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Sunday, 13 May 2018

S&P finally raises Egypt’s sovereign credit rating to ‘B’ from ‘B-’

The S&P has finally come around and raised Egypt’s sovereign credit rating to ‘B’ from ‘B-’: S&P Global Ratings raised its long-term foreign and local currency sovereign credit ratings on Egypt to ‘B’ from ‘B-’, with a stable outlook. “The stable outlook balances Egypt’s falling current account deficit, decreasing inflation levels, and stronger growth prospects against risks from still-high fiscal deficits and a high stock of relatively short-dated government debt issued at high interest rates,” the ratings agency said in a statement (paywall). S&P forecasts GDP growth will reach 5.2% in FY2017-18 and is upping its expectation for growth over the next four years to 5.4% from 4.4%.

Rating hike underpinned by economic reforms: S&P sees that economic and fiscal reforms will underpin rising business confidence and sustain capital inflows. One of its key assumptions is that these inflows will lead to an increase in FX reserves, even as a large portion of the fiscal deficit will be financed through external borrowing. “In net terms, we project the key source of financing for the current account deficit will be net foreign direct investment averaging close to 3% of GDP per year over our outlook horizon.” The outfit sees Egypt experiencing a more broad-based recovery and a slight move away from a consumption-driven economy toward an increasing contribution from investment and net exports.

Upside risk: “We could consider a positive rating action if Egypt’s growth significantly outperforms our forecasts, if larger-than-anticipated improvements in the current account position sharply reduce Egypt’s external financing requirements and external debt levels, and if Egypt’s reform program successfully lowers government debt.”

Downside risk: higher borrowing costs and insecurity: “Negative pressure on the rating could arise if Egypt’s plan to gradually reduce government debt to GDP is derailed by fiscal slippages, higher borrowing costs, or more pronounced currency depreciation than expected, or if foreign exchange reserve levels were to fall significantly. We could also see negative pressure on the rating if the security environment worsens, hindering the recovery in investment and tourism.”

The ratings boost is a testament to the success of the economic reform measures and in the confidence investors have shown towards the Egyptian economy, Finance Minister Amr El Garhy said in a statement on Friday.

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