In March, Moody's revised its outlook for the future of the Egyptian economy from "stable" to "positive" and maintained the credit rating at B-.

Fitch attributed this advancement to the latest developments in the Egyptian economy and the $57 billion in finances that the international financial institutions (IFIs) have committed to the country.

FX influx changes the scene
 

“The near-term external financing risks have markedly reduced due to the Ras El-Hekma deal with the UAE, the move to a flexible exchange rate, and the tightening of monetary policy, which also unlocked additional IFI financing and the return of sizeable non-resident inflows to the domestic debt market.”

In February Egypt signed its largest-ever FDI deal with the UAE’s ADQ worth $35 billion to develop the coastal zone of Ras El-Hekma. The project is projected to attract $150 billion.

At the same time, other partners also committed other financing, including the World Bank ($6 billion), and the European Union ($8 billion) for three years, while the International Monetary Fund (IMF) expanded its loan deal with the country from $3 billion to $8 billion through 2026.

Fitch expected exchange rate flexibility in Egypt to be more durable than in the past, noting that initial steps to contain off-budget spending should help reduce the risks of public debt sustainability.

Debt and off-budget spending
 

Egypt’s overall debt hit 98 percent of GDP in FY2022/2023 and is expected to decline to 92 percent in the current FY2023/2024, which concludes on 1 July. It is likely to continue on the downward path and be below 80 percent by the end of the IMF programme in 2026.

Egypt has taken some actions to contain the off-budget spending; including the inclusion of 59 economic authorities into the general government perimeter starting in the FY204/2025 budget, and a decree capping overall public investment at just EGP 1 trillion.

Egypt’s FX to rebound
 

Fitch expected Egypt’s gross foreign exchange (FX) reserves to jump to $49.7 billion in the current FY2023/2024 despite the estimated current account deficit of 5.2 percent of GDP due partly to lower oil and services exports, and a temporary boost to imports from the recent clearance of an estimated $8 billion FX backlog.

Fitch expected this deficit to be 2.3 percent of GDP in the upcoming FY2024/2025 due to the recovering remittances thanks to the greater exchange rate confidence.

“We forecast FX reserves to rise further to 53.3 billion by FY2024/2025, equivalent to 5.6 months of current external payments, above the 'B' median of 4.1 months, and net external debt to fall 6.5 percent to 23.2 percent of GDP from FY 2022/2023 to FY 2024/2025,” Fitch forecast.

The report also highlighted the local currency depreciation in March that allowed the Egyptian pound to lose over 60 percent of its value against the greenback, while the US dollar rate jumped by almost 40 percent.

As per the report, the action wiped out the huge difference in rates between the official market and the parallel market, peaking at near to  EGP 72/1 USD in January 2024, against the official rate of EGP 31/1 USD then.

“Our somewhat greater confidence that exchange rate flexibility will be more durable partly reflects its close monitoring under Egypt's IMF loan, which runs to late 2026, and the strengthening of external finances it has helped to support, although an external shock would provide a greater test of the authorities' commitment,” said the report.

Drivers behind keeping B-
 

On keeping the B- rating, Fitch attributed that to the high inflation in the country, the expected growth of the fiscal deficit, and the very high-interest costs.

The report also underscored the tensions in the Middle East, including in the Red Sea, and their effects on the Egyptian economy.

In this respect, the report expected that further escalation would impose a risk on the revenues of both the tourism sector and the Suez Canal.

Fitch expected the revenues of Egypt’s tourism sector to decline by six percent, and revenues of the Suez Canal to shrink by 19 percent in the current FY2023/2024.

“While the recent direct strikes between Iran and Israel have raised the risks of escalation beyond Gaza, the apparent rapid containment of the military exchanges limits the potential for a greater spill-over. Fitch's base case remains that the Egyptian government prevents any large-scale inflow of refugees from Gaza. In addition, Egypt faces a lingering risk of greater social instability fueled by high inflation and structural challenges that include high youth unemployment and weakness in governance,” according to Fitch’s report.

Regaining trust
 

Commenting on Fitch’s rating action, Egypt’s Minister of Finance Mohamed Maait confirmed that the Egyptian economy has gradually regained the trust of international rating agencies, paving the way for more positive and stable prospects.

This has been achieved through the adoption of comprehensive, sustainable, and advanced economic reform policies, which promote the recovery, stability, and sustainable growth of the economy, as well as the creation of more job opportunities, according to the minister.

He added that efforts are being made to empower the private sector and increase its contributions to the national economy, particularly with the state's focus on stimulating productive, industrial, and export sectors to achieve comprehensive and sustainable development.

The minister noted that reducing public investment expenditure and setting a ceiling of EGP 1 trillion for the next fiscal year would help attract more private investments.

“The Egyptian economy now possesses greater capacity to meet future financing needs despite the challenging global and regional circumstances resulting from the wars in Europe, Gaza, and tensions in the Red Sea region,” said Maait

Maait affirmed that the IMF-backed loan deal, the supportive measures from financial institutions and international development partners, and the recent and anticipated influx of foreign direct investment contribute to stability and economic progress, and help alleviate short- and medium-term financial pressures.