EUROMONEY’S COUNTRY RISK experts have upgraded Egypt’s creditworthiness since the third quarter of 2014. This development arises from the stability provided by the new reform-minded technocrat government led by President Abdel Fattah el-Sisi, which is now embarking on a wide-ranging structural reform and development agenda, including an ambitious plan for a new capital city to cope with population growth.
Egypt’s total risk score of 35.2 points from a maximum 100 means the country still ranks a lowly 107th in Euromoney’s global rankings. However, it is the 14-place jump in the rankings since the end of last year – climbing 29 in total since tumbling to its lowest point in June 2013 – that should be alerting the investor community. That marks the largest rise through the rankings of any of the 186 countries surveyed over that period, pushing the sovereign closer to the top of tier-5, the lowest of ECR’s categories containing sovereigns most at risk of repayment problems. The rise through the ranks shows an improving credit, which market indicators are gradually factoring in. Five-year credit default swap spreads had tightened to almost 300 basis points in April 2015 from 800 bps in 2013.
Euromoney’s Country Risk Survey is a unique ‘crowd-sourcing’ approach to analysing investor risk, and is particularly useful for identifying trends and turning points in sentiment, not least concerning the emerging and frontier markets offering potentially large returns. The survey combines political, economic and structural risk valuations from 400-plus economists and other risk experts with scores for capital access, credit ratings and debt indicators. Egypt’s successful return to the international capital markets in April 2015 is expected to mark the first in a series of debt placings whetting the appetites of yield-hungry investors keen to re-engage with Cairo following four years of turmoil and lingering uncertainty over its political and economic direction. Euromoney’s survey signals its risk-return prospects are becoming more balanced at just the right time.
Painful crisis
It has certainly been a torrid few years for Egyptian investors since the country was rocked by the Arab Spring uprising in 2011, with street protests ending 30-years of autocratic rule by President Hosni Mubarak. Parliament was dissolved, the constitution suspended and the imposition of martial law ensued, followed by a reprise of the protests ultimately leading to the removal from power in 2013 of President Mohamed Morsi, who was recently indicted along with other Muslim Brotherhood activists for ordering the arrest and torture of protesters.
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The troubles inevitably took their toll on Egypt’s investor prospects, leading the 23 Egyptian contributors to sharply downgrade a range of political and economic indicators, all ‘flashing red’ the sovereign borrower’s escalating risks. In 2010, before the crisis erupted, Egypt scored a reasonable 50.3 points in the survey, which would today make it a low-scoring tier-3 sovereign, not quite an investment grade rating, but certainly moving in that direction. Egypt was perceived to be broadly as safe a credit as Jordan, Morocco and Tunisia as the economic reforms rolled out as part of the National Democratic Party government’s development plans enabled business and economic growth to flourish. Egypt regularly enjoyed economic growth rates of around 7% in real terms prior to the global financial crisis impact in 2009.
Turning the clock forward
Egypt’s comeback began last year when all 15 of its economic, political and structural risk indicators were upgraded by the experts, to a lesser or greater extent, heralding the prospect of an improving long-term trend in the risk score which so often precedes a credit rating upgrade. Euromoney’s survey has established a decent record in pre-empting the actions by the leading credit rating agencies, and so it has proved with Moody’s upgrade from Caa1 to B3 in April 2015 putting the rating agency on a par with the B- rating of Standard & Poor’s. Both agencies are still more conservative than Fitch, which has Egypt on a stable B rating, so the question is whether its creditworthiness will keep on improving.
All six of Egypt’s political risk indicators presently score less than half the 10 points allocated to them, with government stability, scoring 3.2, the worst of all - although notably it was the one political indicator upgraded slightly during the first quarter of 2015. Maintaining political stability is the key to a sustained improvement. That involves satisfactorily resolving the outstanding issues surrounding amendments to both the Electoral Constituency Division Law and the House of Representatives Law that the political parties and the Constitutional Court can agree on, paving the way for delayed parliamentary elections that now seem likely to take place after Ramadan from mid-June to mid-July.
Cautious optimism
The government has made progress in raising taxes and cutting the budget subsidies weighing on Egypt’s fiscal accounts, to free up more funds for investment, which will be assisted further by its renewed borrowing capabilities. The fall in oil prices has provided extra help for achieving fiscal-macro stability in view of the country’s status as a net energy importer. It also receives political and financial support from the Gulf States (with $12.5 billion worth of new aid pledges forthcoming), and the west in the light of its strategic importance in the region. Egypt will soon benefit too from being a founding member of the Asian Infrastructure Investment Bank, providing access to Chinese capital, all of which is supporting its risk rating.
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Mohamed Elsherbiny, an Egyptian-based contributor to Euromoney’s survey and head of portfolios with CI Capital Asset Management, is optimistic about Egypt’s prospects, although he also sounds a note of caution. “The main risk is geopolitical due to the tensions in the region; Islamist terrorism in particular,” he says, underlined by recent attacks in the Sinai Peninsula marring what is otherwise an appealing tourism destination. “There is also a risk of higher inflation, which might increase social unrest unless the government responds effectively,” he adds. He cautiously points to Egypt’s public finances, moreover, which the government is now tackling but which have deteriorated due to capital outflows spurred by the political turmoil depressing economic growth in recent years. Egypt’s government finances indicator is the lowest scoring in the survey, just 2.7 points out of 10. The fiscal position is likely to improve a little during the current fiscal year (through to end-June 2015), but the deficit will still be around 10% of GDP, assuming GDP growth recovers to around 4% in real terms, as many forecasters predict. In that respect, growth of 6.8% year on year during the second half of 2014 (corresponding to the first half of the 2014/15 fiscal year) is very encouraging, led by increased activity in the construction industry and in the manufacturing sector which emphasises the importance of a sustained recovery in the euro zone for boosting exports to Italy, Germany and France, among other key markets. The score for Egypt’s economic-GNP outlook indicator has been creeping up as a result, as it has for the employment/unemployment outlook.
There are still considerable efforts required to further improve Egypt’s risk rating, however. Regulatory reforms are progressing, but slowly, with Egypt climbing one place in the World Bank’s rankings for doing business 2015, to 112 out of 189 countries, due to better investor protection, while other areas are in need of urgent reform. The current account deficit, moreover, widened significantly to $4.3 billion in the second half of 2014 compared to only $866 million a year earlier, although it was exaggerated by the recovering economy boosting imports. Services income receipts from the Suez Canal, and notably from tourism, increased over the period. Egypt’s diversified foreign-currency sources – from Suez Canal toll fees, export revenues from the natural gas industry (undergoing reform), tourism receipts, migrant worker remittances and other transfers – are key to its potential strengths, and its ability to recover swiftly from its troubles given the emergence of more stable political underpinnings. Foreign exchange reserves are very low, having fallen to just below three months’ worth of import cover, but will be shored up by external borrowings. The domestic debt burden is high, unemployment and poverty indicators challenging, and the banking system has weakened, but will all benefit from an economy gaining traction.