Fitch Keeps Egypt's Credit Rating at B+, With a Stable Forecast

Fitch Ratings announced on Monday that it is maintaining Egypt's long-term foreign-currency (LTFC) Issuer Default Rating (IDR) at a ‘B+' with a stable outlook.

Fitch said that the rating is based on Egypt's recent track record of economic and fiscal reforms as well as macroeconomic improvements regarding stability and external finances.

However, Fitch said that Egypt's rating is constrained by still large fiscal deficits, high general government debt to GDP ratio, and weak governance scores, as measured by the World Bank governance indicators, which underscore political risks.

Fitch said that Egypt's macroeconomic performance further strengthened in 2019, with real GDP growth at 5.6 percent and inflation falling to single digits.

"We forecast inflation to average at 9.5 percent in 2019 and 8 percent in FY 2020/21, down from 14.4 percent in 2018. For real interest rates, we anticipate it will remain comfortably positive, even after the Central Bank of Egypt (CBE) cut its interest rates by a cumulative 450bp in 2019, to 12.25 percent," Fitch said in a statement.

Fitch forecasted that real GDP growth will remain robust at around 5.5 percent in FY 2020/21, with balanced risks to this forecast. Furthermore, it predicted that Egypt will remain committed to its reform programme, following the completion of its $12 billion three-year Extended Fund Facility with the International Monetary Fund (IMF), which officially ends in November 2019. The final disbursement took place in July.

Fitch also said that Egypt's government hit its fiscal targets in FY2019/20, with preliminary numbers indicating a budget deficit of 8.2 percent of GDP, down from 9.7 percent in FY2019/18, and a primary surplus of 2.0 percent of GDP.

Therefore, Fitch forecasted the budget deficit to narrow in FY2019/20 to 7.6 percent of GDP, thanks to lower interest spending in particular, but to remain slightly wider than the government target, 7.2 percent of GDP, given lower revenue projections and weaker assumptions for real GDP growth and nominal GDP.

Consequently, Fitch said that it implies a further decline in government debt to GDP ratio to around 83 percent, an improvement of 20 percent from the peak of 103 percent in FY17.

On the other hand, the Fitch projected that Egypt's current account deficit (CAD) will widen to around 3.2 percent of GDP in 2021, from 2.3 percent in 2018, placing modest downward pressure on foreign reserves and the exchange rate.

"Nonetheless, we expect reserves to remain more than 4.5 months of current external payments (CXP). This assumes that Egypt continues to roll over the vast majority of maturing GCC deposits at the CBE (the outstanding stock is $17.4 billion, with $10 billion that was due to mature in 2019 being rolled over," Fitch said.

It added that Egypt's net external debt has risen sharply, but at 16 percent of the GDP it remains lower than the current ‘B' peer median of 28 percent of the GDP, while around 60 percent of sovereign external debt is multilateral, bilateral or in the form of GCC deposits.