Energy subsidies cuts demonstrate commitment to fiscal and economic reforms, says Fitch: Egypt’s new budget and lower electricity and fuel subsidies demonstrate a continued commitment to fiscal consolidation and economic reform, backed by the country’s IMF program, Fitch Ratings said on Wednesday. “Cutting energy subsidies at the beginning of the fiscal year gives us greater confidence in the authorities’ willingness to control expenditure and hence in the credibility of fiscal targets,” said the agency. Fitch upheld Egypt’s ‘B’ Stable sovereign rating from 22 June.

Fitch noted that headline inflation is set to rise back above 30% following the energy price hikes. The CBE is moving to curb it through last Thursday’s 200 bps interest rate hike.

The ratings agency forecasts that the budget deficit will reach 9.3% of GDP (and a primary deficit of 0.3%), higher than the 9.1% of GDP projected in the FY2017-18 budget. increasing social spending on food subsidies and pensions. Nevertheless, the wage bill is still only budgeted to increase by around 8% in the fiscal year, “which even with attrition from retirements would be significantly below the rate of inflation.” Fitch does expect that raising the value-added tax (VAT) to 14% should be a significant source of revenue.

The government’s budget GDP growth projection of 4.6% is broadly in line with Fitch’s forecast. “However, public finances are a key weakness in Egypt’s sovereign credit profile. We estimate that the general government debt-GDP ratio exceeded 100% at end-FY2016-17 following the flotation of the EGP.” The agency forecast a decline to 87.9% in FY2018-19, but this is highly dependent on securing a small primary surplus and increasing economic growth.

Egypt’s key risk factor? It’s politics, especially considering presidential elections in May 2018. Political sensitivity to the social impact of spending cuts and high inflation still presents implementation risk.

“Fitch’s note represents a major testament by international institutions to the progress of the economic reforms and a vote of confidence in them,” Finance Minister Amr El Garhy said on Wednesday. Deputy Finance Minister Ahmed Kouchouk noted the similarities between Fitch’s forecast and those outlined in the budget, according to a Finance Ministry statement.