Egypt’s credit rating falls to B3

Credit rating agency Moody’s Investors Service has downgraded the rating of the Egyptian government’s long-term foreign and local currency issues to B3 from B2.

Moody’s also downgraded its unsecured foreign currency rating to ‘B3’ and downgraded its unsecured medium-term foreign currency bond program to (P) ‘B3’.

The corporation attributed the downgrade to ‘B3’ to the country’s declining ability to absorb shocks from reduced external support, while the economy is undergoing structural changes towards a private sector-led growth model and heavily dependent on exports under a flexible exchange rate system. currencies.

Liquid foreign exchange reserves have declined since Moody’s announced its negative outlook in May 2022, and the deterioration in foreign liquidity coverage ratios in the monetary system (measured by an increase in net foreign exchange liabilities of the central bank and commercial banks) has increased exposure to foreign risks during a crisis The instability and fragility of the global environment.

The Egyptian government has announced a strategy to sell state assets starting in February this year as part of a new International Monetary Fund program. The program is expected to support the structural adjustment process and help generate sustainable debt-free capital flows that will help pay off external debt service payments over the next two years, according to Moody’s.

However, the Fund noted that these measures will take time before they lead to a tangible reduction in Egypt’s exposure to external risks. In addition, Moody’s said the government’s ability to manage inflationary risks and social stability is yet to be determined, despite its clear commitment to full exchange rate flexibility.

A stable outlook depends on balancing risks. On the one hand, Egypt faces liquidity risks due to tightening capital market conditions, as well as rising domestic borrowing costs and pressure on social spending in an inflationary environment. On the other hand, these risks are mitigated by the government’s domestic financial base and its long track record of running primary budget surpluses, which Moody’s expects will help ease the debt burden after the temporary hitch is overcome.

The credit rating agency also said that the implementation of competitiveness reforms could support the economy’s export base and stimulate increased foreign direct investment inflows, which in turn would increase the sustainability of external debt and reduce the economy’s exposure to external risks sustainably.

Source: Bloomberg.