Egypt Acute Fiscal Challenge Provokes Debt Restructure -Note

Egypt is facing pressures from government’s rising external debt service schedule, which will peak at almost $30 billion in calendar 2024, Moody’s said in a note just recently.

Government revenue record has been unimpressive with key macroeconomic indicators nosediving.

Like Ghana, the Egyptian may result in debt restructuring to reduce pressures from its sizeable debt book. Interest payments on government debt has increased following devaluation of Egyptian pounds.

Egyptian government’s interest/GDP ratio to hit 9.5% for fiscal 2024, and a projected interest/revenue ratio at over 50%, one of the highest among Moody’s-rated sovereigns.

At the same time, the general government debt/GDP ratio reached 95% in June 2023 from 85% in 2022. The sharp increase in the 91-day T-bill rate to over 25% also exceeds previously recorded levels and undermines debt affordability if not mitigated by higher revenue.

Despite these pressures, however, Moody’s said its baseline expectation is that the government’s track record of fiscal reform implementation capacity will help unlock an enhanced financial support package from the IMF and other official lenders.

“We assign a high probability that the IMF broadens the government’s borrowing space to up to $10 billion, which will cover the external funding gap in fiscal 2024 and 2025, while the government still benefits from a large and dedicated domestic banking sector to meet its large financing needs.

Egypt is facing worsening debt affordability. The significant increase in interest payments and a widening gap between the official and parallel market exchange rate have complicated the country’s macroeconomic adjustment process, despite continued fiscal consolidation efforts and expectations for enhanced official sector support.

The banking sector is also affected by these developments given its broad government-related exposure which amounts to around half of total sector assets as of August 2023.

Moody’s base-case scenario is that Egypt will not default on its debt, nor that analysts will witness any government debt reprofiling/restructuring.

The rating firm said it expects the government’s track record of fiscal reform implementation capacity to help unlock an enhanced financial support package from the IMF and other official lenders, while the government still benefits from a dedicated domestic banking sector to meet its large financing needs.

Nevertheless, with Ghana’s debt restructuring in December 2022 still weighing on investors’ minds, Moody’s analysts said they have undertaken a scenario analysis to determine the effect on Egyptian banks should the government decide to restructure its debt in a similar way – by extending maturities on government bonds and lowering the coupon rate. #Egypt Acute Fiscal Challenge Provokes Debt Restructure -Note

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