A return to the international capital markets in April is whetting the appetite of yield-hungry investors eager to snap up the $1.5 billion Eurobond likely to herald the first in a series of market offerings. But are the sovereign borrower’s risks being ignored?
The new reform-minded, technocrat government led by president Abdel Fattah el-Sisi has provided some much-needed stability, and is unveiling ambitious development plans including a new capital city to cope with rapid population growth.
It signals a new start for the sovereign since the economy and its finances were ravaged by the Arab Spring uprising in 2011 and weakened by its aftershocks.
Yet, according to the Euromoney Country Risk survey, Egypt is still lying 121st out of 186 sovereigns worldwide in the 186-country global rankings – firmly entrenched in tier five, the lowest-risk category containing the world’s most likely defaulters.
It hasn’t stopped demand for Egyptian debt, but suggests investors might have got ahead of themselves, losing track of the very high risks involved.
Egypt’s score has admittedly stabilized after plunging 17.6 points since 2010 – rising 2.2 points last year when all 15 economic, political and structural risk factors were upgraded by Euromoney’s expert survey contributors, to a lesser or greater degree.
That heralds the prospect of an improving longer-term trend in the risk score, which can so often precede a credit rating upgrade.
Yet Egypt’s total score is still a paltry 32.7 from a possible 100 points, commensurate with a D to B- credit rating, highlighting its high-risk short-term prospects.
Not one of the risk indicators scores even half of the 10 points available – a relevance that should not be ignored.
Mohamed Elsherbiny, Egyptian-based head of portfolios with CI Capital Asset Management, believes Egypt’s diversified foreign-currency sources – from the Suez Canal, gas export revenue, tourism receipts, remittances and other transfers – are one of its strengths, although he notes that a weak eurozone has dampened that potential.
The country is making progress, too, in cutting subsidies, raising taxes and investing more – plus, as a net energy importer, lower oil prices are an added benefit to Egypt’s investor profile.
The external debt metrics are manageable, and Egypt is receiving political and financial support from the Gulf states and the west in the light of its strategic importance in the region.
GDP growth, meanwhile, is predicted to accelerate in real terms from 2.2% in fiscal year 2013/14 (through July), to 3.8% in 2014/15 and 4.3% in 2015/16, according to the IMF’s latest projections.
Don’t forget the risks
However, the country urgently needs even higher growth rates to aid development, especially when considering the high levels of poverty – affecting 40% of the population – and the substantial unemployment and underemployment problems that exacerbated the uprising.
Elsherbiny firmly believes the main risk is still “geopolitical due to the tensions in the region; Islamist terrorism in particular”.
There is a risk too of higher inflation “which might increase social unrest unless the government responds effectively”, he adds.
He also cautiously refers to Egypt’s public finances, which have deteriorated. They are likely to improve a little during the current fiscal year, he expects, but the deficit will still be around 10% of GDP. Foreign-exchange reserves are very low and the banking system has been weakened.
Other risk experts concur. The score for the government finances indicator is just 2.7 out of 10 and for employment/unemployment it is just 3.3.
Egypt might be turning, but its scores for corruption, transparency, institutions, policymaking and government stability are all exceptionally low – as is the structural risk score for its labour market/industrial relations.
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