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Feb 12 (The following statement was released by the rating agency)
Fitch Ratings says in a new report that Egypt's
ratings have stabilised on tentative political and economic improvements, but
rapid upgrades are unlikely.
In early January 2014 Fitch took Egypt's Long-Term Foreign-Currency rating off
Negative Outlook for the first time since January 2011. Over this period Egypt's
ratings were downgraded by a cumulative five notches. We expect economic
performance to improve over our two-year forecast period but by end-2015 the
economy will still be much weaker than in 2010, illustrating the damage to
Egypt's credit profile caused by political and economic turmoil.
Tentative improvements in political and economic stability were the reasons for
the stabilisation of the Outlook. This reflects large inflows of bilateral funds
following the removal of President Morsi that have eased the pressure on
reserves, the exchange rate and the budget, and a crackdown on opposition
activity by the military and security services. Approval of a new constitution
in January 2014 puts the country on the path to new elections later in the year.
Egypt's Long-term ratings of 'B-' are low and reflect substantial risks and
challenges. Although political turbulence has been contained, serious tensions
remain and Fitch believes that the clampdown on the Muslim Brotherhood brings a
greater risk of radicalisation than before 2011. Donor inflows will not be
sufficient to end foreign-exchange rationing and making major inroads into the
large fiscal deficit will be tough.
Public finances have long been the main weakness for Egypt's ratings. The fiscal
deficit and debt were much worse than for peers before 2011 and have since
deteriorated significantly. Some fiscal consolidation and a pick-up in revenues
are expected, although a larger improvement would be contingent on tackling
politically sensitive subsidies. With a Fitch-forecast budget deficit close to
double digits as a percentage of GDP in FY15 (year ending June 2015) and a
debt/GDP ratio of over 90%, the distance from peers will be large.
External finances have moved from being a rating strength to a neutral factor
since 2010. Egypt has lost, and is not expected to regain, its net creditor
position by 2015, though net and gross external debt will be low compared with
peers. Greater availability of foreign exchange is likely stimulate an increase
in outflows, reflecting current unmet demand, meaning that import coverage will
stay in line with the 'B' median through to 2015.
Macroeconomic factors are a weakness for Egypt's rating. Performance is much
weaker than before 2011. Growth is significantly lower, unemployment is higher
and inflation is still around double digits. Although Fitch expects a modest
strengthening of growth, it will be insufficient to prevent a further rise in
unemployment. By 2015 growth and inflation are still expected to be weaker than
Egypt's ranking for structural factors has improved to "neutral" from "weakness"
since 2010, though this reflects the change in the peer group as the country has
moved down the rating scale. An earlier clean-up of the banking sector means it
has been relatively unscathed in recent years. World Bank governance and Doing
Business indicators and GDP per capita have worsened, though are not far below
the 'B' median. The World Bank political stability index is well below this
median. These are unlikely to improve much by 2015.
A comparison of our 2015 forecasts for Egypt with those for peer medians shows
the damage to the credit profile and highlights the difficulty in generating
outcomes that could return the rating to its end-2010 level.