Fitch Ratings has revised the Outlook on Egypt's Long-term local currency BBB rating to Negative from Stable. At the same time, the agency has affirmed Egypt's other ratings at Long-term foreign currency BB+ with a Stable Outlook and Short-term B.
The change in Outlook is based on projections of an ongoing deterioration in public finances, causing Egypt to compare less favorably over time with its local currency rated peer group. Egypt's consolidated gross general government debt is estimated by Fitch at 86 percent of gross domestic product (GDP) for the fiscal year ending June 2003, up from 71 percent just two years ago.
Although nearly all of the increase in Egyptian debt is accounted for by the effects of exchange rate changes on the external debt stock, this is expected to change. "We have some serious reservations with respect to the medium-term fiscal outlook and, by extension, domestic debt dynamics", says Senior Director of Sovereigns at Fitch, James McCormack. "A growing public sector wage bill and increased subsidies, combined with contingent liabilities in the state banks and other state enterprises mean fiscal pressures are going to intensify."
Fitch estimates public sector contingent liabilities are equivalent to at least 15 percent of GDP, although they will probably not materialize until privatization of the state banks begins, perhaps in 2006. Meanwhile, the general government deficit is forecast by the agency to increase to 3.9 percent of GDP this year from 2.5 percent last year, as politically-sensitive subsidies for food become more costly due to exchange rate depreciation.
The official deficit projection for 2003-04 is 2.4 percent of GDP. The ruling National Democratic Party has initiated an economic reform agenda to address some of the fiscal challenges, bringing much-need credibility and determination to the reform process, but the large bureaucracy remains an obstacle to change.
Fitch says it was encouraged initially when the exchange rate was liberalized and subsequently depreciated earlier this year, but implementation of the more flexible policy has been a major disappointment.
Severe foreign exchange shortages persist, as does the parallel market, and the government has introduced a preferential exchange rate for certain commodity imports while requiring exporters to surrender 75 percent of their foreign exchange earnings. "We don't consider these actions or market conditions to be at all consistent with the announced policy," adds McCormack.
Egypt's external accounts are a comparative strength for the Long-term foreign currency rating. Even though the exchange rate remains effectively controlled, the sizable depreciation since 2001 should stimulate non-oil exports and add to the current account surplus. A recovery in tourism, which was delayed by the war in Iraq, is expected.
In addition, Egypt's public sector external debt payments are only about two billion dollars in 2004 and 2005, leaving a very small gross external financing requirement - current account balance plus amortization payments - especially compared to similarly rated sovereigns.
Foreign exchange reserves, at about $14.7 billion, contribute to a strong external liquidity position, again comparing well with similarly rated sovereigns. Egypt's gross and net external debt ratios are mixed versus the peer medians. The country's annual foreign exchange earnings (CXR) are exceptionally low relative to the size of the economy, so while debt/GDP ratios are in line with its peers', debt/CXR ratios are higher. As export earnings increase, Egypt's debt/CXR ratios are forecast to decline. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
