“The upgrade reflects our view that the Egyptian authorities have secured sufficient foreign currency funding to manage Egypt’s short-term fiscal and external financing needs. We expect support from bilateral lenders to continue over the medium term as the Egyptian authorities try to address the country’s political and economic challenges,” S&P in a statement said.
In our view, the July announcements that Kuwait ($4 billion), Saudi Arabia ($5 billion), and the UAE ($3 billion) would provide Egypt with cash, interest-free loans, oil, and oil products amounting to 4.4% of 2013 GDP reduces the likelihood that Egypt will face a balance-of-payments crisis.
“The UAE has since agreed to provide Egypt with a further 1.1% of 2013 GDP in project-related development funding, which we view as an indication of the Gulf Cooperation Council’s (GCC’s) willingness to financially support Egypt. The GCC has already given to Egypt three-quarters of the funds it promised in July,” it added.
“In our view, Egypt’s net international reserves will likely stabilize at above two months of current account payments during 2013-2016. We estimate its external debt (net of official reserves and financial sector external assets) will be a relatively modest 15% of current account receipts (CARs) in 2013. Egypt’s overall net external liability position will likely reach a much more significant 100% of CARs in 2013.
Egypt’s military-backed interim government is working toward an amended constitution. We expect it will hold a constitutional referendum in late 2013, and follow this with parliamentary and presidential elections,” the statement added.
The military removed Mohamed Morsi from power in July 2013 and has since banned Morsi’s Freedom and Justice Party (FJP), the Muslim Brotherhood’s political arm. Its leaders have been subject to a crackdown by security forces. In our view, recent events could further radicalize elements of society and raise the prospect of escalating violence. At the same time, electoral outcomes are likely to lack legitimacy in the eyes of a significant proportion of population. “We believe that Egypt’s political tensions will persist, its policymaking will be short term, and structural weaknesses in its fiscal and external positions will continue.”
“We assess Egypt’s government finances as very weak. We estimate the change in general government debt will average 12% of GDP in 2013-2016. The interim authorities are implementing an expansionary budget, including a 1.5% of GDP stimulus package that will focus on reactivating the economy and improving social justice. We understand that the authorities will also try to increase the tax base.
“We also anticipate that the Central Bank of Egypt will continue to monetize much of the government’s local currency debt. We estimate this will generate 10% average annual inflation over the next few years, alongside supply-side constraints. Central bank claims on the government and public sector increased to about 23% of GDP as of July 2013.
“The government’s stock of debt is relatively high and expensive. General government interest payments increased sharply to above 35% of revenues in 2013, from 27% in 2012. We expect net general government debt to reach 76% this year and peak at 78% in 2014, having risen sharply from 69% in 2012. The government is increasing its debt to meet its significant fiscal deficits while using some of its borrowings–namely from the GCC states–to support the level of foreign currency reserves at the central bank.
“In our view, the government’s ability to raise revenues or cut spending is limited, particularly given Egypt’s shortfall in basic services. We estimate the government’s contingent liabilities as limited.
“We assess monetary policy flexibility as low, reflecting our view of the central bank’s close management of the Egyptian pound and the banking system’s exposure to the government. We estimate GDP per capita at $3,400 in 2014, indicating a narrow potential tax and funding base for the government. Following several years of sustained strong GDP growth, output is now expected to expand more slowly given ongoing political instability,” it added.
“The stable outlook balances our view of Egypt’s difficult political landscape and significant external financing pressures against relatively generous support by bilateral donors.
“We could lower the ratings if we conclude that the Egyptian authorities are unable to prevent a further significant deterioration in external, fiscal, or monetary indicators. We could also lower the ratings if we believed donor support was unlikely to be forthcoming in a sufficient and timely manner to help Egypt meet its financial obligations.
“We could raise the ratings if Egypt’s political transition strengthens relations between the government and wider society and brings about a sustained improvement in external performance, including net international reserves, thereby easing external pressures.”