Moody’s downgrades Egypt on rising borrowing costs

Moody’s Investor Service has downgraded Egypt’s credit rating to “Caa1” from “B3”, citing high inflation and rising domestic borrowing costs.

The downgrade also reflects the persistence of foreign currency shortages due to increasing external debt service payments over the next two years.

• FTSE places Egypt on potential demotion watch list
• Egyptian banks suspend overseas use of debit cards
• UAE and Egypt sign currency swap agreement

“An inability to arrest a further drawdown in foreign currency liquidity in the monetary system will likely lead to a downgrade while a further deterioration in debt affordability undermines confidence in the government’s capacity to service its debt,” the ratings agency said in a report.

However, Moody’s changed Egypt’s outlook to stable due to the government’s track record of fiscal reform implementation capacity and the launch of the asset sale strategy.

In addition, it expects continued external financial support from the International Monetary Fund (IMF) under its $3 billion deal and from the Gulf Cooperation Council countries.

Egypt’s local-currency ceiling was lowered to “B1” from “Ba3”, and the foreign-currency ceiling to “B3” from “B2”.

The report said that foreign exchange shortages persist despite the improvement in the current account deficit to 1.2 percent of GDP at the end of fiscal 2023 from 3.5 percent in fiscal 2022 on the back of strong import compression and improved revenues from Suez Canal and tourism.

Latest official figures showed that the Central Bank of Egypt’s reserves stood at $34.9 billion in August, representing just a $1.5 billion increase since last June and $7 billion less than before Russia’s invasion of Ukraine. 

Saudi Arabia, the UAE and Qatar deposited $13.9 billion into Egypt’s central bank last year.

Moody’s, however, believes that the materialisation of asset sale proceeds at the central bank will help restore the economy’s foreign currency liquidity buffer.

These proceeds include the $1.9 billion in sales finalised on July 11, of which $1.65 billion was in foreign currency. Another $3.5 billion will be raised from sales in fiscal 2024.

Last month global index provider FTSE Russell said it will add Egypt and Pakistan to the watch lists for potential demotion in its equity index suites.

The two countries will be on watch lists for demotion from “secondary emerging markets”, with Egypt moving to become an “unclassified market” and Pakistan getting “frontier market” status.

Egypt has already imposed import restrictions to curb forex outflow, while at least two national banks have suspended using Egyptian pound debit cards outside the country.

The country is gearing up for elections in December after devaluing its currency by more than half in the year to March.