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May 30 (The following statement was released by the rating
The victory of Abdul Fattah al-Sisi in this week's
Egyptian presidential election does not alter Fitch Ratings' expectation that
the authorities will be cautious in addressing the large fiscal deficit. Egypt's
public finances are the main weakness for its sovereign credit profile.
Sisi's victory was not in doubt. Initial indications are that turnout was around
46%, lower than 52% at the election won by Mohammed Morsi in 2012 and despite
three days of polling. Very high turnout might have enhanced the legitimacy of
the return to military rule in domestic and international eyes, but we do not
think economic policy, or Egypt's relations with GCC countries that have
provided grants and loans following the removal of President Morsi, will be
Sisi has not set out a detailed economic programme. But the interim
actions, and Sisi's broad pronouncements on the need to maintain growth and make
Egyptian society more equitable, suggest the authorities are mindful of the
risks of popular opposition to fiscal consolidation, which would initially focus
on subsidies. In the final budget draft submitted to the interim president the
government planned to cut spending on petroleum subsidies, but expected the
budget deficit to widen in fiscal year ending June 2015, to 12% of GDP, from
11.5% forecast for FY14.
The authorities will probably continue the small steps towards subsidy
taken by the interim government. These were aimed at controlling consumption
rather than allowing prices to rise. Smart-card terminals have been installed in
all petrol stations and are used for transactions between wholesalers and
retailers. A project to reduce the bread subsidy has been implemented in Port
Said and is set to be expanded.
The improvement in budgetary performance in the first nine months of FY14,
the fiscal deficit narrowing to 7.1% of GDP from 10% in the same period last
year, mostly reflects higher government revenues driven by grants. These
constituted 2.5% of GDP, up from 0.2% a year earlier. This improvement therefore
may not be sustainable, while the sensitivities around reducing subsidy spending
mean the deficit will stay in or close to double digits over our ratings
Tax revenues have risen by 8% year on year, below inflation, and have not
pace with an 11% spending increase. Wages, subsidies and interest payments rose
significantly in recent years and represented 84% of spending in the first nine
months of FY14.
These outturns are in line with our view that Egypt's fiscal and economic
performance has stabilised, but at a low level. In January, we revised the
Outlook on Egypt's long-term rating to Stable after three years on Negative, and
affirmed it at 'B-' due to tentative improvements in political stability and
economic conditions. These were partly driven by bilateral fund inflows that
eased pressure on the budget, reserves and exchange rate. The next scheduled
review of the rating is on 27 June 2014.
The low rating reflects substantial risks to Egypt's credit profile, chiefly
weak public finances. Without significant fiscal reform, general government debt
will remain above 90% of GDP, well above the median for Egypt's ratings peers.