Fitch Downgrades Egypt to ‘B’ with Negative Outlook
Fitch Ratings has downgraded Egypt’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with outlook accorded as negative amidst uncertainties in the local economy.
In the rating note released, Fitch said the downgrade of Egypt’s IDRs and the negative outlook reflect the country’s macroeconomic condition with pressure from external financing.
In Fitch’s view, external financing risk has increased given high external financing requirements, constrained external financing conditions and the sensitivity of Egypt’s broader financing plan to investor sentiment.
The rating agency noted that all this comes against a background of high uncertainty on the exchange-rate trajectory and reduced external liquidity buffers.
“We see a risk that a further delayed transition to a flexible exchange rate will further undermine confidence, and, potentially, delay the IMF programme”.
Fitch said the rating action also captures a marked deterioration of public debt metrics, including a renewed deterioration in government interest costs/revenue, which, if not reversed, would put medium-term debt sustainability at risk.
Egypt is facing pressure from External financing amidst high debt to gross domestic ratio and stretched fiscal position of the government.
Uncertainty around Egypt’s ability to meet its external financing needs has increased, reflecting still constrained prospects for market access and the lack of market confidence in the Central Bank of Egypt’s (CBE) new exchange rate regime, which has held back foreign currency (FC) inflows, Fitch said.
It notes the country’s incomplete transition to flexible exchange rate as one of the key rating factors in its recent assessment.
Foreign currency shortages resurfaced in February 2023, while the official exchange rate stabilised, following successive devaluations that had left the Egyptian pound against the US dollar about 50% weaker compared with the start of 2022.
“In our view, the stabilisation partly reflects the reluctance of market participants to transact in the foreign exchange (FX) market, given high uncertainty around the future exchange rate level.
“Also, interventions by public sector banks, further damaging confidence in the durably flexible exchange rate regime and the value of the currency”.
Fitch said it assumes that the exchange rate will depreciate further before stabilising in the financial year ending June 2024, adding that Egyptian external financing needs remain large even after government secured lifeline support from the International Monetary Fund.
The external financing requirement will be more challenging in 2024 due to increasing government external debt maturities of around US$7.2 billion, up from US$4.3 billion in 2023, including US$2.1 billion of Eurobond maturities; compared with US$0.8 billion in 2023.
Fitch projects a current account deficit of 3.3% of GDP -about US$12 billion- in 2023 and 2024, versus 3.5% (over US$16 billion) in 2022, with most of the improvement coming from stronger tourism and Suez Canal receipts.
The rating note added that Egypt’s external liquidity buffers remain weak, after a marked deterioration in 2022. Gross official reserves have started to recover to US$34.4 billion at end-March 2023 from a low of US$33.1 billion in August 2022 and US$41 billion in February 2022.
This happened after the central bank of Egypt (CBE) let the pound depreciate in October 2022 and January 2023. CBE’s and commercial banks’ net foreign assets, however, deteriorated again in the beginning of the year to a negative US$24.5 billion in March 2023 from a negative US$20 billion in December 2022, reflecting constraints on FX liquidity.
The rating was anchored on the authorities’ external financing plan which hinges on an annual net foreign direct investments (FDI) target of US$10 billion from 2023, supported by the participation of GCC partners including in the government’s privatisation programme.
“…we continue to believe GCC support to Egypt’s economy is strong, and successful divestment deals with Gulf partners would help restore confidence and unlock further investments”.
According to the government, it is well advanced to secure a total of US$6.8 billion external financing to cover external debt maturities for 2024 and the remainder of 2023.
Fitch noted that 2024 financing plan, however, is currently short of near US$1 billion and incorporates about US$2 billion bond issuance, while prospects for market access remain constrained.
Still, Egypt’s largest 2024 Eurobond maturities worth about US$1.6 billion are due in the second half of the year, providing some space to secure additional financing.
“We forecast general government debt will increase to 96.7% of GDP in 2023, from 86.6% in 2022, well above the expected 2023 ‘B’ median of 54.7%, mainly due to the currency devaluations inflating external debt as a share of GDP.
“Although we expect negative real interest rates will support a significant reduction in debt to 87.3% of GDP by the end of 2024, Egypt’s high public debt levels remain a key rating weakness”, Fitch stated.
Analysts noted that Egypt’s interest payment continues to pose a risk to debt sustainability, rising to over 54% of revenue in 2024, one of the highest among Fitch-rated sovereigns.
It was noted that currency weakness continues to impact inflation record and growth. Headline inflation reached 32.6% in March 2023, reflecting the currency devaluation, on top of fuel price adjustments, and supply bottlenecks due to foreign currency shortages.
“We see uncertainty about the timing of the inflation peak and its level, as well as the adjustment period for the economy to absorb further currency weakness. We forecast 2023 average inflation to reach 24% and to steadily decrease to 18% in 2024, helped by a favourable base effect.
Fitch expects inflation, foreign currency shortages, fiscal policy tightening and heightened economic uncertainty to weigh on growth, which will slow to 4% in 2023 from 6.6% in 2022 before recovering to 4.5% in 2024. #Fitch Downgrades Egypt to ‘B’ with Negative Outlook#