Fitch affirms Egypt's rating at B+ with stable outlook

CAIRO – 10 March 2021:  Fitch Ratings affirmed, Wednesday, Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook.

The rating agency clarified that the rating and outlook are reinforced by its recent track record of fiscal and economic reforms, which the authorities are furthering, as well as its large economy, which has demonstrated stability and resilience through the global health crisis.

“The ratings are constrained by still large fiscal deficits, high general government debt/GDP and domestic and regional security and political vulnerabilities, for example as reflected in lower scores on World Bank governance indicators compared with the 'B' median,” it noted.

According to Fitch, Egypt's economy has outperformed the vast majority of Fitch-rated sovereigns over the past year. A low incidence of coronavirus cases and deaths allowed for a measured public health response and supported resilient domestic demand, even as tourism and other export-oriented sectors sagged. 

Fitch expected Egypt to hit real GDP growth of 3 percent for the fiscal year of 2020/2021, after achieving 3.6 percent in FY20 and 5.6 percent in FY19.

“The recovery of tourism to Egypt and shipping through the Suez Canal, supported by a global economic recovery, will drive an increase to 6 percent growth in FY22 (above potential growth),” it added.

It stated that inflation has continued to trend down, expecting it to average 5 percent in FY21 and 7 percentin FY22, broadly in line with FY20 but well below the FY19 rate of over 13 percent.

As for banking sector, it foresaw bank credit to the private sector to grow 20 percent yoy in FY21, in line with FY20 and up from 12 percent in FY19.

In Fitch’s view, minimal currency volatility in 2020 reflects a degree of intervention from the CBE as well as public sector banks making FX available at the prevailing exchange rate, at the cost of part of their net foreign assets. 

“Continued exchange rate rigidity poses risks to macroeconomic stability and current account performance in the medium term, although it has supported non-resident inflows into the Egyptian pound government bond market. Real effective appreciation in recent years has eroded a large part of the competitiveness gain from the 2016 devaluation,” it said

Continued real appreciation could weigh on growth and the current account deficit and could require another sharp exchange rate adjustment in the future, in turn potentially undermining price stability and domestic confidence. Nevertheless, the CBE maintains that it is committed to exchange rate flexibility, intervening only to mitigate disorderly market movements, according to Fitch.

The report reviewed foreign investment in Egypt’s debts instruments as it reached to $28 billion by February 2021, attributing this figure to the attractive real interest rates, Egypt's relatively strong economic performance and reforms to market structure could attract further inflows. However, it noted that  these flows could quickly reverse in response to any confidence shock, putting pressure on Egypt's foreign exchange liquidity, interest rates and the exchange rate.

“Egypt's current account deficit narrowed to 3.1% of GDP (just over USD11 billion) in FY20 from 3.6 percent in FY19 as an increase in remittance flows from Egyptians working abroad and a mild increase in non-oil exports offset a decline in tourism receipts. We forecast only a marginal widening of the current account deficit in FY21-22. Remittances and tourism receipts will fall further as the full impact of the coronavirus shock crystallises in FY21, but we expect that this will be largely offset by the compression of import demand,” it stated.

Regarding foreign direct investment (FDI), FDI expected it to reach $5.5 billion in FY21 after net FDI remained relatively resilient at $7.1 billion in FY20.

Egypt's net external debt, including non-resident holdings of local debt (at 18% of GDP in FY20) is significantly smaller than the current or forecast 'B' category median. Although net external debt will rise in nominal terms, we expect it to remain contained as a share of GDP.