Moody’s: Egypt’s IMF program to support fiscal and external position, reform pace may slip

CAIRO (Capital Markets in Africa) – While Egypt’s IMF program will support gradual improvements to the country’s fiscal and external position, its social and economic costs risk slowing the pace of fiscal reform momentum, Moody’s Investors Service said in a report today.

The report, “Government of Egypt – IMF Program Supports Gradual Fiscal, External Improvements”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“The implementation of the IMF program’s targets, including reductions in fiscal deficits and government debt levels, as well as improvements in Egypt’s external liquidity position, will help address Egypt’s key credit challenges,” said Steffen Dyck, a Moody’s Senior Credit Officer and co-author of the report. “However, ambitious fiscal consolidation targets will be challenging to achieve and could face implementation risks in a scenario of mounting public discontent.”

Moody’s projects that Egypt’s fiscal deficit will decrease to 11.0% of GDP in fiscal year 2017 and 8.5% in 2019, from 12.6% in 2016. Moody’s forecasts are more conservative than the IMF program projections of 10.0% of GDP in fiscal 2017, reducing to 6.1% in fiscal 2019, driven by Moody’s somewhat lower growth assumptions and potential fiscal slippage, both in the near- and medium-term.

Although Moody’s expects Egypt’s fiscal challenges to remain high, the country’s monetary, fiscal and structural reforms will likely lead to slow but steady improvements for the sovereign credit profile beyond the timeframe of the IMF program.

The liberalization of Egypt’s foreign exchange regime and the depreciation of the Egyptian pound will initially keep the current account deficit high due to the pent-up demand for imports and the lower sensitivity of exports to the exchange rate.

Moody’s anticipates that the current account deficit as a percentage of GDP will increase in the 2017 fiscal year and fall only from 2018 onwards due to the weaker exchange rate.

Nonetheless, higher incoming portfolio and foreign direct investment flows, along with additional external funding from the IMF, multilateral and bilateral partners, will support Egypt’s balance of payments and international reserves position.