S&P maintains Egypt’s stable outlook on higher growth prospects

A deterioration in Egypt's external debt balance is only likely to be temporary as the country's economy maintains momentum

S&P Global Ratings affirmed 'B/B' long-term and short-term ratings on Egypt and maintained a stable outlook .

S&P Global Ratings affirmed a 'B' rating on Egypt's short and long-term sovereign debt and maintained a stable outlook, despite elevated external risks to the economy due to the coronavirus pandemic.

Egypt’s economy, like other countries in the world, has suffered due to the coronavirus pandemic. However, the impact has been “less severe” than that faced by many emerging market sovereigns due to the limited lockdown measures taken and a ramping up of healthcare capacity, the ratings agency said in an update.

“The stable outlook reflects our expectation that the weakening of external and government debt metrics will be temporary, and gradually improve from 2022, supported by higher gross domestic product and current account receipts (CARs),” S&P Global said.

“Egypt's foreign exchange reserves and access to domestic and external debt markets will allow it to cover higher external and fiscal financing needs and upcoming maturities over the next 12 months,” the report said. “Although we project that external debt will rise sharply as a proportion of CARs in the fiscal year ending June 30, 2021, this ratio should gradually decline thereafter.”

The ratings agency also predicts strong medium-term growth prospects for Egypt, barring the near-term impact of the pandemic, “underpinned by the ongoing implementation of fiscal and economic reforms”.

"In our view, the Egyptian authorities' plan to generate a central government primary surplus of at least 2 per cent of GDP from fiscal 2022 is ambitious. Nonetheless, we expect primary surpluses of about 1 per cent of GDP over fiscals 2022-2023, combined with recovering growth and lower domestic interest rates, should put debt-to-GDP back on a downward path."

S&P Global forecasts that Egypt's debt will rise to 88.1 per cent of GDP this year and top 90 per cent next year, before dropping back down towards 85 per cent by 2023.

The government earlier this year obtained two facilities from the International Monetary Fund to help address the economic repercussions of Covid-19 and meet higher financing requirements. This includes a Rapid Financing Instrument (RFI) of $2.8 billion and SBA (Stand-By Arrangement) of $5.2bn.

The SBA programme targets higher social and health spending, while pushing for lower accumulation of debt and implementation of structural reforms on governance and transparency.

Egypt is the only country in the Middle East and North Africa region that is expected to maintain economic growth throughout 2020, according to the Washington-based lender. It expects the country's economy to grow at 3.5 per cent this year and 2.8 per cent next year. Overall, the IMF is forecasting a 4.4 per cent contraction for the region's GDP this year, rebounding by 2.9 per cent next year.

S&P Global expects a recovery in public and private investment will support growth in Egypt during the second half of fiscal 2021.

The government's ongoing efforts to improve the business climate, such as the settlement of arrears to exporters, new industrial land allocation mechanisms and the privatisation of state-owned enterprises will support growth in the medium term, it added.

The Central Bank of Egypt also introduced other measures to support the economy, including lowering interest rates to 8 per cent from 10 per cent on loans to small and mid-size enterprises (SMEs), industrial and tourism sectors and social housing schemes, as well as providing credit guarantees of 100bn Egyptian pounds ($6.38bn), which is equivalent to 1.7 per cent of GDP. It also offered deferred payment schemes.

“We could consider a positive rating action over the medium term if Egypt's economic expansion significantly outperforms our forecasts, or if Egypt's reform programme materially narrows government and external financing needs, thereby reducing debt and reflecting a track record of stronger governance," S&P Global Ratings, said.