Reuters logo
7 months ago
Fitch Affirms Egypt at 'B'; Outlook Stable
December 15, 2016 / 5:10 PM / 7 months ago

Fitch Affirms Egypt at 'B'; Outlook Stable

16 Min Read

(The following statement was released by the rating agency) HONG KONG/LONDON, December 15 (Fitch) Fitch Ratings has affirmed Egypt's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B' with a Stable Outlook. The issue ratings on Egypt's senior unsecured foreign- and local-currency bonds are also affirmed at 'B'. The Country Ceiling and the Short-Term Foreign- and Local-Currency IDRs are all affirmed at 'B'. KEY RATING DRIVERS Egypt's ratings balance a large fiscal deficit, a high general government debt/GDP ratio, strains on the balance of payments and recent volatile political history, with low albeit rising external debt and renewed progress in implementing an economic and fiscal reform programme. The government's programme of economic and fiscal reform has regained momentum, after stalling in the fiscal year to June 2016 when the budget deficit widened to a preliminary 12.2% of GDP. In July the government implemented a second round of electricity subsidy reform by raising prices 35%-40%. VAT came into effect in September, after parliament approved an amended law, which put the rate at 13% initially and 14% at the start of FY17. The central bank floated the EGP on 3 November, leading to a sharp depreciation of the currency, which has since averaged EGP17.1 against the USD (up to 12 December), compared with a prior auction rate of EGP8.8. This followed an extended period of pressure on the currency amid depressed levels of foreign exchange, which was severely limiting economic activity. The government also enacted a second round of fuel subsidy reform (the first round was in mid-2014), raising fuel prices by 30.5%-46.8%. This step was part of the government's programme following the EGP flotation to control the fiscal cost of imported fuel. IMF board approval for the three-year USD12bn extended fund facility followed these reforms, on 11 November with a first tranche of USD2.7bn disbursed immediately. Details of the IMF agreement have yet to be released beyond the following general aims: reducing government debt/GDP by almost 10 percentage points by the end of the programme, implementing structural reforms and entrenching the newly liberalised exchange rate regime. Egypt has also been raising external financing from a number of other sources, including the GCC, the World Bank, a currency swap with China worth around USD2.6bn, and USD2bn from a consortium of international banks. The liberalisation of the EGP has attracted renewed portfolio inflows. Egypt's stock of international reserves climbed to USD23.1bn at end-November, from USD19.1bn in October and a low of USD15.6bn in July. We estimate that current reserve levels are just above four months of current external payments (CXP), a ratio that had been less than three in 2012-15. Net external debt/GDP (11.7%) and net sovereign external debt/GDP (8.1%) are lower than the 'B' peer medians in 2016, but are rising on the back of greater recourse to foreign financing. Nevertheless, the bulk of sovereign external debt is concessional and the ratings are supported by the absence of a recent history of debt restructuring. The public finances will remain a key weakness of Egypt's credit profile. Despite VAT and subsidy reforms, we expect only modest narrowing in the budget deficit in FY17, to 11.6% of GDP. Tax revenue growth will be strong and the civil service law (approved by parliament in October) will continue to restrain public-sector wage growth. However, the subsidy bill will increase because the impact of the weaker EGP on import costs of fuel, for example, outweighs the subsidy price reform. Also, the higher interest rates that accompanied the EGP flotation imply a substantial increase in interest payments. We expect greater fiscal consolidation in FY18, with the budget deficit narrowing to 9% of GDP and the primary deficit to 0.3% of GDP. Government debt/GDP is likely to peak in FY17, at around 99%, pushed higher by the combined effect of large additions to external debt and a sharply weaker EGP (assuming an end-June exchange rate of EGP16 to the USD). We forecast government debt/GDP to fall to 93% in FY18, on a smaller budget deficit and currency appreciation to EGP14.5. The level of guaranteed debt and contingent liabilities is currently unclear. The Public Finance Management unit, recently established within the MoF, expects to release data on this in early 2017. We expect that GDP growth will be weaker in FY17, at 3.3%, given the challenges the economy was facing before the EGP flotation, especially in manufacturing and tourism, and because the fiscal and monetary reforms will initially be a drag on private consumption. Despite fiscal consolidation, we forecast stronger GDP growth in FY18, at 4.5%, as the exchange rate adjustment beds in, as gas production starts at the giant Zohr field, and with stronger investment. With inflation set to rise above 20% in the first half of 2017, fiscal and monetary reforms present some risk of social backlash, especially given ongoing structural problems including high youth unemployment, deficiencies in governance and the business environment, as well as intermittent security issues. The government is seeking to mitigate these risks by emphasising that it is bolstering social safety nets (including cash transfer schemes) and that the reforms will deliver better economic performance and employment. Furthermore, food subsidy allocations have increased and electricity provision has improved markedly. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Egypt a score equivalent to a rating of 'B' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign Currency IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently balanced. The main factors that, individually or collectively, could lead to a positive action are: - A track record of progress on fiscal consolidation leading to declining government debt/GDP. - Sustained stronger economic growth supported by reforms to the business environment leading to increased investment and employment. - Significant accumulation of international reserves following a sustained narrowing of the current account deficit and higher net foreign direct investments. The main factors that, individually or collectively, could lead to a negative rating action are: - Failure to narrow the fiscal deficit and put government debt/GDP on a downward trend. - Reversal of fiscal and/or monetary reforms, for example in the face of social unrest. - Renewed downward pressure on international reserves due to further strains on the balance of payments, including weaker access to foreign financing. KEY ASSUMPTIONS Fitch assumes local banks remain willing and able to finance the fiscal deficit. The political environment is assumed to be more stable than in 2011-2013, although sporadic, and at times serious, attacks on security forces are assumed to continue and underlying political tensions will remain. Contact: Primary Analyst Toby Iles Director +852 2263 9832 Fitch (Hong Kong) Limited 68 Des Voeux Road Central Hong Kong Secondary Analyst Ed Parker Managing Director +44 20 3530 1176 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016557 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below