Moody's downgrade to increase cost of borrowing for Egypt, experts warn

Muhammed Khalid , Tuesday 10 Oct 2023

The recent decision by international credit rating agency Moody's to downgrade Egypt’s credit rating from B3 to Caa1 will inflate the cost of borrowing and place a heavier debt burden on the country, experts told Ahram Online.

File photo of Moody s sign is displayed on 7 World Trade Center, the company s corporate headquarter
File photo of Moody s sign is displayed on 7 World Trade Center, the company s corporate headquarters in New York (Photo: AP)


"There is a paradox in Moody's decision as the agency downgraded Egypt's credit rating while changing the outlook from negative to stable. If it had a positive outlook about the Egyptian economy, it should have maintained the country's credit rating at its previous level," explained Ahmed Moaty, CEO of VI Markets Egypt, in an interview with Ahram Online.

"Another piece of evidence for this paradox is the mention of Egypt's progress in the sale of state assets and its ability to attract potential investments from Gulf countries, along with the improvement in tourism revenue," Moaty added.

In a report issued last week, Moody’s attributed its decision to the foreign currency shortage in the face of increasing external debt service payments over the next two years.

In August, Egypt’s foreign asset deficit reached nearly $25.92 billion, posing more challenges to the country's plan to collect  $191 billion in annual US dollar revenues by 2026.

Banking expert Hany Aboul-Fotouh, speaking to Ahram Online, stated that Moody's decision was influenced by a range of factors, including the shortage of foreign exchange reserves, the increase in inflation rates to their highest levels since 1990, and the conflict in Russia and Ukraine.

He noted that the outbreak of the Russia-Ukraine conflict disrupted global supply chains, leading to a sharp rise in the prices of essential commodities and increasing pressures on the Egyptian government's budget.

According to Minister of Finance Mohamed Maait, Egypt's budget deficit accounted for six percent of its GDP its debt-to-GDP ratio was 95.6 percent for the fiscal year 2022/2023. Egypt's GDP had reached EGP 9.8 trillion ($318.23 billion) at the time.

Higher cost of borrowing

One of the most significant consequences of Moody's decision will be to deter investors from Egypt's treasury bonds and bills, prompting the government to increase yields to attract more investments, thereby inflating the cost of borrowing.

"Unfortunately, Moody's decision is already impacting investors' confidence in Egyptian debt instruments, urging the government to increase yields, which increases the cost of borrowing," noted Moaty.

Aboul-Fotouh concurred, anticipating a negative impact on foreign investments in government debt instruments due to high investment risks in Egypt. Investors are now seeking higher returns through less risky opportunities.

The remedy

To remedy the current situation and avert further credit rating downgrades, Moaty and Aboul-Fotouh advise the government to take all necessary measures to prevent the depletion of hard currency.

"The government should impose stricter controls on imports to prevent further depletion of foreign currency and expedite the privatization program to secure more funds," suggested Moaty.

During FY 2022/2023, Egyptian imports fell by 18.92 percent year-on-year to $70.78 billion.

Aboul-Fotouh recommended that the government accelerate the economic reform programme to build investor confidence, emphasizing that improving Egypt's credit rating requires time and effort.

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