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