Fitch Revises Egypt’s Outlook to Positive as ‘Macros’ Improve
Fitch Ratings has revised the Outlook on Egypt’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to Positive from Stable, and affirmed the IDR at ‘B-‘.
According to the rating note, the sovereign near-term external financing risks have markedly reduced due to the Ras El-Hekma deal with the United Arab Emirates (UAE), the move to a flexible exchange rate and the tightening of monetary policy, which also unlocked additional IFI financing and the return of sizeable non-resident inflows to the domestic debt market.
The Ras El-Hekma investment underscores the strength of GCC financial support for Egypt, and Fitch has somewhat greater confidence that exchange rate flexibility will be more durable than in the past, the rating note reads.
In addition, initial steps to contain off-budget spending should help to reduce public debt sustainability risks. The USD35 billion Ras El-Hekma deal comprises USD24 billion of fresh foreign-currency (FC) inflows in fiscal year ending June 2024.
Fitch said half of these funds accrue to the Ministry of Finance, lowering debt issuance needs, and half to the New Urban Community Authority. The remaining USD11 billion of the deal consists of the conversion of existing UAE FC deposits held at the Central Bank of Egypt (CBE) to local-currency (LC) deposits for investments, reducing Egypt’s external debt.
At the first review in March, the IMF Extended Fund Facility (EFF) was augmented by USD5 billion to USD8 billion, the EU approved a three-year EU support package of EUR7.4 billion, and non-resident holdings of domestic debt rose to USD35.3 billion, from USD16.6 billion at end-2023.
As a result of capital inflows, the net foreign liability position of CBE fell by around three-quarters in March to USD1.3 billion, and that of banks to USD2.8 billion, from USD17.5 billion in January.
Fitch forecasts gross FX reserves will increase USD16.2 billion in FY2024 to USD49.7 billion despite a 4pp widening of the current account (CA) deficit to 5.2% of GDP.
Analysts said widening of current account was due partly to lower oil and services exports, and a temporary boost to imports from the recent clearance of an estimated USD8 billion FX backlog.
Recovering remittances due to greater exchange rate confidence contributes to analysts projected narrowing of the current account deficit to 2.3% of GDP in FY25, Fitch ratings said.
“We forecast FX reserves to rise further to USD53.3 billion by FYE25, equivalent to 5.6 months of current external payments, above the ‘B’ median of 4.1 months, and net external debt to fall 6.5pp in FY23-FY25 to 23.2% of GDP”.
Fitch said 38% depreciation of the official exchange rate in March to EGP49.4/USD collapsed the very large divergence with the parallel market rate (which peaked at near EGP72/USD in January, against the official rate of EGP31/USD).
The interbank FX market has revived, with daily turnover volumes increasing by more than tenfold since February.
“Our somewhat greater confidence that exchange rate flexibility will be more durable partly reflects its close monitoring under Egypt’s IMF EFF, which runs to late 2026, and the strengthening of external finances it has helped to support, although an external shock would provide a greater test of the authorities’ commitment”.
Initial steps have been taken to better monitor and contain off-budget expenditure, including the phased inclusion of 59 Economic Authorities into the general government perimeter starting in the FY25 budget, and a decree capping overall public investment at EGP1 trillion.
The ratings agency stated that the sharp increase in CBE deficit financing since early 2023 has also reversed; its net claims on the government fell 24% in March to EGP1.7 trillion, and use of the single government account overdraft has returned to within its legal limit.
Fitch stated Egypt’s ‘B-‘ rating also reflect its assessment of key macroeconomic indicators drivers.
Inflation rose to 35.7% year on year in February, partly due to parallel market depreciation and FX shortages, before edging down to 33.4% in March.
Fitch projects inflation to fall to 12.3% in June 2025, reflecting the 800bp of policy interest rate rises this year, broad exchange rate stability, easing supply constraints, and a strong base effect in February, with a positive real interest rate of close to 4% at year-end.
“We forecast GDP growth to slow 0.7pp in FY2024 to 3.1%, before accelerating to 4.7% in FY25 on strengthening confidence, remittances, real incomes and FDI spending, still slightly below Egypt’s trend rate”.
Fitch said progress in IMF EFF structural reform measures to support private sector activity and competitiveness would help lift sustainable growth and reduce the risk of renewed imbalances.
Analysts forecast the general government deficit to narrow 0.3pp in FY24 to 5.5% of GDP, with fiscal revenues from the Ras El-Hekma deal more than offsetting a 2.7% of GDP rise in debt interest.
The rating note stated that normalisation of non-tax revenue, and a further increase in debt service costs underpin Fitch Ratings projection for the deficit to widen to 8.8% of GDP in FY2025, above the central government target of 7.3%, which incorporates additional revenue mobilisation measures of around 1% of GDP.
The majority of deficit financing will continue to be met on the domestic market, according to analysts.
The country’s debt interest/revenue is projected to peak at close to 68% in FY2025, the highest among ‘B’ category sovereigns and more than five times the ‘B’ category median of 13% in 2024, before falling to a still extreme 45% in FY2028, helped by a large fall in the policy interest rate and the short average maturity of domestic debt.
“While we have not made any adjustment to incorporate the government’s planned expansion of the general government perimeter, using FY2025 budget figures that bring in Economic Authorities would result in a near halving of interest/revenue”, Fitch stated.
General government debt/GDP is projected to fall to 84.5% of GDP at FYE25, from 95.9% at FYE23, on primary surpluses and very strong nominal GDP growth, but still well above the current ‘B’ median of 57.9%.
Fitch incorporates debt-enhancing stock-flow adjustment averaging near 3% of GDP over this period to reflect Egypt’s record of off-budget fiscal spending. There remains a lack of visibility on Egypt’s large and complex broader public sector, creating uncertainty over the size of contingent liabilities and adding to fiscal risks.
It said further escalation of regional conflict represents a risk to tourism and Suez Canal receipts, which we already project to fall 6% and 19%, respectively, in FY2024.
While the recent direct strikes between Iran and Israel have raised the risks of escalation beyond Gaza, the apparent rapid containment of the military exchanges limits the potential for a greater spill-over.
Fitch’s base case remains that the Egyptian government prevents any large-scale inflow of refugees from Gaza. In addition, Egypt faces a lingering risk of greater social instability fueled by high inflation and structural challenges that include high youth unemployment and weakness in governance. #Fitch Revises Egypt’s Outlook to Positive as ‘Macros’ Improve
