Moody’s Affirms Egypt’s High Credit Risk Ratings, Outlook Positive

Moody’s Affirms Egypt’s High Credit Risk Ratings, Outlook Positive

Moody’s Ratings has affirmed the Government of Egypt’s Caa1 long-term foreign and local currency issuer ratings and maintained the positive outlook. The global ratings agency concurrently affirmed Egypt’s foreign-currency senior unsecured ratings at Caa1, and its foreign-currency senior unsecured MTN program rating at (P)Caa1.

The positive outlook, in place since March 2024, continues to reflect the prospects for an improvement in Egypt’s debt service burden and external profile, Moody’s said. “As expected at the time of our last rating action, progress in external and fiscal rebalancing has been made”.

Analysts explained that with the devaluation and flotation of the currency, Egypt has now stronger foreign exchange buffers, and borrowing costs have started to decline. Additionally, monetary policy credibility and effectiveness is increasing as the central bank maintains a policy stance consistent with inflation targeting and a floating exchange rate regime.

Moody’s believes that this should allow policy rates to decline, bringing further relief on the cost of debt, while maintaining an environment favorable to steady foreign-currency inflows. The government’s efforts toward fiscal consolidation and enhancing tax revenues are also underway, aiming to achieve primary surpluses of 3.5% of the country’s gross domestic product (GDP).

However, credit vulnerabilities reflected in the Caa1 ratings continue to pose risk to Egypt achieving durable improvements in fiscal and external positions. Egypt’s high, albeit declining, debt ratio, very weak debt affordability compared to peers, and its persistently large domestic and external financing needs constrain the credit profile.

These constraints raise the economy’s susceptibility to capital outflows in case of external shocks that could challenge the authorities’ commitment to a floating exchange rate policy. Analysts said, in turn, this could result in the reemergence of external imbalances and erosion of foreign-currency buffers.

This vulnerability is further compounded by ongoing risks to fiscal consolidation and sustained improvements in debt and debt affordability taking into account large contingent liabilities in the public sector and very limited fiscal room to meet social spending needs while maintaining primary surpluses.

“We have 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 our view, ultimately the obligation of the Government of Egypt.

“We have concurrently maintained the positive outlook to the Egyptian Financial Corporation for Sovereign Taskeek Sukuk Company, mirroring the positive outlook on the Government of Egypt”.

The country’s measures to tighten liquidity and control inflation raise the prospects of durably lower inflation and interest rates, as the central bank’s monetary policy credibility and effectiveness strengthen. This would bring some relief to the government’s highly-stretched debt affordability.

The central bank has implemented measures to tighten the money supply as outlined in the IMF program parameters.

These include the suppression and repayment of direct central bank loans to public entities and a tightening in reserve money growth.

The latter will serve as a useful indicator of future headline inflation trends, signalling the sustainability of disinflationary patterns under the central bank’s inflation targeting regime adopted in March 2024 with a flexible exchange rate.

The Caa1 rating and positive outlook also include a set of fiscal measures that we expect to be implemented and/or start yielding results, Moody’s said. By the end of 2025, the government aims to complete subsidy reforms while expanding the Takaful and Karama cash transfer program, which supports 20% of the population as of 2024.

Along with tax reforms, such as removing some VAT exemptions and preferential tax treatment for public entities, these measures will help the government achieve and maintain primary surpluses of 3.5% of GDP. This surplus is expected to start in fiscal 2025 (ending June 2025), in line with the track record of primary surpluses recorded since 2018.

Moody’s added that a future recovery in Suez Canal receipts should further expand the revenue base. It said the positive outlook also reflects prospects of an improvement in Egypt’s external position.

Significant foreign direct investment inflows and future project development commitments, together with the shift to a market-based exchange rate regime, have boosted capital inflows and replenished Egypt’s liquid foreign exchange reserve buffers to $36 billion.

This allowed Egypt to regain access to international capital markets at affordable rates, which will help the economy to meet its large external financing needs.

Specifically, analysts project external debt service payments to peak at $33 billion in fiscal 2025, in addition to a current account deficit at $18.5 billion and short-term external debt rollovers at $26 billion.

Moody’s said these sizeable aggregate amounts will translate into pronounced increases in outflows of foreign currency at particular times, and could translate into a significant weakening of the monetary system’s net foreign assets position if not offset by fresh capital inflows.

The positive outlook speaks to the likelihood that more credible monetary and fiscal policy through these episodes will help secure such inflows and maintain macro financial stability.

While credit prospects are positive, the rating affirmation takes into account our assessment that a range of plausible developments may derail the prospective improvement in debt affordability and strengthening of the external position explained above.

Material improvements in debt affordability, the debt burden, and external stability depend on further steady enhancements in monetary and fiscal policy effectiveness, which are still nascent.

Challenges to monetary and the floating exchange rate policy may arise if demand for foreign exchange increases significantly, possibly because of capital outflows or lower confidence in the Egyptian pound, for instance, in the context of ongoing adverse regional geopolitical dynamics.

Meanwhile, challenges to fiscal policy may stem from pressures to meet important social spending needs while maintaining consequent primary surpluses or difficulties in broadening and deepening the government’s revenue base.

“We forecast some improvements in Egypt’s debt burden and debt affordability, albeit from weak levels. We expect interest to revenue to decline below 50% in fiscal 2027 from 63% in fiscal 2025, and debt to GDP to fall below 80% in fiscal 2027 from 84% in fiscal 2025,” Moody’s said.

Analysts assume that none of the significant public sector liabilities will shift to the government’s own balance sheet, including the large portfolio of government guarantees at 30% of GDP at the end of 2024, half of which are written on behalf of the Egyptian General Petroleum Company.

Meanwhile, the government’s annual gross financing needs will remain significant at over 30% of GDP in light of large T-bill rollovers in the local currency market.

Improvements in Egypt’s debt and external vulnerability profile will also depend on sustained robust GDP growth to support government revenue, and continued confidence demonstrated by domestic depositors, remittance providers, and foreign investors’ in Egypt’s local currency. This fragility in currently already very weak credit metrics is consistent with the Caa1 rating. Nigerian Exchange Falls by N73bn as Investors Dump VFD, OANDO