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July 8 (The following statement was released by the rating agency)
Recently announced fuel price hikes are an important step toward reducing subsidies that
contribute to Egypt's substantial fiscal deficit - a key rating weakness, according to Fitch
Tackling subsidies is a key way of reducing Egypt's budget deficit, which we
estimate at 12.1% of GDP in 2013/14 (to end June). A double-digit fiscal deficit
in each of the last three years has pushed government debt to over 90% of GDP
from 76.6% at end-FY11 and contributed to a series of downgrades to Egypt's
ratings. The subsidy bill, which is dominated by fuel products, accounted for
about one-third of total spending in FY13, or 12% of GDP.
The price hikes, which range between 40%-78% for petrol and 175% for natural
gas, follow the adoption of a tighter budget on June 29. The 2014/15 budget
targets a deficit of 10% of GDP, down from the draft budget's 12.2% after
President Abdul Fattah al-Sisi's intervention resulted in a 1% of GDP cut in
budgeted subsidy spending and a 1.5% of GDP rise in budgeted tax revenues.
Subsidy spending is to be held at the FY13 level and tax revenues are budgeted
to rise by 26%. Several new revenue-raising measures have been introduced,
including a capital gains tax.
The budget maintains a conservative assumption for grants. Only pledged grants
that have yet to be drawn are included in the budget, totalling EGP23bn
(USD3.2bn), compared to an official estimate of EGP117bn for FY13. Fitch assumes
that support, primarily from Kuwait, Saudi Arabia and UAE, will remain
forthcoming and anticipates grants to be well above the budgeted level.
Concerns about political stability have prevented previous administrations from
tackling the cost of subsidies. The mandate secured by President Sisi following
his election victory in May and the effective repression of much of the
opposition means the political environment is more conducive to fiscal
consolidation. Only isolated protests in response to the price hikes were
reported. However, serious political tensions remain and the expected return of
inflation to double-digits (from 8.2% in May) may cause social strains.
Fitch reaffirmed its 'B-' long-term foreign currency rating for Egypt on June
27, noting that "material progress on fiscal consolidation" was one factor that
could lead to a positive rating action.