Standard & Poor's Adjusts Egypt's Economic Outlook from Positive to Stable

On Tuesday, Standard & Poor's Global Ratings updated its outlook on Egypt from positive to stable, while affirming the nation's sovereign credit ratings at "B-/B" for both long and short-term foreign and local currency. This change reflects the agency's revised expectations for Egypt's external financial situation and its ability to manage foreign currency shortages.

Previously, S&P's positive outlook was grounded in the potential for significant improvements in Egypt's external environment and a reduction in foreign currency scarcities. A key factor in this perspective was the liberalization of the Egyptian pound's exchange rate, which S&P believed would stimulate GDP growth and aid the government's efforts to stabilize public finances.

An upgrade in Egypt's credit rating, according to S&P, would depend on faster-than-anticipated improvements in the government's fiscal health or external debt conditions. This could potentially result from an accelerated pace in reducing national debt or increased foreign direct investments (FDI), particularly following the government's planned divestiture of state-owned assets.

Additionally, an improvement in the availability of foreign currency, reducing existing foreign exchange constraints, could also prompt an upgrade in ratings.

However, S&P's decision to modify its outlook to stable is based on two primary concerns: the risk of Egypt deviating from its current economic reform trajectory—including maintaining exchange rate flexibility—and the possibility of continued economic imbalances, such as a persistent foreign currency deficit. A second concern is the high interest expense burden on the government, which, if unchanged, could heighten the risk of distressed debt scenarios.

S&P highlighted the Egyptian government's commitment to maintaining exchange rate flexibility in the future, coupled with the structural support from an extensive International Monetary Fund (IMF) program and additional financing. This commitment is seen as crucial for enhancing Egypt's resilience to external shocks, and it is expected to lead to a gradual decrease in inflation rates, interest costs, and the government's debt servicing burdens.