Frankfurt am Main, August 18, 2017 -- Moody's Investors Service has today affirmed the Government of Egypt's
long-term issuer and senior unsecured bond ratings at B3.
The outlook remains stable.
The rating affirmation is based on Moody's view that the B3 rating appropriately
captures Egypt's credit risk profile. Very weak government finances
will continue to constrain the rating pending further clarity on the sustainability
and impact of the reform programme. While Egypt's external
liquidity position has significantly improved over the past 12 months,
the increase in international reserves has been mainly driven by debt-creating
inflows, thus also raising the level of external debt and foreign-currency
denominated debt.
The stable rating outlook reflects Moody's view that upside and
downside risks to the rating are balanced. Reform progress has
been impressive. However, while political stability has improved
to some degree, reform momentum may face headwinds, including
from the presidential election set to take place by May 2018. Visibility
on the extent to which the reform programme will materially improve the
sovereign credit profile in the coming years remains limited.
In today's rating action Moody's has also affirmed the provisional senior
unsecured (P)B3 Medium-Term Note programme rating. Egypt's
country ceilings stay unchanged at B2/Not Prime (NP) for the foreign-currency
bond ceiling, Caa1/NP for the foreign currency deposit ceiling,
and Ba2/NP for the local-currency country risk ceilings.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE RATING AT B3
Moody's expects Egypt's credit profile to remain heavily influenced
by the government's very weak government finances for a sustained
period, with already high fiscal deficits continuing to grow in
nominal terms over the coming years and declining only gradually as a
percentage of GDP. Based on preliminary estimates, the general
government fiscal deficit reached around 11% of GDP in fiscal year
2017 (ended 30 June 2017), down from 12.1% in 2016,
and will decline to around 10% in the current fiscal year according
to the rating agency's forecast. Moody's estimates that the
general government's primary deficit shrank to 1.8%
of GDP in fiscal 2017 from 3.7% the year before, and
will start to show small surpluses from 2019 onwards.
As a consequence, Egypt's government financial strength will
remain very weak for the foreseeable future, with debt and debt
affordability metrics continuing to exceed by some margin the median for
B3-rated sovereigns. The debt-to-GDP ratio
likely peaked at 100% in fiscal 2017 and Moody's expects
that it will decline to about 90% by 2019, still a very high
level.
Monetary tightening in response to rapidly rising inflation has driven
up the government's domestic funding costs, with the cumulative
700 basis points rise in the Central Bank's policy rate having driven
one-year T-bill rates to above 20%. Moody's
expects interest payments to remain very high, accounting for close
to 40% of revenues over the coming two to three years.
Set against that negative driver, macroeconomic stability has been
broadly maintained despite the negative inflation shock resulting from
the credit-positive foreign exchange regime liberalization on 3
November 2016. Moody's projects that real GDP growth has
held up well, at 4% in fiscal 2017, and that it will
continue to pick-up in the coming years.
External liquidity has also improved. Reduced uncertainty about
exchange rate policy, elimination of the parallel market and unlocking
of multilateral funding following the exchange-rate liberalization
has led to an increase of the Central Bank of Egypt's net international
reserves to $36 billion at the end of July from $15.5
billion a year earlier. The increase in reserves was largely the
result of debt-creating inflows, with external debt almost
doubling to an estimated 33% of GDP in fiscal 2017 from around
17% the year before. However, repatriation of private
remittances through the formal banking system, and to a lesser extent
foreign investor participation in the stock market and FDI inflows also
contributed to the increase.
RATIONALE FOR THE STABLE OUTLOOK
The stable rating outlook signals that upside and downside risks to the
rating are balanced. Reform progress has been impressive and political
stability has improved. Ongoing structural economic reforms should,
if implemented as intended, improve the business environment and
lift domestic and foreign direct investment. Moody's expects
Egypt to continue to comply with the programme targets under the IMF Extended
Fund Facility. Despite the sharp rise in inflation as result of
the currency devaluation and fiscal reforms there were no large-scale
protests, and the broadly stable security situation bodes well for
the tourism sector.
However, downside risks exist. The presidential election
set to take place by May 2018 could create uncertainties around future
reform momentum; while Moody's expects continued reform commitment
by the government, there is a risk that the large, young and
growing population, which is facing high unemployment and inequality,
could exert pressure that slows or even reverses reforms (e.g.,
increasing the public sector workforce or re-instating certain
subsidies).
Last year's introduction of a value-added tax (VAT) has been
the main revenue side reform. Further fiscal consolidation is focused
on increasing revenue efficiency, keeping spending growth under
control, and improving the structure of government spending.
Current expenditure items including subsidies & social benefits and
compensation to public sector employees, together with interest
payments, represent more than 90% of total spending.
Although the government has made progress with regards to energy subsidy
reforms, any increases in energy and food prices would likely drive
up subsidy spending; in this respect, the government's
plan to move towards an automated, market price-based fuel
price adjustment mechanism is credit positive but will take some time
before being realized.
Moody's views the probability of another public uprising as low,
though the impact of any such event on the economy and government finances
would clearly be very high.
Overall, Moody's has concluded that further time is needed
to assess the implementation of structural reforms, and their impact
on economic and financial strength.
FACTORS THAT COULD CAUSE THE RATING TO MOVE UP/DOWN
Faster-than-currently expected progress under the reform
programme would be credit positive. In particular, more rapid
fiscal consolidation and improvements in debt metrics, while preserving
social stability, would be a key driver for a potential positive
rating action. In addition, early signs of successful implementation
of structural economic reforms would include rising FDI inflows,
increasing exports in higher value-added goods, and a meaningful
reduction in unemployment. Continued strengthening of external
buffers, including further rebalancing of the net international
reserve structure away from deposits in Egyptian banks' branches
abroad, and moving away from reliance on concessional financing
and external debt towards FDI and higher value-added goods and
services exports as main source of foreign exchange inflows would also
support a positive rating action.
Any signs of reform slowdown would jeopardize the stable outlook.
Depending on the form and speed of reversals and the implications for
government finances and external liquidity this could even lead to downward
pressure on the rating. Renewed social and political instability
or a material deterioration in the security situation could also lead
to a negative rating action.
GDP per capita (PPP basis, US$): 12,554 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.3% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Jun/Jun): 14%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -12.1%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6% (2016 Actual) (also
known as External Balance)
External debt/GDP: 16.8% (2016 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 15 August 2017, a rating committee was called to discuss the
rating of the Egypt, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/framework, have improved.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
