Global Arab Network | Fitch: Stable outlook for Egypt's foreign currency issuer

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Fitch: Stable outlook for Egypt's foreign currency issuer

Global Arab Network - - Mohamed Tamer

Wednesday, 09 December 2009 12:27

Fitch Ratings has today affirmed the Arab Republic of Egypt's Long-term foreign currency Issuer Default rating (IDR) at 'BB+' and Long-term local currency IDR at 'BBB-'. Both ratings have Stable Outlooks. The Short-term foreign currency IDR is affirmed at 'B'. The Country Ceiling is affirmed at 'BB+'.

"Egypt's economy has proved resilient to the global financial crisis due to economic reforms introduced since 2004 and the resulting increased investment and diversification of the economy," says Richard Fox, Head of Middle East and Africa Sovereign Ratings at Fitch. "Strong external indicators are another key support for Egypt's rating. On the downside, fiscal consolidation has come to a halt, and while a temporary halt is within the rating's tolerance, the country's deficit and debt ratios remain well ahead of peers, giving no scope for let up in the reform process."

Egypt entered the global recession in fairly good shape, with three years of 7% GDP growth, positive debt dynamics, and external indicators comparing well to 'BBB' and 'BB' rating medians. However, the ensuing global crisis affected all of Egypt's main foreign currency streams: hydrocarbons, tourism, remittances and Suez Canal fees. Growth slowed to 4.1% y-o-y in Q408, but has since recovered to nearly 5% in Q309. External receipts are recovering, a better-than-expected budget performance gave room for a 1.5% of GDP fiscal stimulus, and falling inflation earlier in the year allowed interest rates to be cut. Foreign investment has also proved resilient, comfortably financing the current account deficit, with international reserves rising again since May, after falling sharply in Q408.

The main impact from the global recession has been a halt to fiscal consolidation with the deficit and debt burden essentially unchanged in FY09 (year ending June) after three years which saw the debt ratio fall by 33% of GDP. The FY10 budget projects the deficit will rise to 8.4% of GDP, although the debt ratio should remain broadly stable. A temporary halt to fiscal consolidation is within the tolerance of the 'BB+' rating but with gross debt above 70% of GDP and net debt of nearly 60%, Egypt's fiscal room for manoeuvre is limited.

A number of other economic indicators remain weaker than the peer group, which will necessitate continuing reform efforts. In particular, Egypt's headline inflation rate of 13.3% remains high and is rising again. Core inflation of 6.5% is much lower, but even this is sensitive to food price volatility. The central bank is strengthening its monetary policy tools, but its ability to control inflation through the interest rate channel, while improving, remains weak. The banking system is improving and has not required special support, but Fitch still judges it relatively weak compared to peers. The government has had important successes in improving the business environment, but this still compares unfavourably to peers in some respects. Meanwhile, high inflation and parliamentary and presidential elections in 2010 and 2011 respectively, are likely to constrain reforms that could be made in the short-term.

Global Arab Network

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