A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York - Reuters/Brendan McDermid
CAIRO - 7 February 2023: Moody's Investors Service downgraded Egypt's long-term foreign- and local-currency issuer ratings to B3 from B2 and changed the outlook to stable from negative.
Furthermore, Moody's downgraded Egypt's foreign-currency senior unsecured ratings to B3, and its foreign-currency senior unsecured MTN program rating to (P)B3.
It elaborated that the downgrade to B3 reflects Egypt's reduced external buffers and shock absorption capacity while the economy undergoes a structural change toward a more export- and private sector-led growth model under a flexible exchange rate regime.
“Liquid foreign exchange (FX) reserves have declined since the negative outlook assignment in May 2022 and FX liquidity buffers in the monetary system have dwindled (as measured by the build-up of large net foreign liability positions at the central bank and commercial banks), increasing external vulnerability at a time of fragile global conditions,” it added.
As for the government offering program which support the structural adjustment and help generate sustained non-debt creating capital inflows to meet increased external debt service payments over the next two years, it stated that these measures will ultimately take time to tangibly reduce Egypt's external vulnerability risks.
It added that the clear commitment to a fully flexible exchange rate, the government's capacity to manage the implications for inflation and social stability is yet to be established.
According to Moody’s, the stable outlook balances up- and downside risks, noting that the downside risks relate to liquidity risks reflected in tight international capital market conditions, as well as higher domestic borrowing costs and social spending pressures in an inflationary environment.
These risks are mitigated by the government's dedicated domestic funding base and the government's track record of consistently generating primary surpluses which Moody's expects will help reduce the debt burden after a temporary setback.
As for the upside risks, they relate to the implementation of stated competitiveness reforms that may enhance the economy's export base and support foreign direct investment inflows which, in turn, would enhance the economy's external debt carrying capacity and sustainably reduce the economy's external vulnerability risks.
Moody's has concurrently lowered Egypt's local-currency ceilings (LC) to Ba3 from Ba2, maintaining the three-notch difference with the sovereign rating, which reflects the public sector's large footprint in the economy that inhibits private sector development and credit allocation, mitigated by a growing track record of implementation of structural competitiveness reforms and further progress that Moody's expects under the new IMF program.
The FC ceiling was lowered to B2 from Ba3 previously, two notches below the LC ceiling from one notch previously, to reflect the narrow foreign currency liquidity buffer in the monetary system. The reported adoption of import restrictions and foreign currency withdrawal limits abroad point to potential risks of transfer and convertibility restrictions under scenarios of intensifying stress, mitigated by the agreed shift to a flexible exchange rate regime and the recent removal of letters of credit requirements that supports a gradual rebalancing of external accounts.