Moody's affirms Egypt's credit rating on economic resilience

Moody's Investors Service affirmed Egypt’s sovereign credit rating on the “proactive crisis response” of authorities in the Arab World’s most populous country and their track record of economic and fiscal reforms over the past six years.

The “B2" long-term foreign and local currency issuer ratings underpin Egypt's broad and dedicated domestic funding base that helps it to weather tightening financing conditions, Moody’s said on Friday. “Egypt's strong trend GDP [gross domestic product] growth supports economic resiliency and the prospect of attracting foreign direct investment in line with the government's privatisation strategy,” the rating agency said. However, Moody’s changed Egypt’s outlook to negative, from stable, as rising inflation raises borrowing costs, exacerbating debt affordability challenges and social risks. Inflation in the Arab world's third-largest economy rose to its highest level in about three years in April to more than 13 per cent, driven by a rise in price of foodstuffs and an increase in energy prices.

The fallout from the Russian invasion of Ukraine, which triggered non-resident outflows of about $14 billion as of mid-April, from holdings of $31bn in mid-February, also underpins Moody’s outlook decision. “Immediate balance of payment risks are mitigated [however] by $22bn in financial commitments by GCC sovereigns — of which $11bn are already deposited in support of FX [foreign currency] reserves, and the remainder pledged as FDI and asset purchases — and by the prospect of a new IMF programme,” Moody’s said.

Egypt’s economy has faced economic headwinds this year as it struggled to weather the impact of the Russia’s war in Ukraine on its economy, which has undergone major reforms since 2016. The North African country is the world's largest wheat importer and had relied on Russia and Ukraine for about 50 per cent of its grain imports.

Visitors from the two countries had also been major contributors to its tourism sector, accounting for 31 per cent of all arrivals before the war. On May 19, the Central Bank of Egypt raised its key interest rates by 200 basis points in a bid to contain inflation.

In March, Egypt devalued its pound by about 15 per cent and raised the interest rate by 100bps. That was the first interest rate increase since 2017. Despite economic headwinds, the country has a track record of “economic resiliency based on strong economic growth”, Moody’s said.

Moody's forecasts Egypt's economy will grow by 5.5 per cent in the 2022 fiscal year and expand 4.5 per cent in the following year. “The track record of improved policy effectiveness supports the government's structural economic reform agenda to enhance export competitiveness, broaden the revenue base and a shift to targeted income-support measures,” Moody’s said.

“The maintenance of primary surpluses [is] underpinning Moody's expectation of a renewed reduction in the debt-to-GDP ratio starting [in] fiscal 2023.” Despite the larger interest bill, Moody's projects the general government debt ratio to resume its downward trajectory towards 85 per cent of gross domestic product in 2025, after an increase to more than 93 per cent in the 2022 fiscal year, as a result of the valuation effect from the currency depreciation, it said.