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13 April 2024

Egypt deficit to widen amid falling FDI

By Staff Writer

Egypt economy will slow down during the next two fiscal years while the deficit will widen amid falling foreign direct investment, Standard & Poor's Ratings Services said yesterday.

The ratings agency affirmed country's "BB+/B" foreign currency and "BBB-/A-3" local currency sovereign credit ratings. The outlook on the ratings is stable. As inflationary pressures ease, the sharp deterioration in external demand now poses the principal threat to Egypt's creditworthiness.

S&P's expects economic growth to fall to around 5.5 per cent in fiscal 2009 (ending June 30) and 4.4 per cent in 2010, from an average of seven per cent in the past three years, because of a slowdown in tourist arrivals, static workers' remittances, and weakening demand for manufacturing exports.

Slower growth will put pressure on public finances and S&P's expects government deficit to widen to 7.9 per cent of GDP in fiscal 2009.

The agency also expects Egypt's external position to weaken. Compounded by a fall in traffic passing through the Suez Canal, the current account is likely to register a deficit of two per cent of GDP in 2009, widening to 3.4 per cent in fiscal 2010, following years of surpluses.

Inward foreign direct investment will likely decline while substantial net outflows from the debt and equity markets have already occurred.

However, Egypt is better placed to weather external shocks as the the cabinet in mid-2004, launched its programme of fiscal reform, banking sector consolidation and privatisation, and the central bank simultaneously embarked on an overhaul of monetary policy.

Though public finances remain weak, gross debt-to-GDP has maintained a steady downward trajectory, to 71 per cent at end-fiscal 2008 from 105 per cent in 2005. On the external side, the substantial build-up of central bank reserves and foreign currency assets gives the monetary authorities greater capacity to mitigate the shock of falling external demand.