In an interview with Daily News Egypt analyst at Moody’s Sovereign Risk Group Mathias Angonin discussed Egypt’s bond credit rating, economic growth, national projects, and the stability of its economic situation.
While, Angonin expects a strong commitment from Al-Sisi’s government to continue a gradual fiscal consolidation, with the implementation of VAT to increase revenues, there are host of challenges to Egypt’s financial prosperity: Egypt faces an energy shortage; infrastructure and inefficient labour market are impediments to foreign investment; a tourism slump will challenge the foreign exchange coffers. How Egypt mediates these risk will serve as a referendum on the current economic gains seen under President Al-Sisi.
What are the main differences between Egypt’s bond credit rating and that of other countries?
In comparison with other countries in our ratings universe, Egypt’s B3 government bond rating reflects “moderate (+)” economic strength, “low (-)” institutional strength, “very low (-)” fiscal strength, and “high” susceptibility to event risks. Other developing countries rated B3 with a stable outlook on their rating include Pakistan, Ecuador, Democratic Republic of Congo, Bosnia, and Solomon Islands.
What are the factors that Moody’s considers while reviewing the credit ratings of countries?
Moody’s sovereign risk analysis focuses on four broad factors: Economic Strength, Institutional Strength, Fiscal Strength, and Susceptibility to Event Risk. We have a range of indicators for each factor scores and we compare them across our sovereign universe.
Do you think the government will be able to achieve its plans to stimulate economic growth and reduce the budget deficit?
The government’s commitment to gradual fiscal consolidation appears to be strong. However, there will be a balancing act between rationalising current spending and maintaining social spending commitments. We believe achieving the deficit target for 2015/2016 will very much depend on revenue performance.
The implementation of VAT as replacement for the current sales tax is the cornerstone of revenue-side reforms. Although the implementation date was pushed back several times, there has been momentum in the discussions and we are waiting to see whether it will be implemented in 2016.
What is the effect of the Egypt’s security status, especially in Sinai, on the credit rating?
Security risks have persisted in Egypt but have previously been geographically concentrated in parts of North Sinai, limiting the effect on tourism and business. However, recent events, including the plane crash in October and terrorist attack in Luxor in February, threaten the nascent revival of tourism. Egypt’s tourism is sensitive to security risks. A slump in tourism revenues would exacerbate the current account position and make the build-up of foreign exchange buffers more challenging.
Moreover investors’ perception of a higher security risk in Egypt threatens to reverse the recent positive trend of foreign investment flows. This would not only reduce the overall balance of payments surplus experienced in fiscal year 2015, but also negatively affect Egypt’s economic growth.
How do you see Egypt’s economic strategy?
Although growth slowed sharply following the revolution in 2011, economic activity started to pick-up under the government of President Abdel Fattah Al-Sisi and we expect real GDP growth to strengthen further over the rating horizon. Public and private investment will be the key growth drivers over the upcoming years.
How do you see Egypt’s national projects, such as the New Suez Canal extension?
Increased activity from the Suez Canal extension will benefit government revenues due to higher corporate tax payments from the Suez Canal Authority and increased dividends. The development of surrounding areas for the logistics sector should also be beneficial for economic growth and employment. Although the SCA expects receipts from passage tolls to rise to $13.2bn annually by 2023, we think it may be too optimistic given world trade growth trends.
Other crucial projects include additional investment in natural gas production and electricity production. The discovery of a large offshore natural gas field in the eastern Mediterranean is credit positive because increased domestic gas production will help reduce the need for natural gas imports and eventually re-establish the country as a net hydrocarbon exporter.
How do you see the investment climate in Egypt?
Net flows of foreign direct investment increased year-on-year in 2015 following the Egypt Economic Development Conference (EEDC) in March 2015, although they are still far below the peak levels of 2008. Investor sentiment recovery in 2015 was due to perceived political stability and improved security conditions, though recent security events may reverse this trend. Improvements to the business climate would also help to bring back FDI inflows.
What are the challenges that foreign investors face?
Key challenges to investment in Egypt include infrastructure bottlenecks and unreliable energy supply, together with an inflexible and inefficient labour market, as highlighted by the 2015-2016 World Economic Forum Global Competitiveness Index.
From your viewpoint, what are the challenges facing the finance sector in Egypt?
- Egyptian banks have high direct exposure to government securities and this is a significant source of concentration risk.
- Recently, the Central Bank of Egypt (CBE) instructed Egyptian banks to raise their lending to small and midsize enterprises (SMEs) to 20% of their loan books over the next four years, up from 5%-10% currently, according to our estimates. SME lending will support job creation and help lower the country’s high unemployment but will also jeopardise banks’ asset quality.
- The banks’ resilient deposit-based funding is a key credit strength. Deposit growth will continue to be strong as the banks deepen their reach of the bankable population. However despite the authorities’ efforts to increase the flow of foreign-currency to the banking system, the shortage of foreign currency will continue to hinder imports and create bottlenecks for economic activity.
Moody’s bond credit rating for Egypt since the 25 January Revolution in 2011:
31 January 2011: Moody’s downgrades Egypt’s government bond ratings to BA2 from BA1 and changed the outlook from stable to negative.
16 March 2011: Moody’s downgrades Egypt’s foreign and local currency government bond ratings by one notch to Ba3 from Ba2. The outlook on these ratings remains negative.
27 October 2011: Moody’s downgrades Egypt’s government bond ratings by one notch to B1 from Ba3. The outlook remains negative.
21 December 2011: Moody’s downgrades Egypt’s government bond ratings to B2 from B1.
12 February 2013: Moody’s downgrades Egypt’s government bond ratings to B3 from B2 and maintained the negative outlook.
21 March 2013: Moody’s Investors Service downgrades Egypt’s government bond ratings to Caa1 from B3. The rating outlook is negative.
24 July 2013: Moody’s confirms Egypt’s CAA1 government bond rating, while maintaining the negative outlook.
20 October 2014: Moody’s raises Egypt’s credit ratings outlook to stable from negative citing a more stable political and security situation and signs of economic recovery.
07 April 2015: Moody’s raises the country’s credit rating to B3.
19 May 2015: Moody’s provides a B3 counterparty risk assessment to the National Bank of Egypt, Banque du Caire, and Banque Misr. Standard & Poor’s affirmed Egypt’s long- and short-term foreign and local currency sovereign credit ratings at B-/B, putting the country’s outlook at positive instead of stable.