Morgan Stanley moves Egypt’s sovereign credit down to ‘dislike stance’

US investment bank Morgan Stanley moved its rating on Egypt’s sovereign credit from “neutral” to a “dislike stance” on Monday, citing increased financing needs and pointing to “mounting risks” for investors in the Egyptian market.

Morgan Stanley is the latest international financial institution to downgrade Egypt’s creditworthiness over the past period as the government struggles to secure foreign currency inflows amid an economic crisis marked by the depreciation of the national currency on foreign exchange markets.

Egypt’s financing needs are estimated at $24 billion for the current fiscal year, with increased reliance on foreign direct investments, portfolio inflows and asset sales, which have all “disappointed to the downside,” according to Morgan Stanley’s Global EM Strategist report.

Outlining the main factors driving its decision, the report points to the upcoming presidential elections scheduled for December, which lower the probability of any “meaningful” policy reforms, said the bank, stating in particular that it was unlikely the government will soon introduce a flexible exchange rate — a key policy recommendation in the loan agreement Egypt sealed last year with the International Monetary Fund. The bank also expects that any future moves to increase interest rates to align with inflation would pose a challenge for the Egyptian market.

Another factor raised by the report is the risk of investor services company Moody’s impending credit rating report on Egypt, which was postponed to November to spare Egypt from facing a likely second downgrade in the last seven months due to persistently slow foreign currency inflows.

“In the event of a downgrade, we think that there will be some forced selling (3-4 points across the curve) as this would be Egypt's first Caa1 rating,” Morgan Stanely states in its report.

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. Citing an attempt to “balance” government progress in its “privatization, fiscal, and structural reform agenda” with concerns about Egypt’s foreign currency inflows, the agency extended the review in August for another three months.

Debts set to mature in the coming year, said Morgan Stanley, include $5 billion in borrowing from the Emirati First Abu Dhabi Bank and Emirates NBD — signed in June and November 2021 and set to mature in 2024. Morgan Stanley expects the repayment to be rescheduled or converted to foreign direct investment given the Gulf Cooperation Council countries’ support for Egypt “in a bid to maintain financial stability.”

Last month, credit rating agency Capital Intelligence downgraded Egypt’s long-term sovereign debt rating from B+ to B, citing delays in ensuring a flexible exchange rate and the privatization of state-owned assets — two measures that have been among the most important conditions insisted on by the IMF for approving its $3 billion loan agreement with Egypt in December. The agreement was supposed to see its first review in March but has been postponed several times since.

Egypt still aims to complete privatization deals worth around $4.8 billion by June 2024 to cover a financing gap, currently estimated at around $24 billion by Morgan Stanley, and reach the target specified in the IMF loan program conditions.