Fitch Ratings affirmed Egypt’s long-term foreign-currency issuer default rating (IDR) at ‘B+’ with a stable outlook on Wednesday. The rating is supported by Egypt’s “recent track record of fiscal and economic reforms,” coupled with its large economy, which has remained stable and resilient through the global health crisis, as “continued economic growth and a modest coronavirus support package limit the pandemic’s impact on Egypt’s public finances.” Weighing on the rating is the country’s “still-large fiscal deficits, high government debt-to-GDP and domestic and regional security and political risks.”

Fitch expects the fiscal deficit to narrow by the end of FY 2021-2022 with government tax revenues rising. The introduction of the new Customs Law and the modernization of the tax system through the digital tax platform, which will help the government increase tax revenue-to-GDP by two percentage points over the next four years. The deficit is expected to have widened to 7.5% of GDP during the previous fiscal year from 7.0% in FY 2019-2020 and 7.9% in FY 2018-2019.

Government debt levels remain a “core weakness” but debt-to-GDP will begin to fall during the current fiscal year, the ratings agency said. Debt rose from 84% of GDP in FY 2018-2019 to an estimated 88% in FY 2019-2020 and FY 2020-2021, but is expected to fall back to 86% by the end of this year in June 2022 due to accelerating growth and continued primary surpluses.

Egypt’s GDP “outperformed the vast majority of Fitch-rated sovereigns throughout the coronavirus pandemic,” on the back of domestic demand, natural gas production and new public-sector investment amid declining tourism and export revenues, Fitch said. Private sector credit growth, which grew from 20% in FY2019-2020 to 21% in FY2020-2021, also helped bolster economic growth. Real GDP is expected to increase to 5.5% by FY 2022-2023 as global economic and travel conditions normalize from the pandemic.

One of the biggest threats to Egypt’s fiscal stability: changing global monetary conditions. Foreign holdings of government debt reached nearly USD 34 bn last month, having increased from less than USD 10 bn in the wake of the covid market crash, but Fitch warns that inflows “could reverse in response to any confidence shock or shift in global liquidity conditions, putting pressure on foreign exchange liquidity, interest rates and the exchange rate.” On the plus side, Egypt’s inclusion in the JPMorgan GBI-EM bond index starting January of next year and the settlement of Egyptian bonds by Euroclear, which is expected to happen later in 2022, will both provide “some structural support” to foreign demand for EGP bonds. Finance Minister Mohamed Maait has estimated that inclusion in the JPM index will result in passive inflows of about USD 1 bn.