Moody’s Affirms Egypt Ratings, Outlook Now Positive

Moody’s Ratings has changed the outlook on the Government of Egypt from negative to positive, reflecting significant official and bilateral support announced and marked policy steps taken in the past week.

According to Moody’s, if these moves are maintained, they could support macroeconomic rebalancing.  The investor services firm concurrently affirmed Egypt’s foreign-currency senior unsecured ratings at Caa1.

The affirmation of the Caa1 rating reflects the Government of Egypt’s high debt ratio and very weak debt affordability compared to peers that increase fiscal accounts’ shock exposure and which Moody’s expects will improve only gradually.

In addition, Moody’s affirmed the backed senior unsecured ratings of the Egyptian Financial Corporation for Sovereign Taskeek sukuk company at Caa1 and its program rating at (P)Caa1 which are, in Moody’s view, ultimately the obligation of the Government of Egypt. 

Moody’s has concurrently assigned a positive outlook to the Egyptian Financial Corporation for Sovereign Taskeek sukuk company, mirroring the positive outlook on the Government of Egypt.

The very large front-loaded foreign direct investment contribution by the Government of United Arab Emirates (Aa2 stable) significantly bolsters the economy’s foreign exchange reserves to broadly cover Moody’s estimated external financing gap until fiscal 2026.

As a result, the downside risks that prompted the change in outlook to negative in January are significantly reduced. In addition, the positive outlook captures the marked change in economic policy with a large devaluation of the currency and an increase in interest rates that, if maintained, will help Egypt maintain an upsized IMF program, reduce the risk of a renewed build-up of external imbalances and strengthen the economy’s shock resilience over time. 

The affirmation of the Caa1 rating reflects the Government of Egypt’s high debt ratio and very weak debt affordability compared to peers that increase fiscal accounts’ shock exposure and which Moody’s expects will improve only gradually.

Moody’s expects total interest payments will consume almost 65% of revenue at the end of fiscal 2024, a ratio that may temporarily deteriorate further in light of the observed official currency devaluation.

The agreed allocation of a large share of divestiture proceeds directly to the treasury to support debt sustainability will partly mitigate the highly adverse metrics.

The government’s large gross financing needs at over 30% of GDP, especially in the local currency market drive government liquidity risk in light of large T-bill rollovers at higher rates.

Meanwhile, the repeated reliance on large external support packages since the November 2016 devaluation highlights persistent vulnerabilities related to the economy’s shock exposure and diminishing reform perseverance observed in previous instances, especially with respect to currency reform.

The local-currency ceiling is unchanged at B1, and the foreign-currency ceiling at B3. The three notch gap between the local-currency ceiling and the sovereign rating reflects a large and diversified economy with a large public sector footprint that generates significant financing requirement that inhibits private sector development and credit allocation, notwithstanding recent reforms to level the playing field with public sector entities.

The two-notch gap between the foreign currency and local currency ceiling reflects transfer and convertibility risks given persistent, albeit easing, foreign exchange shortages and weakening policy effectiveness.

The $35 billion (8.8% of GDP) foreign investment commitment by the Government of United Arab Emirates (Aa2 stable) announced on 23 February includes $24 billion in new cash transfers over two months for the acquisition of land development rights, and will broadly double Egypt’s foreign exchange reserves ($26.5 billion at the end of January) within a few weeks.

The injection of fresh FX liquidity is sufficient to help close the external financing gap until fiscal 2026 that Moody’s estimates at about $15 billion, in addition to a $7 billion FX backlog that has accumulated since February 2022.

The conversion of $11 billion in UAE deposits at the central bank to foreign investments will also reduce the monetary system’s net foreign liability position by the same amount over the next few weeks.

This fresh capital injection forms the backdrop to the marked shift in economic policy that, if maintained, will strengthen the economy’s macroeconomic rebalancing over time under the umbrella of an enhanced IMF program.

On 6 March, the Central Bank of Egypt (CBE) floated the official exchange rate which converged to the parallel rate at about EGP51 per USD from EGP30.9 per USD, and hiked the policy rate by 600 basis points to 27.25%, broadly aligning the policy rate with the 91-day T-bill rate.

On the same day, the IMF confirmed staff-level agreement with the Egyptian authorities on a set of comprehensive policies and reforms needed to complete the first and second reviews under the Extended Fund Facility (EFF) arrangement, paving the way for an augmentation of the original IMF program from US$3 billion to about US$8 billion, subject to Board approval.

The CBE’s policy rate hike brings monetary policy nearer to neutral after an extended period of negative real interest rates.  The tightening of fiscal policy and slowdown in infrastructure spending agreed with the IMF should over time reduce inflation and support debt sustainability while fostering an environment that enables private sector activity and restore investor confidence. 

Meanwhile, the removal of currency distortions by shifting to a managed float, and the shift to an inflation targeting regime, if maintained, should ease FX shortages and promote renewed remittance inflows through official channels, and incentivize foreign investment and portfolio inflows in the future.

The affirmation of the Caa1 rating reflects the Government of Egypt’s high debt ratio and very weak debt affordability compared to peers that increase fiscal accounts’ shock exposure and which Moody’s expects will improve only gradually.

Moody’s expects domestic borrowing costs will consume almost 65% of revenue at the end of fiscal 2024, a ratio that may temporarily deteriorate further in light of the observed official currency devaluation. The agreed allocation of a large share of divestiture proceeds directly to the treasury to support debt sustainability will partly mitigate the highly adverse metrics.

The government’s large gross financing needs especially in the local currency market drive government liquidity risk in light of banks’ already large government securities exposures.

Meanwhile, the repeated reliance on large external support packages since the November 2016 devaluation highlights persistent vulnerabilities related to the economy’s shock exposure and diminishing reform perseverance observed in previous instances, especially concerning currency reform. Anti-Homosexuality: Uganda Faces Difficulties Accessing External Funding –Fitch

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