S&P lowers Egypt’s rating as funding pressures mount

Reuters/Amr Abdallah Dalsh

S&P Global Ratings has lowered Egypt’s long-term sovereign credit rating to B- from B.

The downgrade is based on the recurring delays in implementing monetary and structural reforms, which are worsening imbalances in the currency market, S&P said in a statement.

The agency added that Egypt’s net foreign asset position was deteriorating, with a delay in critical International Monetary Fund disbursements and other multilateral and bilateral financing.  

“These funding sources include Gulf Cooperation Council support, which we expect to continue,” it said.

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Although Egypt had an agreement with the IMF to move to a flexible exchange-rate system, the government’s response to currency pressures has been to impose controls on private-sector imports via the banking system. 

S&P expects an exchange-rate adjustment will result in a devaluation of the Egyptian pound to around its level in the parallel market, currently about EGP40 per US dollar. 

“After which, we expect the Central Bank of Egypt to allow the pound to be much more responsive to external shocks,” the agency said.

Higher inflation will likely result in higher policy rates, increasing government debt service costs, at least in the short term.

The ratings agency estimates economic growth will slow to about 4 percent in 2023, from 6.6 percent in the previous year. Because of the foreign currency crunch, GDP growth is anticipated to slow further in 2024. 

After the central bank’s long-term strategy for the exchange rate becomes clearer, market confidence should improve and growth will pick up in 2026, S&P said.