Moody’s raises outlook on Egypt to positive amid game-changing economic measures

Amr Kandil , Friday 8 Mar 2024

Credit-rating company Moody's Ratings (Moody's) has revised the outlook on Egypt to positive from negative amid game-changing economic measures, including the flotation of the Egyptian local currency and an increase in interest rates.

Moodys

 

In a statement on Thursday, Moody’s said the positive outlook reflects the marked change in economic policy, including the large devaluation of the Egyptian local currency and 600-basis-point increase in interest rates by the Central Bank of Egypt (CBE).

The company noted that maintaining these factors will help the country maintain an upsized International Monetary Fund (IMF) program, help avoid another build-up of external imbalances and enhance the economy’s resilience to shocks over time.

Impactful measures
 

Moody's views the CBE's new rate hike as a step towards neutral monetary policy after a prolonged period of negative real interest rates.

The Egyptian government's commitment to tightening fiscal policy and slowing down infrastructure spending as outlined in the recently expanded $8 billion loan agreement with the IMF, is expected to reduce inflation and support debt sustainability.

Moody’s also noted that these actions will help create a proper environment for the private sector and restore investor confidence.

The company hailed the country’s transition toward a managed float system and the adoption of an inflation-targeting regime as important measures to address foreign exchange shortages, foster official remittance inflows, and incentivize foreign investment inflows.

On Wednesday, Egypt reached an agreement with the IMF to expand a previous $3 billion loan deal to $8 billion, with expectations to attract a total of $20 billion from partners, including the IMF, the World Bank and the European Union.

The IMF agreement coincided with the CBE's decision to let market forces determine the value of the Egyptian pound (EGP) and increase interest rates, aiming to unify exchange rates and eliminate foreign exchange backlogs.

Prime Minister Mostafa Madbouly expressed confidence that the measures taken by the government and the CBE would provide ample dollar liquidity to overcome economic challenges and arrears accumulation.

Moody's also emphasizes the significance of the recent $35 billion foreign direct investment (FDI) deal between Egypt and the United Arab Emirates for the development project of Ras El Hekma in Egypt's North Coast.

The company said the investments will broadly double Egypt's foreign exchange reserves, which totalled $26.5 billion at the end of January, within a few weeks.

‘Very high credit risk’
 

The New York-based business also affirmed Egypt’s long-term foreign and local currency issuer ratings at Caa1, which the company’s “very high credit risk” bracket as it, under Moody’s assessment, indicates “poor standing and the vulnerability to very high credit risk.”

The rating company said the “high debt ratio and very weak debt affordability” of the Egyptian government compared to its peers increase the exposure to fiscal accounts to shocks, according to the statement.

However, Moody’s anticipates a gradual improvement in this area.

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