GCC fiscal pressures could affect supporting Egypt: Standard & Poor’s

Daily News Egypt
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Local banks in the North Africa region are still “slowly familiarizing” themselves with Islamic finance and sukuk markets as a creditable financing alternative, according to an report by international ratings agency Standard and Poor’s (S&P) published 18 February. (AFP Photo)

Economic growth in Egypt will be backed by political stability and the government’s commitment to undertaking economic and fiscal reforms, international ratings agency Standard and Poor’s (S&P) said in its latest report on Egypt.

S&P described the fiscal reforms as introducing new wage reform and applying the value-added tax (VAT) system on goods and services. “In our view, Egypt’s economic recovery will depend on maintaining security, sociopolitical stability, and on addressing bottlenecks and shortcomings in energy and foreign exchange market,” S&P said.

High domestic debt, wide fiscal deficits, low income levels, and institutional fragility are constraining S&P’s ratings on Egypt. According the agency, the current level of foreign currency reserves represents a “limited buffer” to absorb further depreciation in the Egyptian pound.

Egypt’s political and security landscape has stabilised after the election of President Abdel Fattah Al-Sisi in 2014.

“The security and socio-political improvement in Egypt remains fragile, however, with incidents of hostility occurring between the government and supporters of the now-outlawed Muslim Brotherhood, and conflicts against the Egyptian affiliate of Islamic State in Northern Sinai,” the report revealed.

Government’s fiscal reforms since 2014, including raising administered fuel and electricity prices, which aim to gradually phase out fuel subsidies over the next five years, are partly counterbalanced by spending on health, education, and social transfers, S&P said.

Despite the persistently wide fiscal deficit, S&P did not expect the government to face major challenges in raising domestic financing through the Egyptian banking system “because Egyptian banks still enjoy a comfortable liquidity position”.

“Egyptian banks have so far remained keen buyers of government debt and in recent years have chosen to invest their excess domestic currency liquidity in government debt offerings,” it said. S&P also expected the Egyptian government to issue Eurobonds and Sukuk (Islamic bonds) to diversify its funding sources.

“We assess Egypt’s monetary policy flexibility as low, reflecting our view of the CBE’s intermittent interventions in the foreign exchange market and its exposure (along with that of the banking system) to the government, as well as an annual inflation rate exceeding 10%,” S&P said.

Standard and Poor’s expectations for the Egyptian economy:

  • GCC countries support to Egypt could be affected by their recent fiscal pressures.
  • Investments in the oil and gas sector will be increased after Eni’s discovery of the Zohr natural gas offshore field.
  • Egyptian exports could recover thanks to a higher demand from Europe and a depreciating currency.
  • New parliament will support the government’s priorities.
  • Fiscal deficit will close at 11.5% of GDP in FY 2015/2016.
  • Egypt will receive concessional loans from international official institutions during the current fiscal year.

In November, S&P downgraded its Egypt’s outlook from “positive” to “stable”, maintaining its B-/B credit rating. The agency said the stable outlook means that Egypt will largely remain politically stable and fiscal deficits will improve but remain at high levels.

Last May, S&P affirmed Egypt’s long and short-term foreign and local currency sovereign credit ratings at B-/B, putting the country’s outlook at “positive” instead of “stable”.

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