Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Egypt’s Long-Term Foreign and Local Currency Sovereign Ratings of ‘B-’ and its Short-Term Foreign and Local Currency Ratings of ‘B’. The Outlook for Egypt’s ratings is revised to ‘Stable’ from ‘Negative’.
A long-term rating within the ‘B’ range indicates significant credit risk, as the capacity for timely fulfilment of financial obligations is very vulnerable to adverse changes in internal or external circumstances.
The change in the Outlook for Egypt’s ratings is driven by the following factors:
(a) Receding short-term financing risks and improving international liquidity in large part due to the continued availability of financial assistance from friendly states and international donors.
(b) The mildly improving political climate – although risks remain high.
Near-term external financing risks have receded due to the receipt of financial support from the member states of the Gulf Cooperation Council, (GCC). Since July 2013, GCC states have pledged total support to Egypt in the region of USD15 billion (5.5% of Egypt’s GDP), of which about 75% has so far been disbursed. This support has been in the form of cash donations, interest-free loans, oil, and oil products. As a result, official foreign exchange reserves have begun to increase (contrary to CI’s previous expectations) and now fully cover the country’s short-term gross external financing needs (the sum of the current account deficit and external debt falling due).
International reserves are expected to continue growing in 2014-16 – provided the political situation does not deteriorate – but are unlikely to reach pre-crisis levels. Nevertheless, CI expects foreign reserves to continue to provide adequate coverage of short-term external debt (on a remaining maturity basis) and a reasonable buffer against moderate external economic shocks.
In the policy arena, the stabilisation of the reserve position has provided the authorities with a short respite to focus on measures needed to strengthen macroeconomic and fiscal fundamentals, including the reform of taxes and subsidies.
The political climate has also improved in recent months. The new constitution, endorsed in a referendum in January 2014, paves the way towards the holding of presidential and parliamentary elections, both of which are due to take place later this year. Nevertheless, prospects for a speedy restoration of civil stability currently appear low in view of the entrenched polarisation between supporters of the government and those of the deposed president.
Egypt’s ratings continue to be supported by the country’s comparatively low level of external debt which stood at 16.5% of GDP (64% of current account receipts) in 2013. The debt maturity profile is relatively favourable and gross external financing requirements are low at an estimated 4.7% of GDP in FYE 2014.
Notwithstanding the above, the public finances remain a major rating constraint in view of structural weaknesses, high rigidity, large indebtedness and dependence on foreign funding to secure its financing needs. The general government budget deficit is expected to exceed 14% of GDP in FYE 2014, while general government debt is projected to reach 89% by next June, reflecting large financing needs. In CI’s opinion, the adverse political environment still constrains the ability and willingness of the current government to implement serious reformative measures aimed at reducing economic and financial vulnerabilities.
The ‘Stable’ Outlook reflects CI’s expectation that Egypt’s fiscal and external position will stabilise over the next 1-2 years, as the upcoming elections could result in a government that is willing to undertake serious – yet gradual – structural reforms.
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