Egypt budget deficit to remain high

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Fitch Ratings said today that it forecasts Egypt’s budget deficit will remain above 10 per cent of GDP in 2015/16 and 2016/17 due to the failure to implement fiscal reforms in a timely manner and low growth.

It affirmed Egypt’s long-term foreign- and local-currency issued default ratings (IDRs) at B with a stable outlook. The issue ratings on Egypt’s senior unsecured foreign- and local-currency bonds have also been affirmed at B. The country ceiling has been affirmed at B and the short-term foreign-currency IDR at B.

“We estimate a budget sector deficit of 11.6 per cent of GDP in (the year to June 2016), broadly the same as in fiscal year 2015,” Fitch says. “This is larger than budgeted for a number of reasons. These include the failure to introduce VAT as planned (estimated to raise revenue of about 1 per cent of GDP), the devaluation in March and surging interest payments. An important reason for the failure to introduce the VAT was the parliamentary elections in October-December 2015 and a decision to wait for parliament to be operational. There has been some spending restraint, especially in regard to wages.”

“The draft budget for fiscal year 2017, which is still subject to approval by parliament, aims to reduce the deficit to 9.8 per cent of GDP, helped by the belated introduction of VAT and further reform of fuel and electricity subsidies,” Fitch said. “We expect the budget sector deficit to remain larger than the draft target, owing to our weaker growth assumptions and implementation risk, but nevertheless to narrow to 11 per cent of GDP.”

Fitch said general government debt increased to an estimated 90.3 per cent of GDP in fiscal year 2016, well above the peer median. Government external debt is relatively low, although the devaluation of the Egypt pound in March has an upward effect on the debt stock.

“We expect debt/GDP to edge up to 90.5 per cent in fiscal year 2017, given only modest deficit reduction and assuming some further exchange-rate weakness,” Fitch said. “Thereafter, we forecast that deficit reduction and robust nominal GDP growth will put the debt/GDP ratio on a gentle downward trend.”

Fitch said foreign-exchange reserve coverage remains low at around three months of current external payments. Security incidents have dealt a blow to tourism inflows in 2015-16, while other lines of the current account have also struggled. FDI increased in 2015, and is likely to rise this year; some further support is coming in, both multilateral and from the Gulf Cooperation Council (GCC). The Central Bank of Egypt responded to the strain on the balance of payments by devaluing the currency in mid-March by 14 per cent against the US dollar, and further exchange-rate weakness is likely.

Gross external debt has been rising, due largely to concessional support from the GCC, but it remains below peers. Fitch forecast it will rise to around 18 per cent of GDP by end-2016. Net external debt will remain just below 7 per cent of GDP, compared with a B median of 26.3 per cent. The bulk of external debt is on a concessional basis, and while Egypt’s external liquidity ratio has been worsening it remains stronger than peers. The rating is supported by the absence of a recent history of debt restructuring.

Real GDP growth has slowed in in 2015/16 to an estimated 3.2 per cent, owing to declines in tourism and shortages of foreign exchange. This is after strengthening to 4.2 per cent in fiscal year 2015, from an annual average of around 2 per cent since the Arab Spring in 2011. However, energy shortages are being addressed, and public and private investment is rising.

Fitch assumes growth will strengthen slightly to 3.6 per cent in fiscal year 2017 and further the following year. Inflation is above peers, and Fitch forecast that it will remain in double-digits in 2016-2017, with structural rigidities aggravated by the weaker exchange rate.