International rating agency Standard & Poor's announced it had lowered its long-term foreign currency issuer credit and senior unsecured debt ratings on the Arab Republic of Egypt to double-'B'-plus from triple-'B'-minus. All other ratings on Egypt were also lowered by one notch. The downgrade reflects the view that the government's financial and structural reform measures will at best slow down, rather than reverse, the recent deterioration in Egypt's creditworthiness. The outlook is stable.
"Although the government is taking steps to gradually tighten fiscal policy through stricter expenditure controls and revenue-raising measures, the adjustments have not been sufficient or timely enough to reduce the high debt burden or support the fixed exchange rate regime," said Standard & Poor's credit analyst Navaid Farooq. "Fiscal policy flexibility is curtailed by the high gross general government debt burden, at 92 percent of GDP (Gross Domestic Product) in fiscal 2001/2002 (net general government debt is 73 percent of GDP)."
The budget deficit is expected to reach 5.3 percent of GDP in fiscal 2001/2002 (July-June) and five percent in 2002/2003. The general government deficit is forecast at 3.4 percent in 2001/2002. These deficit levels are higher than those of triple-'B'-minus peers. Moreover, substantially narrower deficits are required if Egypt's government debt burden is to converge with that of its peers.
In addition, although the government has adopted several important structural reform measures, it has done so after long delays. The country's EU Association Agreement provides an anchor for further reforms. These, however, are likely to be implemented in a very gradual manner and might be halted in times of stress for fear of political instability, due to low per capita income, labor-market rigidities, the lack of a formal social safety net, and wide income disparities.
On the external front, Egypt continues to have a comfortable cushion of international reserves relative to its projected external financing needs, but its practical value in responding to external shocks has been shown to be rather limited by the current exchange rate policy. Although the authorities have devalued the exchange rate on several occasions, monetary policy remains characterized by a reluctance to use reserves to defend the exchange rate or change the rate in a timely fashion in line with market circumstances. The government is planning to grant the central bank greater independence, but market credibility will be achieved only gradually.
Looking ahead, Farooq added: "The steps that the government has taken, including raising fiscal revenues and controlling expenditures, are in the right direction. Although the measures have not reversed the deterioration of credit indicators, they should eventually lead to their stabilization. Moreover, S&P's expects the government to continue implementing reforms, albeit at a slow pace. Nevertheless, in the medium term, if the deficit is not reduced, the credibility of the current exchange rate regime is not restored, and the pace of structural reforms slows further, then the ratings would be lowered." — (menareport.com)
© 2002 Mena Report (www.menareport.com)
