New York, March 07, 2024:
Moody’s Ratings (Moody’s) has today changed the outlook on the Government of Egypt to positive from negative and affirmed the Caa1 long-term foreign and local currency issuer ratings. Moody’s has concurrently affirmed Egypt’s foreign-currency senior unsecured ratings at Caa1, and its foreign-currency senior unsecured MTN program rating at (P)Caa1.
In addition, Moody’s has affirmed the backed senior unsecured ratings of the Egyptian Financial Corporation for Sovereign Taskeek sukuk company at Caa1 and its program rating at (P)Caa1 which are, in Moody’s view, ultimately the obligation of the Government of Egypt. Moody’s has concurrently assigned a positive outlook to the Egyptian Financial Corporation for Sovereign Taskeek sukuk company, mirroring the positive outlook on the Government of Egypt.
The change in Egypt’s outlook to positive reflects significant official and bilateral support announced and marked policy steps taken in the past week that will, if maintained, support macroeconomic rebalancing. The very large front-loaded foreign direct investment contribution by the Government of United Arab Emirates (Aa2 stable) significantly bolsters the economy’s foreign exchange reserves to broadly cover Moody’s estimated external financing gap until fiscal 2026 (ending in June 2026). As a result, the downside risks that prompted the change in outlook to negative in January are significantly reduced. In addition, the positive outlook captures the marked change in economic policy with a large devaluation of the currency and increase in interest rates that, if maintained, will help Egypt maintain an upsized IMF program, reduce the risk of a renewed build-up of external imbalances and strengthen the economy’s shock resilience over time.
The affirmation of the Caa1 rating reflects the Government of Egypt’s high debt ratio and very weak debt affordability compared to peers that increase fiscal accounts’ shock exposure and which Moody’s expects will improve only gradually. Moody’s expects total interest payments will consume almost 65% of revenue at the end of fiscal 2024, a ratio that may temporarily deteriorate further in light of the observed official currency devaluation. The agreed allocation of a large share of divestiture proceeds directly to the treasury to support debt sustainability will partly mitigate the highly-adverse metrics. The government’s large gross financing needs at over 30% of GDP especially in the local currency market drive government liquidity risk in light of large T-bill rollovers at higher rates. Meanwhile, the repeated reliance on large external support packages since the November 2016 devaluation highlights persistent vulnerabilities related to the economy’s shock exposure and diminishing reform perseverance observed in previous instances, especially with respect to currency reform.
The local-currency ceiling is unchanged at B1, and the foreign-currency ceiling at B3. The three notch gap between the local-currency ceiling and the sovereign rating reflects a large and diversified economy with a large public sector footprint that generates significant financing requirement that inhibits private sector development and credit allocation, notwithstanding recent reforms to level the playing field with public sector entities. The two-notch gap between the foreign currency and local currency ceiling reflects transfer and convertibility risks given persistent, albeit easing, foreign exchange shortages and weakening policy effectiveness.
