Reform program enhances Egypt’s growth path: Moody’s

CAIRO – 9 May 2019: “The macroeconomic and fiscal reforms the Government of Egypt (B2 stable),implemented in the run-up to and under the umbrella of its 3-year Extended Fund Facility (EFF) with the IMF since November 2016, have helped move the economy toward a higher trend growth path and strengthened its shock-absorption capacity,” Moody’s Investors Service (Moody’s) said in a report.

Answering a question about expectations of economy to sustain higher-trend growth, Moody’s stated that continued progress on reforms observed over the past 3 years and improvements in the private sector’s access to credit underpin Moody’s expectations of a return to 5.5 percent GDP growth in 2019 and further acceleration to 6 percent by 2021.

“Longer-term, Egypt’s potential growth will hinge on reforms that foster absorption of large numbers of new labor market entrants over the next decade in light of the public sector’s balance sheet constraints. Longstanding vested interests in the public sector are likely to slow these efforts,” it added.

The report further said that the completion of reforms to energy subsidies envisaged under the EFF together with earlier reductions in the wage bill to an expected 5 percent of GDP from 8.5 percent in 2013 underpin our expectations of a return to a general government primary surplus in fiscal 2019.

“In particular, the extension of the consumer price indexation formula to most fuel types–supported by the adopted oil price hedging mechanism as backstop against oil price spikes–will shield the fiscal trajectory from oil price shocks and allow the fiscal deficit to decline in line with a gradually diminishing interest bill,” it added.

The report further noted that the changes in the structure of government spending towards more focused support to lower-income households and toward investment will help strengthen the resilience of the government’s fiscal position to economic and financial shocks.

How resilient is Egypt’s credit profile to liquidity risks and capital market outflows?

Answering this question, Moody’s said that annual gross financing needs worth 30-40 percent of GDP over the next few years – driven by the high interest bill in the 8 percent-9 percent of GDP range and the low average maturity of the debt stock of about three years – are a key source of liquidity risk for the sovereign that will continue to weigh on Egypt’s credit profile.

“Although sharp capital outflows in the second half of 2018 and the consequent widening in spreads highlight the sensitivity of Egypt’s debt costs to shifts in foreign investor demand, this period also underscores the shock-absorption capacity of domestic financial sector and its role as a primary funding source for the government during times of stress,” it added.

In April,Moody’s upgraded the long-term foreign and local currency issuer ratings of the Government of Egypt to B2 from B3, and changed its outlook to stable from positive.

Moody’s upgrades Egypt’s rating to B2 with stable outlook

CAIRO – 18 April 2019: Moody’s Investors Service (Moody’s) upgraded the long-term foreign and local currency issuer ratings of the Government of Egypt to B2 from B3, and changed its outlook to stable from positive.