has started to improve following an inflationary spike,” the report added.

“Public finances will remain a key weakness of Egypt's credit profile, but we expect continued fiscal consolidation to start to reduce government debt/GDP in FY18. The general government primary deficit halved to 2.6 percent of GDP in FY17 from 5.3 percent of GDP in FY16,” the report expected.

“At the beginning of FY18, the government enacted another round of fuel and electricity price increases and raised the VAT rate to 14 percent from 13 percent. We forecast the budget sector deficit to narrow again in FY18, to 9.7 percent with a primary deficit close to balance. We expect Egypt to achieve a primary surplus in FY19 for the first time in more than 15 years. Budget sector primary deficits averaged 3.6 percent in FY11 to FY17,” the report added.

Fitch stated that on the spending side, there has been restraint of the wage bill, which grew by 6.4 percent year on year in July-December, well below inflation rates, reflecting ongoing implementation of wage reforms under the civil service law of 2016. The wage bill is budgeted to amount to around 5.8 percent of GDP in FY18, down from more than 8 percent in FY14 and FY15.

Fitch forecasted general government debt/GDP to fall to 93 percent in FY18 from a peak of 103 percent in FY17, marking an inflection point in the strong upward trend since the 2011 revolution.

By the end of FY19, which is likely to also mark the end of the current IMF program, the report forecasted general government debt/GDP to have fallen to 88 percent. The key risk to this outlook is that reform momentum weakens. Furthermore, guaranteed debt has increased in recent years (26 percent of GDP at end-June 2017).