Moody's Investors Service has changed Egypt's outlook to stable from negative and affirmed its Caa1 government bond rating.
"The outlook change to stable from negative reflects our expectations of an improving fiscal and economic environment, building on a number of developments over the past year that reduce downside risks to the rating," the Corporate of Ratings said on Monday in a statement.
Moody's explained that "Key drivers for the outlook change to stable from negative are the stabilized political and security situation, the launch of government initiatives toward fiscal consolidation, signs of a growth recovery and an improvement in macroeconomic stability and strong support from external donors."
The service added that "the government is also working on revenue-enhancing measures, including a shift from the current goods and services tax to a value-added tax system."
Meanwhile, these initiatives target a deficit reduction, with the current fiscal year target set at 10 percent of GDP, compared with an 12.8 percent estimated by the Finance Ministry in fiscal 2014 and 8.5 percent by 2019. At the same time, the ministry plans to stabilize the government debt ratio and reduce it to between 80 and 85 percent of GDP by 2019, Moody's report said.
In addition, economic growth has started to pick up. Real GDP grew by 3.7 percent year-on-year during the fourth quarter of fiscal 2014, up from 2.5 percent in the previous quarter, while high frequency indicators support the scenario of a sequential pick-up in growth.
External financial support, predominantly from Gulf Cooperation Council member states, continues to bolster external liquidity, supporting Egypt's budget and lowering the government's financing costs. The commitment from the Gulf governments remains strong and will likely continue in the future.
According to the Finance Ministry, Saudi Arabia, Kuwait and the United Arab Emirates have provided almost US$17 billion in grants and loans to the Egyptian government and Central Bank of Egypt during fiscal 2014. In addition, the US government has recently resumed military cooperation and other aid.
However, Egypt's Caa1 government bond rating remains primarily constrained by high fiscal deficits, high government debt, very large fiscal borrowing needs and continued challenges hindering the recovery of economic growth in the post-revolutionary political and economic environment, Moody's added.
