Banking on better ratings
Will the floatation of the pound improve the Egyptian economy's international ranking?
One day after Egypt's long-called-for forex regime liberalisation, Central Bank of Egypt (CBE) Governor Mahmoud Abul-Oyoun was in London to meet with officials from international rating agencies to discuss a possible upgrading of their evaluations of the Egyptian economy, Sherine Abdel-Razek gauges rating agencies' reactions. Abul-Oyoun met with representatives of Standard and Poor's (S&P) and Fitch IBCA, as well as those of other financial institutions and investment houses.
The government desperately needs better ratings for the Egyptian economy. With $1.5 billion worth of Eurobonds currently traded in the international market, the economy has become susceptible to the sovereign ratings assigned it by international rating agencies. Besides Fitch IBCA and S&P, Egypt is currently rated by Moody's, Thomson Bank Watch and Nile Rating.
While none of the rating agencies have announced an upgrading of their sovereign or currency ratings for the Egyptian economy, the floatation move was praised.
In a statement released by Fitch Ratings, the agency said it welcomes the change of the previous managed peg system, which was "a constraint on the sovereign rating, particularly as Egypt has been subjected to a series of external shocks in recent years".
Another positive appraisal came from S&P. "The old regime had long lost its credibility because it had been used to support an exchange rate that was out of line with market conditions and inconsistent with other economic policies," said Ala'a El-Youseff, Standard & Poor's credit analyst and director for sovereign ratings in the Middle East and Africa, in a statement sent to Reuters.
Both agencies have previously expressed reservations regarding Egypt's forex policy and were even expected to base more downgrades on it.
In July, S&P reaffirmed its negative outlook on its investment grade rating for Egypt, which meant there was still a risk it would be downgraded in the following 12 months to "junk" grade. At the time, the agency pointed to the "inflexible" exchange rate as one of the main reasons for hindering Egypt's ratings.
"If within the next year the government misses its fiscal deficit target, the current exchange rate regime loses credibility and the pace of structural reforms remains slow, then the ratings would be lowered," S&P said in July.
Fitch IBCA has also been in favour of floating the Egyptian pound and has long downplayed the government's concerns regarding inflation and other negative social consequences of floatation.
Now that the move has been made, both organisations stress that the economy might need time to reap its fruits and concede that it might face some problems.
Fitch said that one of the negative effects of a depreciated exchange rate could be an increased fiscal burden associated with subsidies on certain imported commodities. Also, according to an agency statement, "the banking system will need time to adjust to the weaker pound and the more liberal exchange rate."
The opinion was echoed by S&P, which also expected the exchange rate to overshoot its market-clearing rate in the short term unless other policies are taken.
"The economy should benefit from a return of liquidity to the foreign exchange market, allowing the central bank to further lower interest rates," said S&P's El-Youseff. "This should stimulate growth, provided fiscal policy is not loosened at the same time. Otherwise, the exchange rate will be destabilised, inflation will rise and growth will be jeopardised."
