UBS Wealth Management's Chief Investment Office (CIO) launched a new report on Africa's sovereign credit prospects, an important benchmark used to evaluate the risk of investing in a country. The report concludes that after years of deterioration, the credit outlook of many African sovereign issuers is stabilizing or improving.
The report assigns a stable credit outlook to Egypt. Over the next five years, the country's population is expected to increase by more than 10 million according to the UN, which is likely to become a sound driver of economic growth if the right conditions are met. Current reforms and a buoyant global backdrop support the economy. Risks include the country's chronic high youth unemployment rate.
Across the continent, Africa’s sovereigns have been hit by a range of issues in recent years, including the end of the commodity super cycle, depreciating exchange rates and mounting public debt ratios. As a result, several sovereigns experienced multiple-notch downgrades. Downgrades send a negative signal about a country's economic prospects to investors.
According to the report's findings, however, macroeconomic prospects in the region are beginning to improve. The International Monetary Fund (IMF) forecasts real GDP growth to almost double this year in Sub-Saharan Africa, reaching 2.6 percent, while fiscal and current account deficits are expected to have peaked at 4.5 percent and 4 percent last year, respectively. Key drivers supporting the outlook include rising global growth and trade, a modest recovery in energy and base metal prices, more competitive exchange rates for African currencies, and structural reforms in a range of countries.
Ali Janoudi, Head of Central and Eastern Europe, Middle East and Africa, France and Belgium International at UBS Wealth Management, said: "From a longer-term perspective, the report indicates that the growth potential of Egypt and many African countries continues to be substantial, supported by drivers such as population growth, urbanization, and a rising middle class. Egypt's efforts to improve the nation's business environment and enhance the credibility of its economic policy will prove decisive for its sovereign credit profile."
Michael Bolliger, Head of Emerging Market Asset Allocation at UBS Wealth Management's CIO, said: "We believe the Egyptian economy can sustainably expand at an annual growth rate of 5 to 6 percent. However, further reform progress is crucial and access to foreign funds is a key element in this process. Despite recent progress, including a successful IMF program as well as the issuance of new Eurobonds, more work needs to be done to unleash the country's full potential."
