Moody's announced that it has maintained Egypt’s long-term foreign and local currency issuer ratings (credit rating) at B2 with a stable outlook.
Moody's has also kept Egypt's foreign currency senior unsecured ratings at B2, and its foreign currency senior unsecured MTN program rating at (P) B2.
“The affirmation of the B2 ratings and stable outlook reflects Egypt's continued exposure to volatile financing conditions driven by weak debt affordability and high gross borrowing requirements, balanced against improving shock resilience evidenced during the pandemic as a result of the government's track record of economic and fiscal reform implementation,” Moody’s explained.
It added that Egypt's broad domestic funding base and renewed build-up of foreign exchange reserves support the country’s economy against volatile capital flows as well as backing the government's second wave of economic reforms, which focus on attaining structural reforms.
Local currency ceiling kept, foreign currency ceiling raised
Concerning the country’s local currency ceiling, Moody’s also kept its rating unchanged at Ba2.
“This affirmation acknowledges the public sector's large footprint in the economy that stifles private sector development and credit allocation, mitigated by the growing implementation of structural competitiveness reforms,” Moody’s illustrated.
On the other hand, Moody’s raised Egypt’s foreign currency ceiling to Ba3, up from B1 previously.
This advancement reflects the progressive removal of remaining barriers to capital inflows and outflows and a more elastic exchange rate, according to Moody’s.
Egypt’s debt affordability very poor
Yet, Moody’s warned that Egypt remains exposed to potential liquidity and external financing shocks, driven by the evolving COVID-19 pandemic and the volatile external liquidity conditions.
“Egypt’s debt affordability is very weak and susceptible to a sharp rise in financing costs; its external position remains sensitive to bouts of capital outflows. The renewed build-up of foreign exchange reserves provides a buffer against sharp capital flow reversals, but vulnerabilities persist,” Moody’s elaborated.
“Egypt's debt affordability as measured by interest/revenue at 46 percent and interest/GDP at 9 percent in general government terms estimated for FY2021/22 is among the weakest of sovereigns rated by Moody's and underpins its exposure to potential funding shocks,” according to Moody’s.
Despite improving from recent peaks, Moody's expected such risks to remain elevated compared with B-rated peers.
Moreover, Moody’s said that Egypt's exposure to funding shocks is exacerbated by very high annual gross borrowing requirements at about 35 percent of GDP in both FY2020/21 and FY2021/22.
On this point, Moody’s clarified that the country’s funding risks are mitigated by the large banking system –which represents a reliable domestic funding base for the government through continued access to international capital markets at favorable terms and by the government's gradual maturity lengthening strategy that aims for an average domestic debt maturity at five years by 2025 from about 3.5 years in FY2020/21.
Borrowing requirements the highest
Nevertheless, Egypt’s annual gross borrowing requirements are expected to remain among the highest of Moody's rated sovereigns for the foreseeable future.
For the external side, the structural narrowing in the current account deficit and renewed build-up of foreign exchange reserves to $36 billion at the end of fiscal 2021 –after declining to $32 billion in May 2020– provides a buffer against future outflows, potentially related to a resurgence of the pandemic or to tightening international liquidity conditions, according to Moody’s.
In this respect, Moody's expected Egypt’s foreign exchange reserve buffer to remain sufficient to fully cover annual external debt service requirements accruing over the upcoming three years.
Egypt responded to pandemic flexibly
Regarding Egypt’s response to the pandemic, Moody’s noted that the government's flexible crisis response has sustained growth during the pandemic despite the sharp contraction in the tourism industry, which accounted for about 10 percent of GDP in 2019, supported by continued public investment and strong remittance inflows.
Furthermore, the government maintained a primary surplus at 1 percent of GDP by raising revenue in FY2020/21, keeping the debt to GDP ratio close to the 90 percent.
Looking forward, Moody's projected Egypt’s debt to GDP ratio to decline to 84 percent by 2024 owing to the continued primary surpluses and the tendency to return to economic trend growth of 5.5 percent starting FY2021/22.
Also, Moody’s said that Egypt’s exposure to social risks is high, driven by low employment rates, resulting in high youth unemployment rates at over 25 percent of the labor force, including among graduates.
“Relatively high poverty rates and gender inequality also contribute to social risks which have been exacerbated by the large economic reform adjustment costs borne by consumers over the past few years. As part of the government's reform effort, social risks are being mitigated by a more targeted social safety net, although the breadth of coverage remains relatively narrow,” Moody’s also said.
Egypt’s Minister of Finance Mohamed Maait said on Saturday that Moody’s affirmation of Egypt’s credit rating reflects the international financial institutions (IFIs)’s confidence in Egypt’s economy, its resilience, and its ability to cope positively with the harsh impacts of the pandemic.
He also added that this action comes while Moody’s has downgraded the credit ratings and revised down the outlook for about 50 percent of the Middle East and North Africa (MENA) region’s countries.