The rating agency Moody’s has explained to Emerging Markets its rationale for upgrading Egypt after four difficult post-revolution years, and says many of the country’s indicators now outstrip its regional peers.
“We think all the Arab Spring countries are witnessing some degree of political stabilisation,” said Steffen Dyck, senior analyst at Moody’s. “But Egypt has achieved the most, coming out with an economic reform agenda, a stabilising political situation, a commitment to fiscal consolidation and positive external donor support.”
On April 7 Moody’s upgraded Egypt to B3 (stable), ending a period of relentless decline in which the sovereign was downgraded by six notches in three years, to Caa1 (negative) by December 2013. The stable rating is a stand-out, as Lebanon and Tunisia are both on negative watch. Both Fitch and Standard & Poor’s upgraded Egypt in late 2014, to B and B- respectively.
While Egypt has struggled enormously with its political environment, it has never quite stopped growing, and averaged 2.7% a year in GDP growth from 2010 to 2014. While that is hardly outstanding for an emerging market, it is well ahead of Tunisia (1.9%) and more or less level with Jordan (2.8%). Real GDP growth has picked up, helped by recovering consumption and investment. Consensus forecasts expect 4.5% growth in 2015 and 5% in 2016.
Egypt, however, has the highest inflation pressures among its peers, and faces continuing worries about its foreign exchange reserves, although they have at least stabilised ($15.3bn at the end of March). Its fiscal deficit is the worst in its peer group (except Libya, whose finances can scarcely be calculated with any accuracy now), and its government debt as a percentage of GDP, at well over 80%, lags only that of Lebanon. The government is financing itself in the very short term in the domestic markets, with an average maturity of around two years.
“Egypt has run fiscal deficits in excess of 10% of GDP for a long time now: this is not something that started in the revolution,” said Dyck. A medium term strategic paper released in October pledged fiscal consolidation and a deficit of less than 4% of GDP within five years, which Dyck considered constructive. “The overall emphasis is not on promising what’s unachievable, but clearly outlining the balancing act they have to make between longer term sustainability and addressing current issues,” he said.
Banking system
Moody’s view on the banking system has changed too, though risks remain. “You still see all these challenges: high credit risk, capital buffers, the reliance of bank profitability on government securities,” said Olivier Panis, senior bank analyst at Moody’s. Some 38% of Egyptian bank assets are government securities, he says, a major risk, making high tier one ratios somewhat misleading. “But the sovereign upgrade reflects an improved capacity for the government to support its banks in times of need.”
There is a lot at stake for Egypt, because improvements in its outlook have not yet attracted portfolio flows. Before the revolution, foreign investors made up 10%-14% of the government securities market; today less than 2%. An improvement in both portfolio flows and FDI would achieve a lot: it would show confidence, improve foreign exchange reserves, and spur growth. Dyck, though, said this will take time. “There is no quick fix, but the direction is on the right path.”