FITCH UPGRADES EGYPT'S CREDIT RATING

UNCLAS CAIRO 001888 SIPDIS SIPDIS STATE FOR NEA/ELA, NEA/RA, EB/IDF USAID FOR ANE/MEA MCCLOUD AND DUNN TREASURY FOR NUGENT AND HIRSON COMMERCE FOR 4520/ITA/ANESA/OBERG E.O. 12958: N/A TAGS: ECON EFIN EINV EG SUBJECT: FITCH UPGRADES EGYPT'S CREDIT RATING ¶1. (U) In a press release issued June 18, Fitch Ratings upgraded Egypt's Long-term Foreign Currency Issuer Default Rating (IDR) Outlook from Stable to Positive, but maintained the overall rating of "BB+." Fitch also maintained the Long-term Local Currency IDR at "BBB" with a Stable Outlook, the Short-term Foreign Currency IDR at "B" and the Country Ceiling at "BB+." The change in outlook signals recognition on the part of the rating agency of the positive changes the GOE has made in management and transparency of the state budget. ¶2. (U) Mohamed Assaad, Advisor to the Minister of Finance for government debt, told econoff that the improved outlook is a positive signal, though without an upgrading of the rating from "BB+," which is still below investment grade, interest rates on foreign currency debt issuances are not likely to decrease. Assaad claimed that Egypt's national debt is currently around 62% of GDP (the Fitch report places it at 80%). Until that percentage declines into the 40-50% range, the country's sovereign rating is unlikely to improve to investment grade. Assaad said that with the Ministry of Finance's current plan to reduce the deficit by 1% annually over the next 5 years, he hoped to see an improvement in Egypt's sovereign rating in the next 2-3 years. Assaad added that Moody's was getting ready to issue a report on Egypt, though that firm was unlikely to change its rating for Egypt. Standard and Poor's is also expected to issue a new report on Egypt in September, but Assaad believe their rating of Egypt would also remain the same. ¶3. (U) Below is the text of Fitch's press release, including the firm's economic projections for Egypt. The peer group mentioned in the release includes Morocco, Tunisia, Turkey, and Jordan, among others. BEGIN TEXT Egypt's creditworthiness is improving gradually, thanks to ongoing economic reforms which address many of the areas that still weigh on Egypt's ratings, said Richard Fox, Head of Fitch's Middle East and Africa sovereign rating team. Fox noted that "the budget deficit and debt ratio will fall appreciably this year and have clearly turned a corner; banking system restructuring is nearing completion; and further reforms are planned to improve the business environment. Growing confidence in the policy framework has brought increased investment and accelerated economic growth. A current account surplus, coupled with strong capital inflows, has increased reserves and helped Egypt attain net external creditor status last year - unusual in the 'BB' rating category." The general government budget deficit is estimated to have fallen close to 6% of GDP in fiscal year 2006/7 (July to June) and the gross debt ratio will fall to near 80% of GDP, compared with over 9% and 90% respectively in 2005/6. The net debt ratio should also fall after three years at 70%. Notwithstanding this sharp improvement, however, public finances remain a relative weakness in Egypt's credit profile and explain the continuing Stable Outlook on Egypt's local currency IDR. Further progress is needed to bring these ratios closer to peer group medians. Fitch notes the important reduction in energy subsidies of about 2% of GDP last year. The establishment of a single treasury account and the re-organisation of financial relations between the Treasury, Social Insurance Funds and the National Investment Bank will bring continuing improvements to public finances. Pension reform, further tax reform and improved public spending efficiency will also strengthen public finances. Egypt's balance of payments continues to perform strongly. The current account remains in surplus, with strong across-the-board growth of external receipts. Reserves have continued to rise, spurred by FDI of 9% of GDP last year - half of it in greenfield non-oil sectors. The current account surplus is, nevertheless, dwindling due to rapid import growth and a deficit is in prospect for 2008. However, it will remain well covered by FDI. The structure of Egypt's sovereign external debt, meanwhile - mainly bilateral and concessional - supports the rating. The debt service ratio and external liquidity both compare well to peers. GDP will grow around 7% this year, unemployment is falling and the investment ratio is rising. Reforms are raising the efficiency of investment and Fitch will be looking for further improvement in the business environment, which remains relatively weak, to sustain high growth rates and rising per capita incomes. Completion of banking sector restructuring and supervisory reforms is also important to support investment and growth. Inflation, boosted to double digits by a number of one-off factors last year, is high relative to peers but has fallen to 10% and should return to single digits this year. Completion of reforms to the monetary policy framework, including an eventual move to inflation targeting, will make an important contribution to improving the macroeconomic policy framework. Political risks weigh on the rating but are not unique at this or higher rating levels. Per capita income, though rising, remains relatively low in peer group terms and the government is making greater efforts to ensure the benefits of faster growth are more evenly distributed. The tourist sector has proved resilient to sporadic terrorist attacks. The government is reasserting political control after the more open elections in 2005. This is not without risks, as evidenced by periodic domestic disturbances. Fitch, nevertheless, expects economic and structural reforms to continue unimpeded. A move to investment grade will depend on evidence that current high growth rates can be sustained, which in turn will require further strengthening of the policy framework, improvement in the business environment and further reductions in fiscal ratios and inflation on a sustained basis. Reversion to a Stable Outlook could be prompted by political or economic shocks that threaten the outlook for growth or the implementation of reforms. END TEXT