Moody's Downgrades Egypt's Outlook to "Negative" from "Stable"

Moody's lowered its outlook of Egypt's credit rating to "negative" from "stable", in light of the country's declining ability to bear government debt and the rise in external pressures. It also affirmed the long-term rating of issuances in foreign and local currencies at "Caa1."

The change in outlook reflects “the increasing risks represented by the continued weakness of Egypt’s credit position amid the difficulty of rebalancing the overall economy and the exchange rate, despite continuing efforts to adjust public finances and support the formal sector,” according to what the agency explained in its statement issued today, Thursday.

Moody's alluded to the significant increase in interest payments "which are expected to consume two-thirds of revenues at the end of fiscal year 2024", and increasing external pressures "with the gap between official and parallel market exchange rates widening further", which have complicated the macroeconomic adjustment process. .

Moody's said that even with the expected increase in IMF financing and the government's continued commitment to achieving primary surpluses, the negative outlook reflects "the risks of insufficient monetary policy measures and external support to prevent debt restructuring given Egypt's very weak debt indicators, its high exposure to debt, and the escalation of... Foreign exchange and interest rates. This comes despite the fact that the basic scenario assumed by the credit rating agency does not expect the country to undertake restructuring in the short term.

Egypt's issuances of government debt instruments in local currency jumped by about 59% in the first half of the fiscal year 2023/24 to record up to 2.7 trillion pounds, according to data from the Central Bank of Egypt.

The funds collected by the government from July to last December increased by about 26% over the total domestic debt instruments that the Egyptian government is estimated to issue during the current fiscal year, according to the financial statement of Egypt’s estimated budget.

Egypt estimated financing needs during the current fiscal year at 2.14 trillion pounds, of which it seeks to provide 1.955 trillion pounds through local financing through the issuance of bonds and treasury bills.

This comes as the Middle East's most populous country is in talks with the International Monetary Fund to at least double its $3 billion bailout programme, little of which has been lent to the country so far. If approved, it will open the door to other external financing to Egypt in foreign currency.

Egypt is living in the midst of a difficult economic crisis, exacerbated by geopolitical tensions in surrounding countries, in addition to a severe scarcity of its dollar liquidity, due to the decline in remittances from workers abroad, tourism revenues, the Suez Canal, and exports. The official exchange rate stands at 30.9 pounds to the dollar in banks, while it has exceeded The price on the parallel market is 56 pounds.

On the other hand, Moody's said, "Monthly foreign exchange liquidity indicators show that despite the $4 billion in asset sales achieved since July 2023, liquid foreign exchange reserves (total reserves minus gold) remained stable below $27 billion at the end of December." While the net position of foreign liabilities of the monetary system (which includes both the central bank and commercial banks) did not improve as expected, indicating the presence of accumulated demands for foreign liquidity.

Moody's indicated that the recent escalation of regional hostilities increases the risks to Egypt's balance of payments by affecting the main sectors generating foreign liquidity in the economy, including tourism and Suez Canal revenues, which have so far largely compensated for the continuation of the crisis. Current transfers and financial transfers from abroad also declined as a result of distortions resulting from the presence of the parallel market.