Fitch affirms Egypt's rating at 'B+' with stable outlook

Fitch affirms Egypt's rating at 'B+' with stable outlook Mon, Apr. 25, 2022
CAIRO - 22 April 2022: Fitch Ratings affirmed Thursday Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook.

Fitch elaborated in a report that Egypt's ratings are supported by its recent record of fiscal and economic reforms, its large economy with robust growth and strong support from bilateral and multilateral partners.

“The ratings remain constrained by weak external liquidity metrics amid still substantial reliance on non-resident investments in the local bond market, large fiscal deficits, high general government debt/GDP, and domestic and regional security and political risks,” it noted.

It referred to the decline in the Central Bank of Egypt (CBE) reserves by $4.7 billion to $35 billion in March 2022, after portfolio outflows and CBE interventions to smooth exchange-rate volatility. “At an estimated 3.7 months of current external payments, reserve coverage is now weaker than the 'B' median. CBE's foreign-currency (FC) assets not in reserves, mostly deposits at local banks, which used to be an important backstop, also declined by $7.6 billion to $1.5 billion.”

Foreign holdings of Egyptian pound-denominated government debt dropped to $17.5 billion by mid-March, a decline of $11 billion from end-2021 and $16 from their all-time high in September 2021, according to Fitch.

It stated that the CBE's net foreign assets remain significantly weaker than gross reserves, declining to a negative $5.1 billion at end-March from $8.6 billion in February, the lowest level since 2016. However, CBE's liabilities are medium- to long-term in nature and have repeatedly been rolled over, and we continue to view gross reserves as the most relevant indicator of Egypt's external liquidity. Aside from GCC deposits, CBE liabilities include a currency swap with the People's Bank of China and repurchase agreements with international banks.

As for the current account deficit, Fitch expected it to shrink to 4 percent of GDP in FY21/22 ($18 billion) and 3.5 percent of GDP in FY22/23 from 4.6 percent of GDP in FY21, noting that the deficit improved in 2H21 helped by growth in shipping through the Suez Canal, a rebound in travel receipts and a widening hydrocarbon trade surplus. Travel receipts will likely still be higher in FY22 than FY21, despite the loss of tourists from Russia and Ukraine (less than a fifth of receipts).

The report also expected general government fiscal deficits of 7.4 percent of GDP in FY21/22 and 7.0 percent of GDP in FY22/23, from 7.2 percent of GDP in FY20/21, wider than the 'B' median.

The central government deficit was 7.1 percent of GDP (annualised) in July 2021-March 2022.

With regard to economic growth, Fitch forecast 6 percent growth in FY22 and 4.5 percent in FY23, although tighter monetary conditions pose significant risks.

“We expect government debt/GDP to fall to about 91 percent in FY22, from 92 percent in FY21 and to remain on a slight downward trend, despite the impact of currency devaluation. Egypt has an established record of surpluses in recent years, but weaker growth presents a risk to the debt dynamics, particularly amid higher interest rates,” it stated.

In addition, overall inflation is anticipated to hit 10 percent in FY22 (July 2021-March 2022: 7.8 percent) and 12 percent in FY23.

“In our view, the CBE is likely to raise interest rates further to maintain positive real policy rates, tame inflation, and support the Egyptian pound and attractiveness of local-currency assets. We assume a further 300bp in rate rise by FYE23/24,” it added.