Moody’s Investors Service changed Egypt’s economic outlook to stable from negative on Monday and affirmed its Caa1 government bond rating.
The outlook improvements are due to “the stabilised political and security situation, the launch of government initiatives toward fiscal consolidation, signs of a growth recovery and an improvement in macroeconomic stability, and strong support from external donors,” Moody’s said in a statement.
Egypt’s Caa1 government bond rating, however, remains primarily constrained by “high fiscal deficits, high government debt, very large fiscal borrowing needs and continued challenges hindering the recovery of economic growth in the post-revolutionary political and economic environment.”
Moody’s further affirmed the Aaa rating of Egypt’s backed global bond. Egypt’s B3 foreign-currency bond ceiling, Caa2 foreign-currency deposit ceiling and Ba3 local-currency country risk ceilings are unaffected by today’s rating affirmation. The short-term country ceilings for foreign-currency bonds and deposits remain unaffected at Not-Prime (NP).
Moody’s explained that the domestic political and security situation has improved, following the constitutional referendum on 14-15 January 2014, which formed the first step in the political reform roadmap and led to greater institutional stability.
Egypt launched several fiscal and economic reforms over the past year, adjusting administered fuel prices, and unveiling plans to phase out fuel and electricity subsidies over the next five years. The government is also working on revenue-enhancing measures, including a shift from the current goods and services tax to a value-added tax system.
Moody’s added that these initiatives target a deficit reduction, with the current fiscal year target set at 10 per cent of GDP, compared with an 12.8 per cent estimated by the Ministry of Finance in fiscal 2014 and 8.5 per cent by 2019. At the same time, the Ministry of Finance plans to stabilize the government debt ratio and reduce it to 80-85 per cent of GDP by 2019.
In addition, real GDP grew by 3.7 per cent year-on-year during the fourth quarter of fiscal 2014, up from 2.5 per cent in the previous quarter, while high frequency indicators support the scenario of a sequential pick-up in growth, Moody’s said.
The HSBC/Markit Purchasing Managers Index rose to a ten-month high of 52.4 in September and tourist arrivals are rising.
Domestic investors are showing confidence in the economic recovery of Egypt. The recent issuance of Suez Canal investment certificates to retail investors was met with high demand and yielded the equivalent of $8.5 billion USD within one week.
Furthermore, the expansion of the canal and development of the surrounding area will be a central supporting factor for economic growth and employment over the next five years at least.
Moody’s noted that external financial support, predominantly from Gulf Cooperation Council member states, continues to bolster external liquidity, supporting Egypt’s budget and lowering the government’s financing costs.
Saudi Arabia, Kuwait and the United Arab Emirates have pledged almost $17 billion in grants and loans to the Egyptian government and Central Bank of Egypt in 2014. In addition, the US has recently resumed military cooperation and other aid.