Research Update:
Ratings On Egypt Raised To 'B-/B' On Donor Support; Outlook Stable
Primary Credit Analyst: Trevor Cullinan, Dubai (971) 4372-7113; [Link]@[Link] Secondary Contact: Dima B Jardaneh, Dubai (971) 4-372-7154; [Link]@[Link] Analytical Group Contact: SovereignEurope; SovereignEurope@[Link]
Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List
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Research Update:
Ratings On Egypt Raised To 'B-/B' On Donor Support; Outlook Stable
Overview
In our view, bilateral donors will continue to provide funds to Egypt, reducing balance-of-payments pressures and giving the Egyptian authorities more time to address political and economic challenges. We expect Egypt's net international reserves to stabilize. We are therefore raising our long- and short-term sovereign credit ratings on Egypt to 'B-/B' from 'CCC+/C'. The stable outlook balances our view of Egypt's difficult political landscape and significant external financing pressures against relatively generous support from bilateral donors.
Rating Action
On Nov. 15, 2013, Standard & Poor's Ratings Services raised its long- and short-term foreign and local currency sovereign credit ratings on the Arab Republic of Egypt to 'B-/B' from 'CCC+/C'. The outlook is stable.
Rationale
The upgrade reflects our view that the Egyptian authorities have secured sufficient foreign currency funding to manage Egypt's short-term fiscal and external financing needs. We expect support from bilateral lenders to continue over the medium term as the Egyptian authorities try to address the country's political and economic challenges. In our view, the July announcements that Kuwait ($4 billion), Saudi Arabia ($5 billion), and the UAE ($3 billion) would provide Egypt with cash, interest-free loans, oil, and oil products amounting to 4.4% of 2013 GDP reduces the likelihood that Egypt will face a balance-of-payments crisis. The UAE has since agreed to provide Egypt with a further 1.1% of 2013 GDP in project-related development funding, which we view as an indication of the Gulf Cooperation Council's (GCC's) willingness to financially support Egypt. The GCC has already given to Egypt three-quarters of the funds it promised in July. In our view, Egypt's net international reserves will likely stabilize at above two months of current account payments during 2013-2016. We estimate its external debt (net of official reserves and financial sector external assets) will be a relatively modest 15% of current account receipts (CARs) in 2013.
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Research Update: Ratings On Egypt Raised To 'B-/B' On Donor Support; Outlook Stable
Egypt's overall net external liability position will likely reach a much more significant 100% of CARs in 2013. Egypt's military-backed interim government is working toward an amended constitution. We expect it will hold a constitutional referendum in late 2013, and follow this with parliamentary and presidential elections. The military removed Mohamed Morsi from power in July 2013 and has since banned Morsi's Freedom and Justice Party (FJP), the Muslim Brotherhood's political arm. Its leaders have been subject to a crackdown by security forces. In our view, recent events could further radicalize elements of society and raise the prospect of escalating violence. At the same time, electoral outcomes are likely to lack legitimacy in the eyes of a significant proportion of population. We believe that Egypt's political tensions will persist, its policymaking will be short term, and structural weaknesses in its fiscal and external positions will continue. We assess Egypt's government finances as very weak. We estimate the change in general government debt will average 12% of GDP in 2013-2016. The interim authorities are implementing an expansionary budget, including a 1.5% of GDP stimulus package that will focus on reactivating the economy and improving social justice. We understand that the authorities will also try to increase the tax base. We also anticipate that the Central Bank of Egypt will continue to monetize much of the government's local currency debt. We estimate this will generate 10% average annual inflation over the next few years, alongside supply-side constraints. Central bank claims on the government and public sector increased to about 23% of GDP as of July 2013. The government's stock of debt is relatively high and expensive. General government interest payments increased sharply to above 35% of revenues in 2013, from 27% in 2012. We expect net general government debt to reach 76% this year and peak at 78% in 2014, having risen sharply from 69% in 2012. The government is increasing its debt to meet its significant fiscal deficits while using some of its borrowings--namely from the GCC states--to support the level of foreign currency reserves at the central bank. In our view, the government's ability to raise revenues or cut spending is limited, particularly given Egypt's shortfall in basic services. We estimate the government's contingent liabilities as limited. We assess monetary policy flexibility as low, reflecting our view of the central bank's close management of the Egyptian pound and the banking system's exposure to the government. We estimate GDP per capita at $3,400 in 2014, indicating a narrow potential tax and funding base for the government. Following several years of sustained strong GDP growth, output is now expected to expand more slowly given ongoing political instability.
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Research Update: Ratings On Egypt Raised To 'B-/B' On Donor Support; Outlook Stable
Outlook
The stable outlook balances our view of Egypt's difficult political landscape and significant external financing pressures against relatively generous support by bilateral donors. We could lower the ratings if we conclude that the Egyptian authorities are unable to prevent a further significant deterioration in external, fiscal, or monetary indicators. We could also lower the ratings if we believed donor support was unlikely to be forthcoming in a sufficient and timely manner to help Egypt meet its financial obligations. We could raise the ratings if Egypt's political transition strengthens relations between the government and wider society and brings about a sustained improvement in external performance, including net international reserves, thereby easing external pressures.
Key Statistics
Table 1
Arab Republic of Egypt - Selected Indicators
2006 Nominal GDP (US$ bil) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest expenditure/revenues (%) Oth dc claims on resident non-govt. sector/GDP (%) CPI growth (%) Gross external financing needs/CARs +use. res (%) Current account balance/GDP (%) Current account balance/CARs (%) Narrow net external debt/CARs (%) Net external liabilities/CARs (%) 108 1,485 6.8 5.0 0.3 (9.2) 90.2 71.2 19.8 55.9 7.6 76.4 0.7 1.8 (45.8) 23.6 2007 130 1,754 7.1 5.3 4.9 (7.5) 79.7 62.9 18.7 50.3 9.3 74.6 0.6 1.6 (60.0) 2.6 2008 163 2,154 7.2 5.4 4.3 (7.5) 70.6 54.7 16.5 46.6 18.3 71.6 (0.4) (1.0) (26.6) 34.8 2009 190 2,473 4.7 2.9 12.0 (6.9) 72.7 57.0 15.2 40.1 11.8 74.4 (2.8) (9.3) (39.9) 44.4 2010 214 2,743 5.1 3.4 10.6 (8.2) 73.4 59.1 20.5 36.5 11.3 73.6 (2.7) (10.0) (50.6) 48.0 2011 232 2,925 1.8 0.1 12.2 (9.8) 76.7 64.1 25.3 34.4 10.1 75.7 (3.1) (11.7) (7.1) 79.4 2012 250 3,101 2.2 0.5 12.8 (10.7) 81.0 69.5 26.8 33.0 7.1 98.4 (4.4) (17.2) 0.8 84.8 2013e 270 3,289 2.0 0.4 17.2 (13.4) 86.8 76.1 36.3 31.2 10.0 96.5 (2.5) (10.1) 15.4 99.7 2014f 281 3,375 3.0 1.3 13.6 (12.0) 87.4 78.3 35.2 29.2 10.0 104.1 (2.8) (11.8) 17.4 112.9 2015f 313 3,694 4.0 2.3 10.0 (10.0) 83.6 76.0 35.1 27.1 10.0 100.6 (2.6) (11.8) 20.1 119.5 2016f 372 4,314 4.0 2.3 9.0 (9.0) 79.4 73.0 30.2 25.3 10.0 99.9 (2.0) (9.3) 21.9 113.8
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Research Update: Ratings On Egypt Raised To 'B-/B' On Donor Support; Outlook Stable
Table 1
Arab Republic of Egypt - Selected Indicators (cont.)
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Criteria For Determining Transfer And Convertibility Assessments, May 19, 2009 Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 Ratings On Egypt Affirmed At 'CCC+/C' On Expected Donor Support; Outlook Stable, July 16, 2013 Reliance On Central Bank Finance Could Raise Inflationary Pressures In Egypt, May 20, 2013 Ratings On Egypt Lowered To 'CCC+/C' On Continued Pressure On Foreign Currency Reserves; Outlook Stable, May 9, 2013 Common Characteristics Of Rated Sovereigns Prior To Default, Jan. 28, 2013 Long-Term Ratings On Egypt Lowered To 'B-' On Escalation Of Political Tensions; Outlook Negative, Dec. 24, 2012 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.
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Research Update: Ratings On Egypt Raised To 'B-/B' On Donor Support; Outlook Stable
Ratings List
Upgraded To Egypt (Arab republic of) Sovereign Credit Rating Transfer & Convertibility Assessment Senior Unsecured Short-Term Debt B-/Stable/B BBB From CCC+/Stable/C CCC+ CCC+ C
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