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Tuesday, 26 April 2022

S&P, Fitch ratings affirm credit rating at BB, B+, say outlook stable despite Russia-Ukraine war

S&P and Fitch Ratings have both affirmed Egypt’s BB and B+ credit ratings with a stable outlook, despite surging food and energy prices caused by the war in Ukraine putting pressure on the country’s finances, the two ratings agencies said last week (here and here). The agencies attributed their affirmed outlook and rating to the government’s policy response and the likely influx of external support.

What they said: “The stable outlook reflects our expectation that the Egyptian authorities’ policy response, alongside significant external support, should prevent a material deterioration in external and fiscal positions due to rising commodity prices,” S&P Global wrote in its note on Friday. Fitch added in its report that the rating was supported by Egypt’s “large economy with robust growth and strong support from bilateral and multilateral partners.”

A helping hand from the Gulf: “GCC support and a new IMF programme will support investor confidence, in our view,” Fitch wrote, adding that it expects talks with the IMF to result in a new financing package from the lender. Saudi Arabia has already deposited USD 5 bn with the Central Bank of Egypt (CBE) and the Saudi sovereign wealth fund is looking to invest USD 10 bn in Egypt’s healthcare, education, agriculture and financial services sectors. Meanwhile, the government has received USD 1.8 bn from Abu Dhabi after ADQ purchased state-held stakes in several listed companies, and Qatar has pledged to invest USD 5 bn in Egypt.

The rate hike + EGP devaluation helped preserve our FX reserves: The devaluation of the EGP in March, along with the CBE’s 100-bps interest rate hike, helped preserve reserves, S&P wrote, while our inclusion in the JPMorgan GBI-EM bond index should help “reduce volatility in portfolio flows by shifting some investment to passive management, generating lower yields and increasing demand for longer-dated debt.”

The government is likely to cover higher wheat prices by “using exchange rate and interest rate policy to manage economic adjustments alongside external funding support from bilateral and multilateral parties,” S&P wrote. The government said in early March that rising wheat prices would cost it an additional EGP 15 bn this fiscal year, penciling the cost in at USD 350 per ton. Wheat prices soared almost 20% in March alone, as the war disrupted exports from major exporters Russia and Ukraine.

Outlook good for debt-to-GDP ratio: “We expect government debt/GDP to fall to about 91% in FY 2021-2022, from 92% the year before and to remain on a slight downward trend, despite the impact of currency devaluation,” Fitch wrote, noting that dampened growth amid higher interest rates could present a risk to debt dynamics. The government had been planning to bring down the debt-to-GDP ratio to below 90% in FY2022-2023 and 82.5% by June 2025 — but that was before the Russia-Ukraine war started to hit government finances.

Inflation will continue to rise, and further interest rate hikes are likely: Both Fitch and S&P expect inflation to continue to rise throughout the year, as the EGP devaluation adds to inflationary pressures. Fitch forecasts inflation hitting 10% in FY 2021-2022, and 12% in the next fiscal year. “In our view, the CBE is likely to raise interest rates further to maintain positive real policy rates, tame inflation, and support the EGP and attractiveness of local-currency assets,” the agency wrote. “We assume a further 300 bps in rate rises by FY 2023-2024.”

The two agencies predict slower economic growth: Fitch forecasts 6% economic growth in FY 2021-22 and 4.5% growth in FY 2022-2023, while S&P pegged growth at a slightly lower 5.7% for the current fiscal year. S&P’s forecast tallies with the government’s recent revision, which was attributed to the impact of the war in Ukraine.

Current account deficit to narrow to 4% of GDP in FY 2021-2022: Both Fitch and S&P expect the current account deficit to narrow to USD 18 bn during the current fiscal year, down from USD 18.4 bn in FY 2020-2021. Tourism receipts will continue to rise despite the loss of two of our biggest tourist destinations. S&P also expects further mitigation due to higher remittances from Egyptians in the GCC benefiting from the spike in oil prices. Fitch expects the deficit to narrow further to 3.5% of the GDP in FY 2022-2023, while S&P expects it to reach 3% by 2025.

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