CAIRO - 7 March 2024: Moody's Ratings (Moody's) has revised its outlook on Egypt from negative to positive and affirmed the Caa1 long-term foreign and local currency issuer ratings.
According to a report by the rating agency, the shift in Egypt's outlook to positive is a reflection of significant official and bilateral support, along with marked policy measures taken in the past week. These actions, if sustained, are expected to support macroeconomic rebalancing.
The report highlighted the substantial foreign direct investment contribution from the Government of the United Arab Emirates (Aa2 stable), which significantly enhances Egypt's foreign exchange reserves. This infusion is anticipated to cover Moody's estimated external financing gap until fiscal 2026 (ending in June 2026).
As a result, the report noted a significant reduction in the downside risks that prompted the change in outlook to negative in January.
The positive outlook was attributed to a notable shift in economic policy, including a substantial currency devaluation and interest rate increase. If maintained, these measures are anticipated to assist Egypt in sustaining an expanded IMF program, mitigating the risk of renewed external imbalances, and enhancing the economy's shock resilience over time.
On February, Egypt signed a deal with the Abu Dhabi Developmental Holding Company PJSC (ADQ) - the sovereign wealth fund of the Emirate of Abu Dhabi - to develop the Ras Al-Hikma city, with total investments of $35 billion whose entitlements will be earned within two months, and the state will have a 35 percent share of the project's profits.
Egypt received $5 billion on March 1 as the final installment of the first tranche of the Ras El Hekma deal with the United Arab Emirates, as announced by the Egyptian Cabinet in a statement.
Prime Minister Mostafa Madbouly confirmed on February 29 that Egypt had received $5 billion as part of the initial installment of the investment partnership agreement with the United Arab Emirates aimed at developing Ras El Hikma.
Furthermore, the International Monetary Fund (IMF) and Egyptian authorities have achieved a staff-level agreement on a set of policies and reforms required to complete the first and second reviews under the Extended Fund Facility (EFF) arrangement.
The IMF loan has been augmented and increased to $8 billion instead of $3 billion "due to significant macroeconomic challenges that have become more complex to manage with the impact of the recent conflict in Gaza on tourism and Suez Canal receipts," according to the IMF statement.
Regarding the Caa1 long-term foreign and local currency issuer ratings, the report emphasized Egypt's high debt ratio and weak debt affordability compared to peers. These factors increase fiscal accounts' vulnerability to shocks, with gradual improvement expected over time.
Moody's projected that total interest payments would consume nearly 65 percent of revenue by the end of fiscal 2024, a ratio that might temporarily worsen following the observed official currency devaluation.
However, the report noted that the allocation of a significant portion of divestiture proceeds directly to the treasury to support debt sustainability would partially mitigate these highly-adverse metrics.
The report highlighted the government's large gross financing needs, exceeding 30 percent of GDP, particularly in the local currency market. This poses government liquidity risk, especially with significant T-bill rollovers at higher rates.
Additionally, the recurrent dependence on substantial external support packages since the November 2016 devaluation underscores persistent vulnerabilities related to the economy's shock exposure and diminishing reform commitment observed in previous instances, particularly concerning currency reform.
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