Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Egypt’s Long-Term Foreign and Local Currency Sovereign Ratings of ‘B-’ and its Short-Term Foreign and Local Currency Ratings of ‘B’. The Outlook for Egypt’s ratings is also affirmed at ‘Stable’.
The affirmation of Egypt’s ratings takes into account: (a) the stabilisation of short-term financing risks, in large part due to the availability of financial assistance from friendly states and international donors; (b) the adoption of small fiscal consolidation measures aimed at reducing the large budget deficit; (c) the improving security situation in Egypt’s main cities; and (d) the relative resilience of the banking sector in the difficult economic and political conditions. Nevertheless, the ratings continue to be constrained by the fundamental weaknesses of the Egyptian economy and the public finances, as well as by political and geopolitical risk factors.
CI notes that near-term external financing risks have stabilised, supported by the financial assistance package received from the member states of the Gulf Cooperation Council (GCC). Since July 2013, GCC states have pledged total support to Egypt in the region of USD18.9 billion (6.6% of Egypt’s GDP), most of which has been disbursed. This support has been in the form of cash donations, interest-free loans, development related financing, oil and oil products. CI considers it likely that financial support from bilateral lenders will continue over the short to intermediate term in view of Egypt’s regional importance and Saudi Arabia and the UAE’s reiterated pledge to support the new Egyptian government.
International reserves are expected to continue to increase – provided that the political and geopolitical situations do not deteriorate – but are unlikely to reach pre-crisis levels. Nevertheless, CI expects foreign reserves to provide broadly adequate coverage of short-term external debt (on a remaining maturity basis) and a reasonable buffer against moderate external economic shocks.
Egypt’s ratings continue to be supported by the country’s comparatively low level of external debt, which stood at 16.0% of GDP (61.5% of current account receipts) in 2014. The debt maturity profile is relatively favourable and gross external financing requirements are low at an estimated 7.7% of GDP in FYE 2015.
The security situation has improved in Egypt’s largest cities following the recent election of General Al Sisi as president. However, the Islamist insurgency in Sinai shows no sign of abating and poses a significant security challenge and a threat to investor sentiment and tourism. More generally, political risk remains a concern in view of the continued polarisation between supporters of the new president, who was elected by a minority of eligible voters, and those of the deposed Islamist president.
In the policy arena, bilateral financial support has provided the authorities with a short respite to focus on measures needed to strengthen macroeconomic and fiscal fundamentals. The new government has announced its reform agenda and raised fuel prices in a step towards reducing costly subsidies. As a result, the budget deficit declined slightly to a still high 12% of GDP in FYE2014 and is expected to reach 11.5% of GDP in FYE2015 (compared to 13.7% of GDP in FYE 2013). General government debt remains very high and is projected to reach 94.5% of GDP in FYE 2015 – contributing to significant financing needs.
The Outlook for the ratings is ‘Stable’. This means that Egypt’s ratings are likely to remain unchanged over the next 12-24 months, provided key credit metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise.
The ‘Stable’ Outlook reflects CI’s current expectation that Egypt’s fiscal and external position will stabilise over the next year or so, based on the continuation of external support and the increasing likelihood that the new government will continue its gradual structural reforms.
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Rating Committee Chairman
Senior Credit Analyst