Fitch Ratings has downgraded Egypt’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’, with a stable outlook.
The credit rating agency said in a Friday report that the downgrade reflects increased risks to Egypt’s external financing, macroeconomic stability and the trajectory of already-high government debt.
It added that slow progress on reforms, including the delay in the transition to a more flexible exchange rate regime and on IMF programme reviews, have damaged the credibility of exchange rate policy, and exacerbated external financing constraints at a time of increasing external government debt repayments.
Furthermore, downward pressures on the currency have increased, the report indicated, explaining that the path to policy adjustment has become more complicated.
The Stable Outlook reflects Fitch’s baseline expectation that reforms – including privatisation, slowdown of megaprojects, and exchange rate adjustment – will accelerate after presidential elections in December, likely paving the way for a new and potentially larger IMF programme and additional support from the GCC.
Regarding exchange rates, the report said that the stability of the official exchange rate since February contrasts with the Central Bank of Egypt’s (CBE) stated commitment to a durably flexible exchange rate.
“Confidence in the currency arrangement appears weak, with foreign currency (FC) shortages at the official rate, the persistence of a widely different parallel market rate and the hoarding of FC by the private sector.”
In Fitch’s view, the CBE’s ability to restore exchange rate and monetary credibility is uncertain.
“Floating the Egyptian pound, without rebuilding confidence and FX availability in the official market, may be associated with significant overshooting of interest rates and inflation (which was already 40% yoy in September), to the detriment of macroeconomic and social stability and public finances. Delays in adjustment aggravate these risks, in our view.”
Moreover, they indicated that Egypt’s general government (GG) will face a significant rise in external debt maturities to $8.8bn in the fiscal year ending June 2024 (FY24) and $9.2bn in FY25, from $4.3bn in FY23. The government is at the advanced stages of receiving $1.5bn backed by guarantees from multilateral, on top of about $4bn direct financing from official partners, including the IMF.
The report cited another sukuk issuance to GCC investors remains a possibility in FY24.
“We currently forecast negative net external GG borrowing of about $2bn in FY24, to be covered with proceeds to the treasury from state asset sales.”
Fitch expects that Egypt’s current account deficit (CAD), which narrowed sharply to 1.2% of GDP ($4.7bn) in FY23 from 3.5% ($16.5bn) in FY22, helped by a surge in tourism and Suez Canal receipts.
However, a large part of the improvement is due to a $16bn import contraction that we think is largely related to limited FC availability and will be increasingly difficult to sustain as it constrains economic growth and exports.
“As a result, we forecast the CAD to expand to 2.8% of GDP ($10.6bn) in FY24 and 2.2% of GDP ($9bn) in FY25.”
In Fitch’s view, the Israel-Hamas war poses significant downside risks to tourism, although they build in some near-term hit.
Moreover, the report indicated that Egypt is increasingly reliant on FDI to cover its CAD, as investor sentiment constrains prospects for portfolio investments and commercial borrowing.
Fitch forecasts that Egypt’s net FDI inflows to grow to $12bn in FY24 from $9.7bn in FY23, supported by the government’s privatisation plan, which targets $5bn in sales proceeds by end-FY24, advised by the IFC.
” This is subject to significant execution risk, in our view, as the success, timing, and scale of the privatisation plan remain uncertain, despite recent progress ($1.9bn sales in July), with limited alternative options except for a further drain on external liquidity buffers (adding to the $5.4bn deterioration in banks’ net foreign assets in FY23).”
“The risk of further portfolio outflows, after the $3.7bn drain in FY23, is still significant, as the foreign holdings of domestic government debt remain high, at $16.5bn at the end of August (50% of gross official reserves, at $3bn in September).
“However, these have stabilised since the beginning of 2023, highlighting substantial resilience to shocks,” the report added.
Regarding debt risk, the Fitch report indicated that GG’s debt to GDP jumped to about 95% in FY23, from nearly 87% in FY22, mostly due to the weaker currency.
Accordingly, they forecast it to decline to 90% in FY24 and 87% in FY25, supported by primary surpluses, negative real interest rates, and average GDP growth of 3.8%.
This is considerably above Fitch’s 2023 ‘B’ median of 56%. A 10% currency depreciation above our forecast would increase debt by about 3pp of GDP, in our projections.
“We forecast interest-to-revenues will exceed 50% in FY25, one of the highest among the sovereigns we rate and pointing to marked solvency pressure.”
