Moody’s Downgrades Egypt, Pushing Bonds Further Into Junk Status

Moody’s Investors Service downgraded Egypt’s credit rating from B2 to B3 on February 7, pushing the North African country further into junk bond or non-investment grade territory.

The ratings agency said the Egyptian economy is increasingly vulnerable to fragile global conditions, as the government tries to shift to a more export-oriented growth model in which the private sector plays a far bigger role, backed by a flexible exchange rate regime.

The administration of President Abdel Fattah El-Sisi, who took power following a military coup in July 2013, agreed to a number of economic reforms under a $3 billion, 46-month support package with the International Monetary Fund (IMF) announced in December. Along with the flexible exchange rate, this involves reducing the role of the state in the economy.

Moody’s said such changes should help to attract capital inflows and reduce Egypt’s vulnerabilities, but it warned that “these measures will ultimately take time” and added that “notwithstanding the clear commitment to a fully flexible exchange rate, the government’s capacity to manage the implications for inflation and social stability is yet to be established”.

Egypt’s liquid foreign exchange reserves had fallen to $26.7 billion by the end of December, down from $29.3 billion in April 2022, according to Moody’s, while net foreign liabilities increased from $13 billion to $20 billion over the same time period. Cairo also faces some large debt servicing requirements in the near future, with $20.4 billion due in fiscal year 2024 and $23.2 billion the following year.

To help cover its liabilities, the government is planning to raise around $9 billion by selling state-owned assets and is also expected to raise about $5 billion from official lenders in addition to the $3 billion provided by the IMF.

Shocks to the system

The downgrade by Moody’s follows a tumultuous period for the Egyptian economy, which was badly affected by the loss of vital tourism revenues during the Covid-19 pandemic, swiftly followed by a sharp rise in imported grain and fuel prices as a result of Russia’s invasion of Ukraine in February last year.

The Egyptian pound has lost almost 50% of its value against the dollar over the past year, as a result of three devaluations, the most recent of which came in January. The falling Egyptian pound has led to high inflation, which reached a five-year high of more than 21% in December. Food prices rose even more quickly, by 37%.

In time, the lower value of the pound should make Egyptian exports more competitive and, if the reform program works, that could also boost confidence in the economy, thereby helping to attract much-needed foreign currency investment. The Gulf Cooperation Council (GCC) countries such as Saudi Arabia, Kuwait, Qatar and the UAE have been key investors in the past and are again seen as the most likely to get involved in further deals.

However, past experience suggests some caution may be justified about the Egyptian government’s ability to enact its promised reforms and attract investors.

Callee Davis, Egypt analyst at Oxford Economics, said “we are seeing a shift in terms of the nature of the funding the GCC is willing to provide. In return for their financing, it would appear that the GCC want more immediate and tangible returns. This is largely set to be achieved through the purchase of Egyptian state-owned assets under the Egyptian government’s broader state-owned enterprise divestment plan. However, these types of investments are subject to global economic conditions, and they are also subject to more bureaucratic and regulatory hurdles, which increases the likelihood of them being delayed.”

Moody’s also warned that entrenched interests could delay the reform program. “The existence of vested interests within the public sector also carries implementation risks, as highlighted by delays in previously envisioned asset sale programs,” it said in its ratings action announcement.