Fitch Ratings said Tuesday the recently announced fuel price hikes are an important step toward reducing subsidies that contribute to Egypt's substantial fiscal deficit - a key rating weakness.
Tackling subsidies is a key way of reducing Egypt's budget deficit, which we estimate at 12.1% of GDP in 2013/14 (to end June).
A double-digit fiscal deficit in each of the last three years has pushed government debt to over 90% of GDP from 76.6% at end-FY11 and contributed to a series of downgrades to Egypt's ratings.
The subsidy bill, which is dominated by fuel products, accounted for about one-third of total spending in FY13, or 12% of GDP.
The price hikes, which range between 40%-78% for petrol and 175% for natural gas, follow the adoption of a tighter budget on June 29.
The 2014/15 budget targets a deficit of 10% of GDP, down from the draft budget's 12.2% after President Abdul Fattah al-Sisi's intervention resulted in a 1% of GDP cut in budgeted subsidy spending and a 1.5% of GDP rise in budgeted tax revenues.
Subsidy spending is to be held at the FY13 level and tax revenues are budgeted to rise by 26%. Several new revenue-raising measures have been introduced, including a capital gains tax, Fitch said.
The budget maintains a conservative assumption for grants. Only pledged grants that have yet to be drawn are included in the budget, totalling EGP 23 bn, compared to an official estimate of EGP 117 bn for FY13.
Fitch assumes that support, primarily from Kuwait, Saudi Arabia and UAE, will remain forthcoming and anticipates grants to be well above the budgeted level.
"Concerns about political stability have prevented previous administrations from tackling the cost of subsidies".
"Now, the political environment is more conducive to fiscal consolidation. Only isolated protests in response to the price hikes were reported. However, serious political tensions remain and the expected return of inflation to double-digits (from 8.2% in May) may cause social strains", it added.
Fitch reaffirmed its 'B-' long-term foreign currency rating for Egypt on June 27, noting that "material progress on fiscal consolidation" was one factor that could lead to a positive rating action.