Capital Intelligence has lowered Egypt's long-term foreign currency rating to BB+ from BBB- and its short-term foreign currency rating to B from A3. The ratings agency also assigned a long-term local currency rating of BBB to the sovereign and a short-term local currency rating of A3. The long-term outlook is revised to stable from negative.
The change in Egypt's ratings reflects growing public indebtedness and continuing concern as to whether the pace and depth of structural reforms will be sufficient to reverse the erosion of sovereign creditworthiness that has occurred in recent years.
The debt of the general government has risen from 61 percent of the gross domestic product (GDP) in June 2000 to an estimated 78 percent in June 2003. The increase in public indebtedness is due to the widening of the budget deficit, government borrowing to reduce the debt of public sector companies, and the revaluation of foreign-currency debt as a result of the depreciation of the Egyptian pound.
The government's scope to use fiscal policy to counter economic shocks and capacity to assume contingent liabilities associated with the broader public sector is diminishing with the growing debt stock. The debt service burden is also steadily increasing with the share of general government revenues consumed by interest payments increasing from 16 percent in fiscal year 1998/1999 to 22 percent in 2002/2003.
The restoration of fiscal discipline is needed to improve public debt dynamics and underpin confidence in the new monetary framework currently being developed. The 2004 budget, however, envisions a sharp increase in spending on wages, pensions, and subsidies as the government attempts to compensate for low job creation in the private sector and for higher inflation triggered by the depreciation of the Egyptian pound. Consequently CI expects the central government deficit to widen to around seven percent of GDP in fiscal 2003/2004 from 6.3 percent in 2002/2003 and for the general government deficit to reach 3.8 percent.
The balance of payments position strengthened in 2002/2003. The trade deficit narrowed and the current account surplus increased to 2.3 percent of GDP. However, the improvement was partly a result of temporary factors including high oil prices and an increase in Suez traffic due to the situation in Iraq. While capital outflows from the resident private sector appear to have abated, long-term foreign investment inflows remain weak.
The depreciation of the Egyptian pound over the past few years has helped non-oil export growth but at six percent of GDP in 2002/2003 the sector remains small by international standards. Efforts to promote international trade have been stepped up in the past year but the trading system is still highly restrictive and deeper structural reforms are needed to stimulate private sector activity.
Moreover, the recent imposition of a foreign exchange surrender requirement on exporters is inconsistent with the aim of facilitating export activity and has undermined investor confidence. Foreign exchange shortages are still being reported in the private sector and a parallel market continues to operate, although its share of total FX activity is declining.
Given limited sources of foreign exchange generation, external debt is fairly high as a proportion of current account receipts at 137 percent in 2002/2003. So too is net public external debt at around 60 percent. Underpinning Egypt's sovereign rating, however, is a low external debt service requirement with principal and interest payments expected to continue to average around 10 percent of current account receipts in the coming years. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
