Credit downgrades put Egypt economy in greater risk

Egypt’s credit ratings, which have been downgraded to negative outlooks twice over the past month, are expected to impact the country’s banking sector as well as the economic recovery in the political transition.

“Ratings keep going down because the budget deficit increases along with the government debt and at the same time the economy is not growing,” said Monette Doss, senior analyst at Prime Group. “The revenue from taxes is also not coming because there is low production.”

According to Doss, the government has to spend despite plummeting revenues. It continues to finance subsidies to keep up with the soaring poverty rate.

Doss pointed out that as a result, the government will continue to borrow locally at higher interest rates.

“Forty percent of deposits in local banks are going to government treasuries, which is a huge risk,” said Doss. “The government’s situation is going to affect the banks, if the government realizes one day that they cannot pay this money back, the banks will default.”

According to this risky outlook, people as well as investors, will be reluctant to put their money in Egyptian banks.

With increased risks and higher interests rates, the cost of borrowing will increase for everyone, from small and medium enterprises to large businesses.

“It is normal for banks to say they are doing fine, but we have to look at the facts. When you have more than 40 percent of deposits going out to government treasuries with no liquidity, increase in government expenses, these are all negative indicators,” she stressed.

According to Doss, the current external and internal debt stands at about 90 percent of the country’s total GDP.

The interest on one-year treasury bills is currently at 14 percent. Government bonds, on the other hand, five-year and seven-year bonds, have interest rates of 14.25 and 14.5 percent respectively.

Since bonds are long-term, they are not facing the same risks as treasury bills.

Most recently, global ratings agency, Moody’s Standard & Poor (S&P) gave Egypt a BB- rating citing “weak” prospects for improvement as well as rising risks to the country’s overall economic stability during the political transition.

The country’s long-term foreign currency sovereignty credit rating was also lowered.

In Early October, Fitch Ratings downgraded Egypt’s long-term default and currency outlook to “negative” stating that the nation “cannot begin its long-term recovery until there is more certainty about its political future,” which has lagged over the past nine months.

Doss predicted that if the situation does not improve, another hit to the Egyptian economic can be expected in the next year.

“There is a political uncertainty in Egypt and this is a result of mismanagement by the current government, the way they handle protests and the way they approach the unrest causes more anger,” she added.

“Politically, they can easily win over investors, increase production, but they have to successfully alleviate the people’s anger.”

Similarly, Karim Helal, board member of Cairo-based holding company, CI Capital asserted that as the political transition prolongs, the country’s recovery would stall, causing greater problems in the long run.