Fitch reiterated its stable outlook on Egypt's rating on tentative political and economic improvements but warned that economic recovery will take time, the ratings agency said in a press release. Egypt's rating, which was downgraded five notches since January 2011 following the ouster of former President Hosni Mubarak, was stabilized in 2014. This reflected the large inflows of bilateral aid following the removal of President Morsi in July 2013 that eased the pressure on foreign currency reserves, the exchange rate and the budget. Fitch also saw the crackdown on opposition activity by the military and security services and the approval of a new constitution, broadly speaking, as a stabilizing political factor for the rating.  

However, the agency is quick to point out that long term ratings of B- reflects substantial risks and challenges. On the political front, the rating agency believes that the clampdown on the Muslim Brotherhood brings a greater risk of political radicalization, while donor aid inflows will be insufficient to permanently address structural trade and fiscal deficits. In particular, the prospects of making a major improvement in the fiscal deficit is unlikely given the fact that fiscal consolidation would require tackling politically sensitive subsidies.

As a result, Fitch forecasts the double digit budget deficit as a percentage of GDP to continue well into 2015 and debt/GDP ratio to reach over 90%. Likewise, Egypt’s external finances remain precarious with chances of the country regaining its net creditor position unlikely in the near future in view of a continued increase in unmet demand for foreign exchange outflows.

Macroeconomic factors such as low economic growth, growing unemployment and high inflation are a weakness for Egypt’s rating. Although Fitch sees a modest strengthening of economic growth going forward, both unemployment and inflation are expected to remain high.

The agency concludes that in comparing Egypt’s 2015 forecast with those of peer groups, the damage to the country’s credit profile in three years of political and economic turmoil highlights the difficulty of generating outcomes that could return the rating to its end-2010 level.