Happy week for Egypt in Moody’s reports

CAIRO – 13 February 2019: “Positive sovereign credit dynamics in Egypt defy global headwinds,”Moody's Investors Service described the Egyptian economy in a presentation,two days after it kept its outlook for Egypt’s banking system at positive levels.
Moody’s presentation about Egypt stated that broad-based growth recovery, continued reform implementation, and emerging track record of resilience to capital market volatility inform the positive outlook.
It described the economy as large and diversified with robust growth potential, noting that growth is reverting to pre-crisis levels with activity improving in most sectors including tourism, natural gas, and manufacturing.
“Boost to external competitiveness after the devaluation supports economic strength,” it elaborated.
According to Moody’s, strong reform momentum with support from international lenders have helped reduce external vulnerabilities.
Despite the positive outlook, the rating agency reviewed key challenges that face Egypt’s economy including high borrowing costs and large financing needs over the next few years which drive Egypt’s significant exposure to interest rate shocks.
It added that the credit profile remains constrained by labor market challenges to absorb the rapidly expanding labor force as durable basis for social stability. “While domestic political stability improved, security risks remain elevated in certain areas.”
“Labor market dynamics are among long-term challenges impacting our political risk assessment,” Moody's further explained.
It also referred that improved institutional strength assessment captures economic and fiscal reform implementation drive. “We assess institutions in line with “low” median sovereign performance, taking into account the continued improvement in government effectiveness.”
Moreover, Moody’s saw that monetary policy is a key to anchoring inflation expectations and reducing borrowing costs over the medium term.
It added that the very weak public finances remain key credit constraint despite the declining debt ratio, noting that Egypt’s financing needs are very high, and debt affordability remains very weak.
As per FX reserves, it stated that they now cover 6.5 months of imports and sufficiently cover upcoming external maturities, adding that foreign participation in local currency market has been volatile, but manageable.
“Share of foreign currency debt has increased,” Moody's referred.
“Structural improvement in balance of payments reduces external vulnerability risk,” it said, clarifying that Egypt’s current account deficit is shrinking and will mainly be funded by FDI inflows.
Regarding Moody’s positive rating for Egypt’s banking System, the agency attributed its outlook to the accelerating state’s growth of 5.5 percent and 5.8 percent in Fiscal years of 2019 and 2020, respectively, driven by increased private and public investment, higher exports and recovering tourism.
“Banks’ high exposure to the Egyptian sovereign links their credit profiles with the government’s improving creditworthiness (B3, positive),” it added.
Moody’s expected banks to maintain ample local currency funding, high liquidity, and strong and stable profitability.
“We expect balance sheet growth of around 15 percent in 2019, propelled by brisk economic activity,” Moody's pointed out.
In August, Moody’s changed the outlook on the government of Egypt’s long –term issuer ratings to positive, a step followed by affirming the BS issuer ratings.