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Thursday, 19 January 2023

Fitch Ratings is positive on IMF agreement, EGP float, but…

IMF pact, EGP flexibility get the thumbs up from Fitch: Our USD 3 bn loan agreement with the IMF and the move to a permanently flexible exchange rate regime have garnered praise in a note from Fitch Ratings. The catch: Our sovereign debt remains at risk of a downgrade if our external position continues to be squeezed in the short term, the rating agency warns.

TL;DR: “The EGP’s depreciation since the start of the year provides evidence of the authorities’ emerging commitment to exchange-rate flexibility, which, if sustained, should have a positive influence on the sovereign’s credit profile in the longer term,” Fitch writes. “In 2016 depreciation helped to boost fiscal revenues while eroding spending in real terms. Our baseline assumption is that a similar dynamic will play out in 2023, but less fiscally beneficial outcomes are possible.”

The caveat: “Further external financing strains, undermining recovery of international reserves and other liquidity buffers, could lead us to downgrade Egypt’s rating,” Fitch writes.

REMEMBER- The rating agency affirmed Egypt’s rating at “B+” in November while revising the outlook to “negative” down from “stable” due to “deterioration” in the country’s external liquidity position.

Reaching agreement on the IMF package helped unlock USD 6 bn in inflows this fiscal year, Fitch says, “including the first USD 750 mn disbursement from the [IMF], another USD 3.75 bn from multilateral sources and USD 1.5 bn from sukuk bond issuance.” Policymakers have penciled in another 12 bn in net FDI and proceeds from the privatization push in FY 2022-2023, Fitch says.

But we still have an external financing gap to fill: Fitch estimates our external financing needs at USD 19 bn this fiscal year and at least USD 22.5 bn next fiscal year. That includes “a narrowing but still large current-account deficit of 3.1% of GDP” or more than USD 13 bn, and external debt maturities of some USD 15.5 bn this fiscal year and next. It doesn’t include some USD 14 bn worth of bilateral debt maturing this fiscal year and next, including some of the recent deposits from our Gulf neighbors, which are expected to be rolled over.

The downside risks: “Shortfalls or volatility” in targeted net FDI, privatization proceeds, and portfolio inflows could see the country miss its external financing targets, Fitch says. Our current debt / GDP and interest / revenue ratios will likely remain “well above” the medians for the “B” rating in the short term thanks to the weaker EGP and high interest rates, the report adds.

Authorities should stay the course: The ratings agency is calling for EGP flexibility and higher interest rates to be sustained, advising policymakers not to “dilute fiscal and economic reforms” even if higher rates and inflation cause short-term disruption.

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