Event

The recently published IMF report shows that Egypt is performing well under the Extended Fund Facility programme that was accepted in November 2016 in light of a looming balance of payment crisis. The programme consists of a USD 12 billion IMF loan. Under the programme, Egypt let the Egyptian pound float and has implemented significant consolidation. Given that in the last six years two other IMF programmes have been prepared but never been implemented, it is a positive sign to see that the current programme remains on track and is well implemented.

Impact on country risk

By letting the Egyptian pound float it has lost half its value against the USD but at the same time it has significantly reduced pressure on the country’s foreign exchange reserves. This resulted in foreign reserves doubling between the end of August 2016 and the end of April 2017. It has enabled Egypt to clear its foreign exchange backlog this September. Central bank officials claim that new foreign-currency requests are met without delay. This is a significant development for a country that has been plagued by difficult access to foreign exchange reserves since the toppling of President Mubarak in 2011. The increased foreign exchange reserves had already led to an upgrade of the short-term political risk by Credendo in June 2017. Besides the devaluation, the economic reform programme foresees a stabilisation of the public debt levels through a subsidy reform, new taxes and significant consolidation. With the reduction in subsidies, diesel and gasoline prices were for example increased by 53%. Nevertheless, significant challenges to the programme remain. The currency floating and subsidy cuts have had a significant impact on inflation which was above 30% at the end of June 2017. This is the highest rate in decades and is causing significant hardship for the population. The central bank has responded to the hike in inflation by increasing the interest rate. Additionally the currency devaluation has increased the nominal value of the (private and public) debt denominated in foreign currency. These elements continue to put pressure on Egypt’s commercial risk, which is currently in category C. Under the consolidation plan it is projected that the public debt will be reduced from around 98% of GDP in FY 2017 to around 81% in FY 2020. This adjustment is necessary in order for the debt to remain sustainable. But this means that the current reform drive needs to be continued.

Analyst: Jan-Pieter Laleman, jp.laleman@credendo.com