Egypt sees economic growth, diversification, reform, but weak fiscal

In its annual report on Egypt, Moody’s Investors Service said the country’s Ba1 foreign currency government bond rating reflects economic growth, diversification, and bold efforts at reform. The local currency government bond rating is Baa3 and carries a negative outlook as the government’s creditworthiness continues to be tested by a weak fiscal position and growing debt.

“Since the installation of President Hosni Mubarak’s new leadership team in 2004, Egypt has embarked on a bold program of reform,” said Moody’s Vice President Sara Bertin-Levecq, author of the report. “Helped by higher oil prices during the same period, the reforms have revitalized the economy.”

The bond rating and Moody’s assessment of a low risk of a payments moratorium in the event of a government bond default form the basis for Egypt‘s Baa2 foreign currency country ceiling for bonds.

With real GDP growth likely to be around 7% for the 2006/2007 fiscal year, Bertin-Levecq said, the economy will build on last year’s positive performance with one important difference: other sectors such as agriculture and manufacturing have picked up, meaning growth will not be dependent solely on high oil and gas prices. The growth of these other sectors should help create jobs and increase economic resiliency.

“A high rate of growth would also help the government in its battle against poverty,” added Bertin-Levecq. “This could potentially ease socio-political pressures.”

The external position of the country is strong due to high oil income, tourism receipts and revenue from the Suez Canal. External debt has declined to manageable levels and foreign reserves have been going up.

“These characteristics, coupled with the external financial support that geopolitically important Egypt is able to garner, have allowed the ratings to be maintained at the current levels in spite of policy slippages and exogenous shocks,” said the analyst.

However, Egypt‘s Baa3 local currency government bond rating has a negative outlook due to the sharp deterioration in public finances that took place from 2002 to 2005.

“The public budget accounts register large deficits,” said Bertin-Levecq, “although the fiscal deficit relative to GDP has been going down from its 9% peak in 2005.”

She added, “Then again, at above 7% in 2007, the deficit remains high due to structurally stubborn expenditures. The financing needs of the government in the domestic market represent a concern in the context of rising inflationary pressure and the relatively weak effectiveness of monetary policy.”

While real GDP growth may slow down slightly this year and in 2008, ongoing reforms “are starting to generate a virtuous circle, and we therefore expect real GDP to grow at consistently healthy rates over the medium term,” concluded Bertin-Levecq.