Egypt’s sovereign ratings raised on improved liquidity, reforms

Capital Intelligence (CI), the international emerging markets rating agency, has raised Egypt’s long- and short-term foreign currency ratings by one notch to BBB-/A3 and  affirmed Egypt’s local currency ratings of BBB/A3.

The change in the foreign currency rating reflects the substantial improvement in external solvency and liquidity ratios over the past few years, which indicate strong repayment capacity and an increased resilience to external shocks, and CI’s expectation that balance of payments trends will remain consistent with external sustainability over the medium term. Egypt’s ratings are also supported by the good progress being made on fiscal and structural reforms, which have helped to improve economic and financial fundamentals.

The external current account recorded its sixth consecutive surplus in fiscal year 2006/2007, which ended in June, net foreign direct investment exceeded USD 11bln, while official foreign exchange reserves reached USD 27.4 bln. Gross external debt continued to decline and is estimated by CI to have fallen to a comparatively low 23% of GDP or 60% of current account receipts (CARs). External vulnerability is mitigated by the country’s net creditor position, with the foreign assets of the central bank and commercial banking sector estimated by CI to exceed the external debt stock by the equivalent of 47% of CARs or 18% of GDP in June. Public external debt service is low and official reserves (excluding gold) are currently about seven times as high as the stock of short-term public external debt on a remaining maturity basis (up from four times in June 2004).

Good progress is being made in implementing the government’s economic reform programme adopted in 2004. The foreign exchange market has been liberalised; customs duties reduced and trade procedures simplified; corporate and personal income taxes reformed; and tax revenue administration strengthened.

The privatisation process has gathered momentum: more than 40 enterprises or joint ventures were wholly or partly privatised during the past two fiscal years, the two largest of which were the Bank of Alexandria and Egypt Telecom. Privatisation proceeds have been used, for the most part, to restructure the remaining public sector entities and to settle a large chunk of the non-performing debt owed by public sector companies to state-owned banks. Efforts are also being made to strengthen macroeconomic policy frameworks and improve governance.

Improving macroeconomic management and more assertive structural reforms have contributed to an acceleration in economic growth and increased employment. Real GDP increased by 6.8% in 2005/06 and by 7.1% in 2006/07 and is expected to remain above trend in the current year. The upturn in the economy and drawdown of government deposits to retire debt has led to a substantial reduction in the ratio of government debt to GDP from 103.3% in June 2005 to an estimated 78.6% in June 2007.

Notwithstanding the notable improvement in Egypt’s overall credit profile over the past few years, there are still several weaknesses and sources of vulnerability. The budget deficit is large and the public debt burden, though manageable and declining, is comparatively heavy. In addition, per capita income is low and unemployment and poverty are both relatively high. Economic development is hampered by excessive bureaucracy, inefficient financial intermediation, and an ineffective education and training system.

The government’s broad-based economic programme is aimed at addressing many of these shortcomings and, provided the reform momentum is maintained, should go a long way to facilitating the transition to a higher and more robust economic growth path and to further reducing vulnerabilities. In CI’s opinion, however, the pace and depth of fiscal consolidation in particular is likely to remain slow, in part because of understandable social and political considerations, and hence public debt ratios are expected to decline rather modestly over the medium term.