S&P affirms Egypt’s rating, fiscal position remains weak


The rating agency said that the country’s political landscape has begun to stabilise and that the security situation is improving.

Specifically, the rating was kept unchanged at “B-” with a stable outlook, which is equivalent to Fitch’s rating on Egypt, but one notch higher than both Moody’s Investors Service and NKC Independent Economists. 

The rating agency highlighted that the Egyptian government has implemented a number of fiscal reforms, including energy subsidy cuts and tax increases on high-end individuals and large businesses as well as on property.


However, it expects the positive fiscal impact of these reforms to be offset by higher spending on targeted benefits, health, education, and scientific research. S&P also considers the government’s ability to make significant spending cuts to be limited.

As such, the agency believes that debt interest payments will remain very high, averaging 35% of fiscal revenues between 2014 and 2017. 

Recently-released data from the Ministry of Finance shows that Egypt’s budget deficit to GDP ratio narrowed in the 2013/14 fiscal year (FY, running from July 2013 – June 2014) on the back of a massive amount of foreign grants. The budget deficit widened in nominal terms from E£237.9bn in 2012/13 to E£244.7bn in 2013/14, but narrowed from 13.6 per cent of GDP to 12.3 per cent of GDP over the same period.

The situation would have been even worse if not for a staggering E£95.9bn worth of aid; all other things held constant, the deficit would have reached 17 per cent of GDP if not for this aid. To put it in perspective, this aid, which is equivalent to $13.7bn, is equal in magnitude to Namibia’s entire economy. 

Including the grants, total fiscal revenues increased by 30.4 per cent to E£456.8bn. Other than grants, though, revenues increased by less than inflation: tax revenues increased by only 3.7 per cent to E£260.3bn, while non-tax revenues increased by 7.1 per cent to E£100.6bn.

Meanwhile, fiscal expenditure increased by 19.3 per cent to E£701.5bn. Most notably, salaries increased by 25 per cent, subsidies and social transfers increased by 16 per cent, and debt interest payments increased by almost 18 per cent. There was also a 34 per cent increase in capital spending, but this came from a low base. 

After adding an additional E£10.7bn for the purchasing of financial assets, total financing needs stood at E£255.4bn in the 2013/14 FY. Of this, E£244.4bn was financed by domestic banks (presumably including the central bank), while foreign sources financed E£4bn of the deficit. 

The finance ministry also released figures for the first quarter of the 2014/15 FY. On the revenue side, there was a 28.4 per cent y-o-y increase in tax revenues, while non-tax revenues (excluding grants) more than doubled compared to 2013/14 Q1.

Total revenues increased by around 30 per cent y-o-y. Despite this, the deficit widened over this period due to a 20 per cent y-o-y increase in spending. Notably, subsidies and social transfers increased by 27.5 per cent y-o-y, mainly due to a large increase in food subsidies and social security benefits. 

Fuel subsidies have however not been included in the new FY’s figures as yet; we expect fuel subsidies to decrease significantly this year – by around 18 per cent to E£103bn due to subsidy cuts and a sharp drop in international oil prices.

This is however expected to be offset by increases in social transfers. Meanwhile, salaries increased by a further 17.1 per cent y-o-y and debt interest payments rose by 14.3 per cent y-o-y. 

The revenue measures announced at the start of the FY appear to have boosted revenues significantly; in fact, there was a 48 per cent y-o-y increase in revenues excluding grants.

We therefore project that the budget deficit excluding grants will narrow from 17 per cent of GDP to around 14 per cent of GDP in the current FY. After adding a projected E£53bn in grants, the deficit is projected to narrow to 11.5 per cent of GDP.

Assuming a gradual decline in grants, we expect the fiscal deficit to GDP ratio to remain in double digits up until 2016/17 and that the public debt to GDP ratio will remain above 90 per cent over the medium term. 

S&P stated that it would consider lowering the rating if fiscal or external indicators worsen significantly or if banks’ appetite for buying government debt securities wane. Moreover, if S&P anticipates that “sufficient and timely” donor aid will not be forthcoming, it would also lower the rating. On the other hand, higher economic growth, together with improved fiscal and external performances, would be needed for a rating upgrade.

Jacques Verreynne is an economist at NKC Independent Economists