Fitch affirms Egypt’s rating at ‘B+’ with stable outlook

CAIRO - 26 November 2019: Fitch Ratings affirmed Egypt's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B+' with a Stable Outlook.

Fitch clarified Monday that Egypt's ratings are supported by a recent track record for economic and fiscal reforms, and improvements to macroeconomic stability and external finances.

“While the ratings are constrained by still large fiscal deficits, high general government debt/GDP and weak governance scores (as measured by the World Bank governance indicators), which underscore political risks,” it added.

The report reviewed Egypt’s macroeconomic performance, describing it as “strengthened” further in 2019, with real GDP growth firming to 5.6 percent and inflation falling to single digits. Prudent monetary policy, base effects, lower oil prices and currency appreciation have fostered disinflation.

Fitch expected inflation to record 9.5 percent in 2019 and 8 percent in 2020/2021, down from 14.4 percent in 2018. As per interest rates, it anticipated that the Central Bank of Egypt (CBE) will seek to maintain positive real interest rates, marking a shift from the monetary policy stance before the reforms of late 2016.

“Real interest rates remain comfortably positive, even after the Central Bank of Egypt (CBE) has cut its main policy rate by a cumulative 450bp in 2019, to 12.25 percent,” it pointed out.

According to the report, lower interest rates should lend support to private-sector investment, employment and private consumption, while strong contributions from other drivers over the last two years may start to taper.

“We forecast real GDP growth will remain robust at around 5.5 percent in FY20 (the fiscal year ending June 2020) and FY21, with balanced risks to this forecast,” Fitch said.

Egypt is expected to remain committed to its reform programme, following completion of its $12 billion three-year Extended Fund Facility with the IMF, which officially ends in November 2019, it noted.

The report further reviewed that the government hit its fiscal targets in FY19, with preliminary numbers indicating a budget deficit of 8.2 percent of GDP, down from 9.7 percent in FY18, and a primary surplus of 2.0 percent of GDP, forecasting the budget deficit to narrow in FY20 to 7.6 percent of GDP higher than the government target of 7.2 percent.

“This still implies a further decline in government debt/GDP, to around 83 percent, an improvement of 20pp from the peak of 103 percent in FY17,” it stated.

The report also referred to foreign reserves and Egyptian pound, saying: “Foreign reserves were $45 billion at end-October, up from $42 billion at end-2018, helped by renewed portfolio inflows and substantial external borrowing (the government has issued USD8 billion of Eurobonds in 2019).”

“In addition, CBE reports USD6.1 billion of foreign-currency deposits, which are not included in official reserves. Foreign participation in EGP T-bills was the equivalent of USD15.2 billion at end-September (4%-5% of GDP; around 17% of the total stock of EGP T-bills), up from $10.7 billion at end-2018,” it added.

As per the Egyptian pound, it said that the pound has strengthened around 11percent against the US dollar YTD in 2019, following the cancellation of the profit repatriation mechanism in late 2018.

“The next test for exchange-rate flexibility will be when there is depreciation pressure. Given nominal appreciation and the ongoing positive inflation differential with trade partners, the Egyptian pound has appreciated more strongly in real effective terms (CPI-based), eroding some more of the competitiveness gains from the 2016 devaluation,” it referred.