S&P Affirms Egypt’s Sovereign Credit Rating at ‘B/B’

S&P Affirms Egypt's Sovereign Credit Rating at 'B/B'

S&P Global affirmed Egypt’s ‘B/B’ sovereign credit rating as it expects the country’s foreign exchange reserve buffers and its access to debt market to cover its temporarily higher external financing needs.

Egypt, one of the few economies to escape a pandemic-induced economic contraction in 2020, will see growth begin to rebound in 2022, S&P said in a report on May 7.

The credit ratings agency affirmed Egypt’s stable outlook on expectations that temporary pressures on external and government debt metrics will gradually decline from 2022, supported by growth in its gross domestic product and current account receipts, it said.

“We expect Egypt’s foreign exchange reserves and access to domestic and external debt markets will allow it to cover higher external financing needs and upcoming maturities,” S&P said. “We see strong medium-term growth prospects for Egypt, barring the pandemic’s near-term impact, underpinned by the ongoing implementation of fiscal and economic reforms.”

Egypt is set to grow 2.5 per cent this year, according to the International Monetary Fund. Egyptian companies’ outlook for future business activity for the year is positive, as economic conditions are expected to improve amid further loosening of restrictions and the country’s inoculation drive, according to the IHS Markit Egypt Purchasing Managers’ Index for March.

S&P expects the Egyptian economy to grow 2.5 per cent this year before accelerating to 4.8 per cent in 2022 and 5.4 per cent in 2023, thanks to higher public and private sector investments as the country emerges from the pandemic.

The government’s efforts to improve the operating environment for businesses – such as introducing a new customs law, settlement of arrears to exporters and industrial land allocation mechanisms – could support growth in the medium term, the agency said.

While the pandemic has slightly altered authorities’ initial target of generating central government primary surpluses of at least 2 per cent for fiscal years 2021 and 2022, recovering growth and lower domestic interest rates should put the debt-to-GDP ratio on a downward track, S&P said.

The agency also expects lower domestic interest rates will allow the government to issue longer-dated bonds and reduce its rollover risks, as gross financing needs are estimated at about 40 per cent of GDP in the fiscal year 2021.

Egypt will also continue to engage with the IMF, either through another programme (funded or unfunded), or at least through several technical missions, for example on revenue mobilisation, S&P said.

Egypt’s tourism sector is expected to recover to pre-Covid levels by 2023, S&P said. Tourism is a key pillar in Egypt, contributing about 12 per cent of GDP and 10 per cent of total employment in 2019.

In terms of portfolio inflows into Egypt, the country’s expected inclusion into JP Morgan’s widely tracked Government Bond Index Emerging Markets Index in the second half of 2021 should help reduce volatility in portfolio flows by shifting some investment to passive management, generate lower yields and increase demand for longer-dated debt, the report said.

Egypt’s domestic banking system remains liquid and can increase holdings of government debt, despite the already-high exposure of 48 per cent of total bank assets as of January 2021, it said.