Moody’s extends Egypt’s credit review for 3 months

Citing an attempt to “balance” government progress with concerns about Egypt’s foreign currency inflows, Moody's Investors Service extended its review of Egypt's credit rating on Friday for an additional three months.

The agency, which downgraded the Egyptian economy’s creditworthiness in February on the back of the foreign exchange crisis and the depreciation of the national currency on foreign exchange markets, has been reviewing Egypt’s ability to repay its debts in foreign and local currency since May.

“The continuation of the review balances progress on the government’s privatization, fiscal, and structural reform agenda against evidence of a further weakening in external liquidity through a drawdown of commercial banks’ net foreign assets at a scale that exceeds recently concluded asset sales, potentially undermining the goal to sustainably replenish the economy’s foreign exchange liquidity buffers ahead of increased debt service payments in fiscal 2024 and 2025,” Moody’s said in a statement announcing the extension.

A downgrade in the short term would have thrown another wrench in the administration’s attempts to climb out of a crisis born from its risky reliance on hot money, which was exposed by Russia’s war in Ukraine and the ensuing investor flight to safer assets. In the year plus since the outbreak of fighting, Egypt has faced an evolving foreign currency crisis that has put downward pressure on the nation’s currency and made necessary and strategic purchases more costly.

A late 2022 loan program with the International Monetary Fund, which was meant to be a “certificate of trust” despite the faltering economy, has turned into a pressure cooker, as the government has yet to implement mandated reforms — from selling stakes in a range of state-held assets to adopting a flexible exchange rate. The international financing agency has repeatedly delayed its review of the loan program, essentially shelving the loan program.

Meanwhile, traditional Gulf allies have begun to play hardball, and President Abdel Fattah al-Sisi is facing a reelection campaign in the coming year.

The credit rating agency said the decision to extend the duration of the review reflects “concerns about the persistence of foreign exchange shortages, as reflected in a parallel currency market, and the materialization of new terms of trade shocks in the food and energy sectors.”

These factors increase the possibility of a renewed devaluation of the currency, the agency explained, which may drive inflation, costs of borrowing and the general government debt ratio to levels more consistent with lower rating levels.

On the other hand, Moody's confirmed that the review will take into account the government's progress in asset sales to private investors, as well as other financial and structural reforms.

The Finance Ministry welcomed Moody's decision in a statement on Friday, praising the agency's understanding of the challenges facing the Egyptian economy, including “internal and external difficulties and challenges.”

The ministry statement stressed that the extension of the review came as a result of a number of structural reforms already implemented in the recent period, including the sale of assets worth $1.9 billion through the government’s offering program, which sources have told Mada Masr have yet to be finalized despite the government’s announcement.

Another reform promoted in the statement was the approval of a law that abolished tax and customs exemptions on the investment activities of state-owned entities to make the market more even, though companies affiliated with the Armed Forces were allowed to keep the exemptions.

The statement added the government will continue to work toward more structural reforms and measures during the coming months to deal with economic challenges.

In May, Moody's began reviewing Egypt's ability to meet long-term obligations in foreign and local currencies, with the possibility of downgrading the country’s credit rating as a result of the risks facing Egypt's financing plans. 

The agency had previously lowered Egypt's credit rating in February to B3 with a stable outlook, as a result of a decrease in foreign currency reserves and a drop in liquidity.

In the second half of 2023, ​​Egypt has to pay $3.86 billion in short-term borrowing and $11.38 billion in longer-term debt.