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Tuesday, 28 July 2020

Fitch affirms Egypt’s long-term FX issuer rating at B+; outlook stable

Fitch Ratings affirmed yesterday Egypt’s long-term foreign-currency issuer default rating at ‘B+’ with a ‘stable’ outlook. The ratings agency said that Egypt’s “recent track record of fiscal and economic reforms, policy commitment to furthering the reform program and ready availability of fiscal and external financing in the face of the covid-19 pandemic” supported the rating affirmation. On the flipside, Egypt’s rating is weighed down by the country’s fiscal deficit, which is “still large,” as well as high general government debt / GDP and weak governance scores as measured by the World Bank governance indicators.” These are broadly the same reasons the ratings agency gave back in November, when it last affirmed the same rating and outlook.

Also weighing on our rating: Public finances, including our debt-to-GDP and debt-to-revenue levels, which Fitch says are “significantly higher” than the “B” median of 65%. The upside of Egypt’s debt is that half of it is from multilateral institutions the country has warm relations with, and we have “considerable domestic financing flexibility” thanks to a robust banking sector. Fitch also cites “weak governance” and political / security risks as other factors weighing against Egypt.

Egypt’s GDP is expected to grow 2.5% in FY2020-2021, which is “well below” the average 5.5% growth Egypt recorded in FY2017-2018 and FY2018-2019. However, the ratings agency expects growth to bounce back to 5.5% in the next fiscal year and average at a little above 5% over the medium term. The accelerated growth will come on the back of a recovery in the tourism industry, as well as an expansion in the energy and manufacturing industries, underpinned by further reforms to improve the business climate. Inflation is expected to hover at an average of 6% this calendar year and 7.5% in 2021.

Fitch sees Egypt’s budget deficit widening to 9.5% of GDP in FY2020-2021, from 8.8% in the fiscal year that ended on 30 June, and sees a “small budget sector primary deficit of 0.4% of GDP.” This is a “more cautious” forecast than that contained in the state budget, which targets a 0.5% primary surplus — revised downward from an initial 2.0% primary surplus target. The ratings agency also sees this indicator recovering in FY2021-2022, when it expects the primary surplus to “reemerge” and the budget deficit to narrow again to 8.8%.

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