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Public finances remain crucial challenge after Egypt election Govt to exempt bonus shares from new tax

CAIRO, May 30, (RTRS): (The following statement was released by the rating agency) The victory of Abdul Fattah el-Sisi in this week’s Egyptian presidential election does not alter Fitch Ratings’ expectation that the authorities will be cautious in addressing the large fiscal deficit. Egypt’s public finances are the main weakness for its sovereign credit profile. Sisi’s victory was not in doubt. Initial indications are that turnout was around 46%, lower than 52% at the election won by Mohammed Morsi in 2012 and despite three days of polling. Very high turnout might have enhanced the legitimacy of the return to military rule in domestic and international eyes, but we do not think economic policy, or Egypt’s relations with GCC countries that have provided grants and loans following the removal of President Morsi, will be affected.

Sisi has not set out a detailed economic programme. But the interim government’s actions, and Sisi’s broad pronouncements on the need to maintain growth and make Egyptian society more equitable, suggest the authorities are mindful of the risks of popular opposition to fiscal consolidation, which would initially focus on subsidies. In the final budget draft submitted to the interim president the government planned to cut spending on petroleum subsidies, but expected the budget deficit to widen in fiscal year ending June 2015, to 12% of GDP, from 11.5% forecast for FY14.

The improvement in budgetary performance in the first nine months of FY14, with the fiscal deficit narrowing to 7.1% of GDP from 10% in the same period last year, mostly reflects higher government revenues driven by grants. These constituted 2.5% of GDP, up from 0.2% a year earlier. This improvement therefore may not be sustainable, while the sensitivities around reducing subsidy spending mean the deficit will stay in or close to double digits over our ratings horizon.
Tax revenues have risen by 8% year on year, below inflation, and have not kept pace with an 11% spending increase. Wages, subsidies and interest payments rose significantly in recent years and represented 84% of spending in the first nine months of FY14.
These outturns are in line with our view that Egypt’s fiscal and economic performance has stabilised, but at a low level. In January, we revised the Outlook on Egypt’s long-term rating to Stable after three years on Negative, and affirmed it at ‘B-’ due to tentative improvements in political stability and economic conditions. These were partly driven by bilateral fund inflows that eased pressure on the budget, reserves and exchange rate. The next scheduled review of the rating is on 27 June 2014.

Meanwhile, Egypt will exempt bonus shares from a new 10 percent capital gains tax on profits made on the stock market, the country’s Finance Minister Hany Dimian said.
On Thursday Dimian said Egypt had approved the introduction of the tax, part of the first phase of income tax reforms it expects to bring in 10 billion Egyptian pounds ($1.4 billion).
“Distributions of bonus shares will be exempt from the taxes,” Dimian told Reuters by phone late on Thursday after a meeting with government finance officials.
Profits from the stock market are currently tax free, and Dimian has said the new tax will not be retroactive.
Egypt is eager to encourage investment but is also trying to find additional revenue sources after more than three years of economic and political turmoil since a popular uprising toppled President Hosni Mubarak in 2011.
Abdel Fattah el-Sisi, the former army chief who toppled the country’s first freely-elected leader after protests last year, won a presidential election with more than 90 percent of the vote this week, according to provisional results.

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