Egypt’s B2 stable credit profile reflects the country’s sizable and diversified economy, and large domestic funding base, Moody’s Investors Service said in a Wednesday report.
It added that Egypt’s credit profile also reflects projected foreign exchange reserves that are enough to cover maturing external liabilities over the next three years.
According to the report, Egypt’s relatively low levels of foreign currency-denominated and external government debt also support the country’s credit profile.
Declining inflation and credible monetary policies have allowed the Central Bank of Egypt (CBE) to cut interest rates, which has contributed towards the gradual decline of governmental domestic borrowing costs.
“This credit outlook reflects the resilience of Egypt’s credit profile against financing shocks despite high exposure, a positive for its credit profile,” says Elisa Parisi-Capone, Vice President – Senior Analyst at Moody’s Investors Service, “This is driven by its effective and credible government policies.”
She added, “A lengthening track record of credible and effective fiscal, economic and debt management would also reflect positively on Egypt’s credit profile.”
Egypt’s main credit weakness is its very large government financing need of 30%-40% of GDP annually, with high rollover rates potentially exposing Egypt’s financing conditions to tightening domestic or external financing conditions.
Similarly, despite a stronger jobs market, securing jobs for new labour market entrants remains a long-term social challenge, as do water shortages. Regional security risks also compound these weaknesses.
A significant improvement in debt affordability and reduced gross financing needs would see the rating being upgraded.
Evidence of sustained improvement in the labour market and in non-hydrocarbon exports would also be a positive change. On the other hand, a new bout of capital outflows which significantly erode the CBE’s exchange reserves, and threaten external stability, would contribute towards a rating downgrade, as would a continued decline in debt affordability.
In June Moody’s said that Egypt’s recent improvements in governance and policy effectiveness shore up the sovereign’s resilience to the shock of the coronavirus outbreak, noting that the global pandemic has triggered Egypt’s capital outflows, but, like in 2018, the domestic market has mostly absorbed the shortfall.
