How Did Rating Agencies View Egypt’s Economy in 2023?

At a time when Egypt is suffering from a foreign currency gap, the eyes of international institutions are focused on the Egyptian economy, which led to the downgrading of Egypt’s credit rating by major international rating institutions amid fears of financing pressures and debt repayment.

Some of these classifications came before the acceleration of geopolitical tensions in the region and before the outbreak of the Israeli war in Gaza, which was followed by tensions in the Red Sea that may affect traffic in the Suez Canal, and some of them took into account the war and its repercussions on the region.

Egypt is suffering from a foreign currency management crisis, which has led to a decline in the value of the Egyptian pound by more than 50% and the continued gap between the exchange rate in the official market and the parallel market, which over the past few days has recorded record levels of 51 pounds per dollar compared to the official rate of 30.9 pounds.

IMF

Last October, the International Monetary Fund revised its growth forecast for the Egyptian economy for the fiscal year 2022/23, expecting a growth rate of 4.2% compared to the previous estimate of 3.7% in the July report.

The Fund also reduced its growth expectations for the Egyptian economy for the current fiscal year 2023/24 to 3.6%, down from the previous forecast of 4.1% in July.

The IMF expected that consumer prices in Egypt would rise from 13.2% in the fiscal year ending in 2022 to 35.7% in 2022/23, followed by a decline to 25.9% in 2023/24.

The Fund also expected unemployment rates in Egypt to decrease to 7.1% from 7.3% in 2021/22, but it is expected to rise again in 2023/24 to 7.5%.

Moody's

Last October, Moody's credit rating agency announced that Egypt's credit rating was reduced from B3 to CAA1, with a stable outlook.

This is the second time that Moody's has downgraded Egypt's sovereign rating during the current year, having previously lowered it last February to B3 from B2.

Moody's said that the downgrade reflects the deterioration of the Egyptian government's ability to bear debt and the continued shortage of foreign currencies in the face of increasing external debt service payments over the next two years, amid increasing restrictions on policy options to rebalance the economy without exacerbating social risks.

Regarding the future outlook, Moody's said that the stable expectations reflect the government's record with regard to the ability to implement financial reform and launch the asset sale strategy, in addition to Moody's expectations of continued external financial support from the IMF, provided that the terms of the reform are complied with, and from the Gulf Cooperation Council (GCC).

The agency stated, “Foreign exchange shortages continue, despite the current account deficit improving to 1.2% of GDP at the end of fiscal year 2023 (ending June 2023) from 3.5% in fiscal year 2022,” according to the statement.

The agency said that this improvement came against the backdrop of sharp pressure on imports and an improvement in the balance of services, driven by economic growth, the strong performance of the Suez Canal, and tourism revenues.

Standard & Poor's

In October, Standard & Poor's announced a downgrade in Egypt's sovereign rating with a stable outlook.

The agency lowered its long-term sovereign credit rating in foreign and local currencies for Egypt to "B-" from "B", with a stable outlook.

The agency fixed the short-term sovereign credit rating at “B”.

It pointed to the possibility of the Egyptian authorities being unable to finance high external debt recovery operations or address the foreign currency shortage in the country, and the possibility of accelerating major monetary and economic reforms that would help bridge the large external financing gap in Egypt.

It hinted at the possibility of downgrading the ratings if the authorities fail to implement the macroeconomic reforms required to reduce economic imbalances in Egypt and unleash multilateral and bilateral financing.

“We can raise our ratings if Egypt reduces levels of net government debt and total external financing needs, by accelerating reforms that support competitiveness, growth and financial results,” It said, noting that under this scenario, we expect renewed bilateral and multilateral financial support.

Fitch

In November, Fitch International lowered Egypt's long-term foreign currency credit rating (IDR) to "B-" from "B", with a stable outlook.

The downgrade of Egypt's credit rating reflects key rating factors such as increased risks to Egypt's external financing, macroeconomic stability, and the already high trajectory of government debt; according to the agency’s report issued Friday.

The report indicated that the slow progress in reforms; Including delaying the transition to a more flexible exchange rate regime and reviews of IMF programmes; It has damaged the credibility of exchange rate policy and exacerbated external financing constraints at a time of increasing repayment of external government debt.

It continued: "The downward pressure on the currency has increased, and the path to policy adjustment has become more complex, from our point of view."

The report continued: “The stable outlook reflects Fitch’s basic expectations that reforms - including privatization, a slowdown in mega projects, and exchange rate adjustment - will accelerate after the presidential elections in December, likely paving the way for a new and perhaps larger IMF program and additional support from GCC countries.”

The report expected that revenues from tourism, the Suez Canal, and a recovery in remittances from workers abroad would help contain the financing needs of larger imports.

"From Fitch's point of view, the war between Israel and Hamas poses significant negative risks to tourism in Egypt."