Egypt Exposed to Possible Liquidity, External Financing Shocks -Moody’s
Egypt exposed to potential liquidity and external financing shocks, global ratings agency, Moodys said in its latest report on the second largest African country by gross domestic products size.
Recall that Egypt displaced South Africa to become second largest, now following behind Nigeria.
In its report, Moody’s Affirms Egypt’s B2 Rating maintains a stable outlook. It explained that the country’s stable outlook balances the credit profile’s significant shock exposure with the demonstrated resilience to past shocks.
According to Moody’s, the government’s restoration of primary surpluses and renewed build-up of domestic and external liquidity buffers supported by a large domestic funding base should help weather periods of capital outflows, wider risk premia and/or pressure on the exchange rate.
However, given weak starting points on debt affordability and outstanding liquidity and external exposure, shifts in global investors’ risk appetite will continue to test the resilience of Egypt’s credit profile, it added.
The rating agency also affirmed Egypt’s foreign currency senior unsecured ratings at B2, and its foreign currency senior unsecured MTN program rating at (P) B2.
It said the affirmation of the B2 ratings and stable outlook reflects Egypt’s continued exposure to volatile financing conditions driven by weak debt affordability and high gross borrowing requirements, balanced against improving shock resilience evidenced during the pandemic as a result of the government’s track record of economic and fiscal reform implementation.
“Egypt’s broad domestic funding base and renewed build-up of foreign exchange reserves provide a buffer against volatile capital flows and support the government’s structural economic reform agenda to improve export competitiveness and broaden the revenue base”.
The country’s local currency (LC) ceiling was unchanged at Ba2 while the foreign currency (FC) ceiling was raised to Ba3 from B1 previously.
Moody’s report said the LC ceiling, three notches above the sovereign rating, acknowledges the public sector’s large footprint in the economy that stifles private sector development and credit allocation, mitigated by the growing implementation of structural competitiveness reforms.
“The improvement in the FC ceiling to Ba3, narrowing the gap to the LC ceiling to one notch from two notches previously, reflects the progressive removal of remaining barriers to capital in- and outflows and a more flexible exchange rate both signalling in Moody’s view a lower risk of future transfer and convertibility restrictions”.
Moodys said Egypt remains exposed to potential liquidity and external financing shocks as a result of the evolving pandemic and volatile external liquidity conditions.
The agency stated that debt affordability is very weak and susceptible to a sharp rise in financing costs; its external position remains sensitive to bouts of capital outflows.
The renewed build-up of foreign exchange reserves provides a buffer against sharp capital flow reversals, but vulnerabilities persist.
Egypt’s debt affordability as measured by interest as a proportion of revenue at 46% and interest to GDP at 9% in general government terms estimated for fiscal 2021 is among the weakest of sovereigns rated by Moody’s and underpins its exposure to potential funding shocks.
Although improving from recent peaks, Moody’s expects these metrics, and risks associated with such exposure, to remain elevated compared with B-rated peers.
Egypt’s exposure to funding shocks is exacerbated by very high annual gross borrowing requirements at about 35% of GDP in fiscal 2021 and 2022.
The report noted that Egypt’s funding risks are mitigated by the large banking system which represents a reliable domestic funding base for the government, by continued access to international capital markets at favourable terms and by the government’s gradual maturity lengthening strategy which aims for an average domestic debt maturity at five years by 2025 from about 3.5 years in fiscal 2021.
Nevertheless, annual gross borrowing requirements will remain among the highest of Moody’s rated sovereigns for the foreseeable future.
On the external side, the structural narrowing in the current account deficit and renewed build-up of foreign exchange reserves to $36 billion at the end of fiscal 2021 after bottoming out at $32 billion in May 2020 – albeit still below the almost $42 billion in February 2020 before the outbreak of the pandemic – provides a buffer against future outflows, potentially related to a resurgence of the pandemic or to tightening international liquidity conditions.
At these levels, Moody’s analysts said they expect the foreign exchange reserve buffer to remain sufficient to fully cover annual external debt service requirements accruing over the next three years.
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On the positive side, Moody’s noted the improvement in governance and policy effectiveness by the government in recent time.
It said the track record of improved governance and policy effectiveness supports the government’s structural economic reform agenda to improve export competitiveness and broaden the revenue base, underpinning the expectation of a renewed reduction in the debt/GDP ratio once economic growth reverts to trend starting in the 2022 fiscal year.
The government’s flexible crisis response has sustained growth during the pandemic despite the sharp contraction in the tourism industry which accounted for about 10% of GDP in 2019, supported by continued public investment and strong remittance inflows.
Egypt also maintained a primary surplus at an estimated 1% of GDP by raising revenue in fiscal 2021, keeping the debt/GDP ratio close to the 90% level in general government terms.
Looking forward, Moody’s expects the debt to GDP ratio to decline toward 84% by 2024. supported by continued primary surpluses and a return to economic trend growth of 5.5% starting fiscal 2022.
The Egyptian government’s National Structural Reform Program focuses on business environment reforms in order to incentivize domestic and foreign private sector investment and improve competitiveness in the non-hydrocarbon tradable sector.
The progressive removal of structural impediments and a shift to a more inclusive, private sector-led growth model will be a gradual process that will be exposed to long-standing vested interests and the risk of reform reversal.
On the fiscal side, the implementation of the Medium-Term Revenue Strategy aims to raise the tax to GDP ratio by about two percentage points in four years mainly through broadening the tax base and via revenue administration reforms instead of higher tax rates.
Together with a gradual reduction in the interest bill as a result of lengthening price stability credentials and a concomitant reduction in domestic borrowing costs, Moody’s expects these reforms to gradually improve debt affordability while allowing for higher spending allocation to health, education and social programs envisioned by the government.
Egypt Exposed to Possible Liquidity, External Financing Shocks -Moody’s
