Why Egypt offers an alternative to Morocco and Tunisia


Jeremy Weltman
Published on:

The borrower is a higher-risk option, but its fortunes are improving.

The dust is finally settling and Cairo's tourism industry – and, too, Egypt's outlook – is on the up

This week, Fitch altered its assessment of Egypt by putting its B rating on a positive outlook.

In Euromoney’s country risk survey, the sovereign borrower ranks 119th out of 186 countries, a tier-five sovereign that is among the world’s worst default risks, but crucially one that is improving:


Although Egypt’s risk score has remained heavily depressed since the revolution in 2011, it rose slightly last year after an upgrading of all five economic indicators, all four structural indicators and a higher score for government stability outweighing deteriorating trends for corruption and transparency.

The slow, but discernible, amelioration to the economic outlook has occurred in response to three main factors: floating the Egyptian pound, benefiting from improving global trade and gaining a three-year financing arrangement from the IMF.

The IMF programme, which provides $12 billion-worth of balance of payments support, naturally comes with conditions attached, but also a glowing first-year report card.

It notes that ambitious reforms completed include the flexible exchange rate, energy subsidies addressed and the budget deficit reduced, as well as measures to increase labour force participation among females and the young, and to enhance the business climate.

Improving security for tourists and investors is crucial, too, considering the combined effects of the revolution and terrorist attacks on foreign sentiment.

The devalued pound since it was floated has made Egypt cheaper and more attractive in that respect, while simultaneously giving a lift to non-hydrocarbon exports.

Moreover, the government passed a new investment law in May 2017 offering incentives to attract foreign capital, and a new bankruptcy protection law is currently working its way through parliament.

High risk, but improving

The country is not without considerable risks given the potential for political change, more terrorism attacks­­ – including attacks on shipping ­­– and other, substantial economic problems.

They include a high annual inflation rate of 22% in December, a current-account deficit exceeding 4% of GDP and a debt burden pushing beyond 100% of GDP in 2016/17.

Encouragingly, the government has upgraded its GDP growth estimate for the fiscal year 2017-18 (July-June) from 4.8% to between 5.3% and 5.5%, and is projecting 6% growth for 2018-19. Inflation is now easing and the debt burden is also projected to fall as the fiscal deficit narrows, and the government targets a primary surplus in 2018/19 for the first time in more than 15 years.

IMF financing with Suez Canal and oil and gas revenues furthermore ensure the foreign currency reserves cover around five months of imports, or the entire stock of short-term maturing liabilities.

After declining by 3.2% in 2016, the latest data show Suez Canal receipts rising in 2017 with traffic enhanced by bulker toll discounts continuing in 2018.

In comparison, Morocco and Tunisia are safer prospects, with Morocco (72nd in the survey rankings) and Tunisia (82nd) both in tier four, equivalent to a B- to BB+ credit rating.

Yet both countries were marked down last year; Morocco slipped two places in the rankings and Tunisia by three.

Doubts about Morocco were expressed by ECR in November, noting the persistent fiscal deficit, large debt burden and political risks.

In Tunisia, where the tourism industry is slowly reviving, the outlook is marred by anti-austerity protests after an unsuccessful attempt to raise consumer prices and taxes to bolster fiscal revenue, and by government instability undermining the political risk scores.

The growing trade deficit, rising debt burden (now 70% of GDP) and fiscal deficit (6% of GDP) have made reforms urgent.

Egypt is still a riskier prospect, but it is closing the gap and offers huge potential if the reforms continue.

Christian Richter, a contributor to Euromoney’s risk survey and a professor in economics at the German University in Cairo, says: “Egypt is definitely going in the right direction and the recovery is noticeable.”

The special economic zones help to attract investment, he says, but it is not enough and will require a concerted effort to tackle red tape and corruption, plus Islamist extremism remains a risk to the political environment.

“Regardless, Egypt is a country of great potential,” he adds.

“There is still work to be done, but under president [Abdel Fattah al-]Sisi the political and economic situation has improved massively.”