Egypt, rating agencies promote the economy
29 April 2019

Rating agencies and the World Bank are promoting Egypt’s economy, which appears to be on the verge of no longer needing the support of the International Monetary Fund. Fitch has improved the rating on the default risk (IDR) of Cairo to “B +” with a “stable” outlook. In a report released on March 21, the rating agency said the new judgment is the result of further progress being made in implementing economic and fiscal reforms, which are leading to better macroeconomic stability and stronger finances.

Upgrade also by Moody’s, which on the same day improved its rating on Egypt’s credit risk portfolio, assigning a rating of “B2” from “B3” with a positive outlook. The agency’s experts argue that “the ongoing fiscal and economic reforms will support a gradual but steady improvement in Egypt’s fiscal parameters and increase real gross domestic product (GDP) growth”.

This can be credited to the economic and fiscal reforms that the government is about to complete, as required by the long-term three-year program of the International Monetary Fund. The governor of the Egyptian central bank, Tarek Amer, declared on 21 April, “Egypt does not need a second loan program with the Monetary Fund”. He has created a positive balance of the financial indicators of his country, emphasizing in particular that since November 2016, the starting date of the 12-billion-dollar maxi-loan granted by the IMF, foreign currency inflows have reached 150 billion dollars.

According to Fitch, it is “likely that the reforms will continue to generate better economic results even after the IMF agreement. The ratio of public debt to GDP is in a downward phase, supported by structural improvements in the budget and the emergence of primary surpluses “, analyzes the rating agency. The public debt-to-GDP ratio will drop to 83 percent in fiscal 2020, after peaking 103 percent in fiscal 2017. Macroeconomic stability in Egypt “has improved, with stronger growth and disinflation”. Average consumer price inflation fell to 14.4 percent in 2018 from nearly 30 percent in 2017, following the sharp depreciation of the Egyptian pound in November 2016. We expect average inflation of 12 per cent and 10 per cent respectively in 2019 and 2020”, concludes Fitch. However, Cairo is aiming for even lower single-digit inflation. The central bank’s target dropped from 13 percent in the fourth quarter of 2018 to 9 percent for the last quarter of 2020.

As for 2020, according to Fitch, “the proposed budget again aims at a primary surplus of 2 percent of GDP and a budget deficit of 7.3 percent of GDP. The consolidation comes mainly from lower interest payments thanks to the trend towards disinflation, lower interest rates and lower debts, as well as the further round of reforms on subsidies, including the introduction of an automatic mechanism for adjusting fuel tariffs”.

According to Fitch, the government has made a political commitment to further fiscal consolidation and structural improvements in the budget that could continue in the future. “In the 2020 financial year we expect wages and compensation of less than 5 percent of GDP, down from the average of 8 percent in the 2015 and 2016 fiscal years”. This is also the result of the public administration law, which provides that “subsidies and social spending will fall to 5.3 per cent in 2020, from 8 per cent in fiscal 2017, after several cycles of increased tariffs between utilities and other regulated prices”. Fitch estimates that subsidies and social benefit spending will decrease by 1.1 percent of GDP in 2019. “Interest spending continued to limit consolidation, but in line with expected amounts: overall, the revenues grew by 28 per cent on an annual basis and expenses by 17 per cent on an annual basis”.

All this is taking place in a context of solid economic growth. The World Bank expects GDP to grow 5.5% in 2019, marking the second highest rate of growth in the Middle East and North Africa region after Djibouti, thanks to private consumption, a recovery in the tourism sector and operations in recently discovered gas fields. In a report on the economic outlook for the MENA region, the World Bank predicted that Egypt’s growth rate will reach 5.8% in 2020.