Wednesday, 28 September 2016

 Moody’s isn’t sweating devaluation, sees ‘gradual’ fiscal reform in Egypt.

The bottom line for Egypt’s “credit story” from Moody’s is what we all know in our bones: We have big challenges, and the Cabinet economic team is largely on the right track in tackling them provided it can keep the reform momentum up. But it’s going to be slow going. Hence the ‘B3’ long-term issuer and senior unsecured bond ratings, tempered by a stable outlook (see Moody’s last statement on Egypt’s rating).

That’s our takeaway from a media briefing in Cairo yesterday hosted by Moody’s in association with Egypt’s MERIS Ratings

The highlight of yesterday’s meeting was Moody’s Investors Service VP and Senior Credit Officer Steffen Dyck who reminded us that while the IMF program is credit-positive,“that does not mean that we see it as a cure for all the challenges we see in Egypt. But it is an important step.

Will we see an IMF executive board decision next week? “I would expect a decision by [next week during the IMF and World Bank general meetings] or within the next two weeks,” he said. Dyck expects Egypt will receive USD 4 bn in the first year, and from “what I’ve heard so far,” that could be structured as USD 2 bn after the decision and USD 2 bn after a quarterly review.

Moody’s predicts that the fiscal deficit will stay in the double digits over the next two years, then gradually decline to around 8-9% by 2020. GDP growth will clock-in at c. 4% between FY15-16 and FY19-20.

The significant deficit means a very high debt burden and an “extremely high” gross government borrowing requirement [the sum of maturing debt and fiscal deficit that has to be financed every year], which Dyck calls the “highest in our rated universe” and puts it at 50-55% of GDP every year that needs to be financed.

The government’s main focus should be on reducing deficit and debt levels through faster growth and a more flexible exchange rate regime to encourage investment, says Dyck.

Where’s the EGP headed? Dyck says he doesn’t know, but adds: “What we are looking at now by end of current fiscal year is EGP 10.50-11.00 to the USD as a working assumption.”

Moody’s is less concerned about monetary policies than fiscal challenges. “The exchange rate is not a key concern for us: the share of foreign currency denominated general government debt is very low, so is the share of externally held government debt. So devaluation would not create a huge spike in debt service payments in foreign currency, which is a strength of the debt structure here,” he says.

Tarek Amer’s problematic media statements re-appear: “A clear communications strategy would help a lot to reduce uncertainty for the market,” says Dyck, not missing the opportunity to mention the central bank governor’s statement that it was a “grave mistake” to have clung to a fixed exchange rate.

The credit rating agency wants faster reforms, but the ghost of angry protestors is still haunting: “We would think that a more rapid fiscal consolidation carries the risk of triggering social unrest,” Dyck says, mentioning the constitution’s mandated social spending.

Melina Skouridou, a Moody’s AVP, answered reporters’ questions about banking, noting that there has been strong credit growth, including lending to the non-government sector, of about 18% as of April 2016.

“We expect that loan growth may soften slightly, but would remain at above 15%, so we expect banks to continue with financial intermediation where significant part of liquidity is invested in government securities,” says Skouridou.

On interest rates, Skouridou said simply “No speculation” when it came to monetary policy decisions, but said banks have a healthy net interest margin, benefiting from low-cost funding given that low-cost current and saving accounts make up a substantial part of deposits.

“So banks can even absorb small lending increases without passing them on,” says Skouridou.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Mashreq (tax ID: 204-898-862), the MENA region’s leading homegrown personal and digital bank; Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt; Hassan Allam Properties (tax ID:  553-096-567), one of Egypt’s most prominent and leading builders; and Saleh, Barsoum & Abdel Aziz (tax ID: 220-002-827), the leading audit, tax and accounting firm in Egypt.