A reading into Egypt’s economic outlook

 

A reading into Egypt’s economic outlook

 

By Ahmed Kamel

Egypt’s sovereign rating has been stable since the currency float on November 3, 2016, thanks to prudent monetary and fiscal policies, which have been carried out since that date. Rating agencies have been upbeat about Egypt’s economy in the wake of sound measures applied over a four-year economic reform program that has reshaped the nation’s monetary and financial landscapes.

As a result of such economic rationalization, it has been no surprise that Standard & Poor's last week kept the nation’s long- and short-term foreign and local currency sovereign credit ratings at ‘B’ with a ‘stable’ outlook.  Although the New York-based rating agency’s move was forecast, it has reiterated Egypt’s robust sovereign fiscal position in the face of the Covid-19 pandemic.

Undoubtedly, the recent rating reflects the financial authorities’ success story in reining in the state budget deficit despite the coronavirus repercussions. The agency forecast Egypt’s economy will “gradually improve” as of 2022.

First, it is imperative to understand what sovereign rating is. From the most creditworthy to the least, Standard & Poor’s uses ‘A’, ‘B’, ‘C’ and ‘D’, which stands for speculative long-term credit risk. A credit rating reveals the potentials of an economy showing relative risk in terms of meeting its financial commitments, i.e. interest payments and repayment of principal on a timely basis.

A sovereign rating simply answer the question: Is the economy on the right track? Certainly, countries are working hard for an upgrade. However, the maintaining of ratings against a backdrop of economic turmoil caused by the Covid-19 pandemic is by all means a significant achievement.

Moreover, the agency rating may be deemed as a reading into the future, showing the nation’s economic outlook and how solid fiscal potentials can bridge any financial gap.

One of the key factors that improve a sovereign rating is a country’s capability of making revenues in foreign currencies. The Egyptian economy has lured $400 billion in hard currency inflows from wide range of resources since the pound flotation in November 2016 at an average $100 billion per year, according to data from the Central Bank of Egypt (CBE).

These resources included loans from international entities, issuances of treasury bills and Eurobonds.  However, the economy received the largest chunk from foreign direct investment, tourism, remittances from Egyptian expats and exports.

With diminishing impacts of the Covid-19 pandemic, the US-based rating agency forecast Egypt’s economy to top five per cent by the fiscal year 2022/2023. Despite the coronavirus repercussions, the national economy – buffered by higher remittances of Egyptian expats and exports – has expanded by more than two per cent since April.

Moreover, with the revival of tourism after the containment of the coronavirus, the current account receipts will increase. A curbed current account deficit should reflect the success of the economic overhaul administered by the government.

The current account deficit is projected to take a downtrend as the next fiscal year, falling to 2.7 and 2.4 per cent of gross domestic product in 2021/2022 and 2022/2023 respectively.