Moody’s Ratings Reaffirms Egypt’s Caa1 Status, Maintaining Positive Outlook Amidst Fiscal Progress
Moody’s Ratings has affirmed Egypt’s long-term foreign and local currency issuer ratings at Caa1, while sustaining a positive outlook, reflecting observed improvements in the nation’s external and fiscal balances. This assessment is further supported by the affirmation of Egypt’s foreign-currency senior unsecured ratings at Caa1 and its foreign-currency senior unsecured MTN program rating at (P)Caa1.
Positive Outlook Rationale
The positive outlook, in place since March 2024, signals expected improvements. Moody’s anticipates a reduced debt service burden and a stronger external profile. Egypt’s currency devaluation and flotation have boosted foreign exchange reserves. Borrowing costs have started to decline.
Monetary Policy and Fiscal Consolidation
The Central Bank of Egypt increases monetary policy credibility. They maintain a stance consistent with inflation targeting and a floating exchange rate. This supports further policy rate declines. Lower rates ease debt costs. They also foster steady foreign-currency inflows. The government advances fiscal consolidation. They aim for a 3.5% primary surplus of GDP. They enhance tax revenues to achieve this.
Credit Vulnerabilities and Risks
However, Caa1 ratings still reflect credit vulnerabilities. These risks threaten durable improvements in fiscal and external positions. Egypt’s debt ratio, though declining, remains high. Debt affordability is weak compared to peers. Egypt faces significant domestic and external financing needs.
These vulnerabilities expose Egypt to capital outflows. External shocks could challenge the floating exchange rate policy. This could cause external imbalances to re-emerge. Foreign-currency buffers could erode.
Rating Ceilings and Underlying Factors
The local-currency ceiling stays at B1. The foreign-currency ceiling remains at B3. The three-notch gap between the local-currency ceiling and the sovereign rating reflects Egypt’s economic structure. A large public sector hinders private sector development. The two-notch gap between foreign-currency and local-currency ceilings shows transfer and convertibility risks. Persistent foreign-currency financing needs and potential capital flight create these risks.
Furthermore, the agency recognizes the Central Bank of Egypt’s commitment to inflation targeting and a floating exchange rate regime, noting an increase in monetary policy credibility and effectiveness. This policy stance is anticipated to facilitate further reductions in policy rates, thereby alleviating debt burdens and encouraging consistent foreign-currency inflows. The government’s commitment to fiscal consolidation, exemplified by its pursuit of a 3.5% primary surplus of GDP through enhanced tax revenue generation, is also acknowledged.
However, Moody’s emphasizes that the Caa1 ratings remain indicative of inherent credit vulnerabilities that could impede sustained fiscal and external improvements. These vulnerabilities include a substantial, albeit declining, debt ratio, constrained debt affordability relative to peers, and significant domestic and external financing requirements.
The agency cautions that these factors render Egypt susceptible to capital outflows in the event of external shocks, potentially challenging the authorities’ adherence to a floating exchange rate policy. Such a scenario could precipitate a resurgence of external imbalances and deplete foreign-currency reserves.
The local-currency ceiling remains at B1, while the foreign-currency ceiling is set at B3. The three-notch differential between the local-currency ceiling and the sovereign rating reflects the complexities of Egypt’s large and diverse economy, wherein a substantial public sector presence may hinder private sector growth. The two-notch gap between the foreign-currency and local-currency ceilings signifies the transfer and convertibility risks associated with persistent foreign-currency financing needs and the potential for capital flight.
