Fitch Ratings has upgraded Egypt’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B-‘, citing improved external finances supported by significant foreign investments and enhanced policy measures. Key developments include the Ras El-Hekma investment, which contributed $24 billion, and a substantial increase in non-resident holdings of domestic debt.
Egypt’s international reserves rose by $11.4bn to $44.5bn, and the banking sector’s net foreign asset position improved significantly. The forecast for foreign direct investment (FDI) is positive, averaging $16.5bn over the fiscal years ending June 2025 and 2026.
Inflation has decreased from 35.7% in February to 26.4% in September from 35.7% in February, and Fitch forecasts it slowing to 12.5% at end-FY25, supported by large base effects, better-anchored expectations and broad currency stability, and 10.6% at end-FY26.
Fitch projected the policy interest rate, held at 27.25% following increases of 800bp in 1Q24, is cut to levels consistent with a real rate of nearly 4%. Given the short maturity of domestic debt, this will drive a fall in general government debt interest/revenue (which is lower than at the central government level) to near 37% in FY29 from a peak of 61% in FY25, albeit still almost treble the current ‘B’ median of 13.9%.
Additionally, the government is taking measures to improve fiscal management and tax administration, which will help contain the general government deficit.
Egypt’s ‘B’ IDRs reflect key rating drivers
Fitch Ratings identifies regional conflict as a key risk for Egypt, particularly concerning potential declines in the Suez Canal and tourism revenues. The forecast suggests a gradual recovery for the Suez Canal revenues to about half the FY23 level by FY26, while tourist revenues remain stable in FY24.
The agency anticipates GDP growth will improve from 2.4% in FY24 to 4% in FY25, driven by factors such as rising confidence, remittances, and foreign direct investment (FDI). However, risks from high inflation, weak governance, and youth unemployment could lead to social instability, impacting reform efforts.
Fitch forecasts the general government deficit will widen to 7.5% of GDP in FY25, partly due to last year’s Ras El-Hekma revenue, before narrowing slightly to 7.1% in FY26. While general government debt is expected to decline to 78.9% of GDP by FY26, it remains significantly above the ‘B’ median.
The banking sector’s stability supports sovereign financing flexibility, with low loan-to-deposit ratios and strong deposit growth expected. Egypt’s governance indicators score low, indicating potential challenges in political stability and the rule of law, as reflected in its ESG Relevance Scores.
Rating Sensitivities
Deterioration in Egypt’s external finances or confidence in macro-policy settings could lead to negative rating actions or downgrades. This might occur if there is a weaker commitment to exchange rate flexibility, resulting in reduced international reserves, a weakened net foreign asset position in banks, or a sustained large current account deficit. Increased risks to debt sustainability could arise from loosened fiscal policies, an inability to decrease interest-to-revenue ratios or an unfavourable debt-to-GDP trajectory, potentially straining financing flexibility.
On the other hand, positive rating actions or upgrades could stem from a marked reduction in external vulnerabilities, which might include a strengthening of international reserves, a sustainable narrowing of the current account deficit, and structural reforms that mitigate risks of renewed economic imbalances. Greater confidence in the durability of policy adjustments supporting exchange rate flexibility and significant reductions in inflation would also play a crucial role. Furthermore, successful fiscal consolidation, achieved through enhanced revenue mobilization and curtailing off-budget spending, could lead to lower debt issuance costs and a substantial decline in public debt ratios over the medium term.
