Fitch Ratings has downgraded Egypt’s credit score for the second time in 2023, citing increased financial risks as progress on fiscal reforms remains slow.
According to the New York-based agency’s rating scale, default ratings for the country’s long-term foreign currency issuers range from “B” to “B-,” which is “highly speculative, with six levels ranging from both default territory and investment grade.” It was lowered. .
Below investment grade, it is more difficult for a country to access capital markets and raise the funds it needs when it wants to borrow.
Fitch said the downgrade reflected heightened risks to Egypt’s “external financing, macroeconomic stability, and already high government debt trajectory.”
“Slow progress on reforms, including the transition to a more flexible exchange rate regime and delays at the IMF. [International Monetary Fund] “The program review undermined the credibility of exchange rate policy and exacerbated external financing constraints as the government’s external debt servicing increased.”
Cairo has asked the IMF for help and has agreed to a $3 billion loan in 2022 to shore up its finances. The Washington-based fund agreed to the deal in exchange for major reforms, including a flexible exchange rate regime and an expanded economic role for the private sector.
“Despite pressure on the currency is increasing and the path to policy adjustment is becoming more complex,” Fitch said.
negative outlook
The rating action comes after Fitch lowered Egypt’s credit score in May (the first downgrade since 2013) and revised its outlook to negative, and S&P Global Ratings also downgraded Egypt’s rating last month. It was done.
However, Fitch updated the outlook to stable on expectations that reforms, including privatization, slowing mega-projects and adjusting the exchange rate, will accelerate after December’s presidential election.
These would likely pave the way for “new and potentially larger IMF programs and additional support from the GCC.”
Egypt, the UAE’s most populous country and one of the world’s largest wheat importers, has faced economic challenges since Russia invaded Ukraine in February 2022.
Annual inflation in the Arab world’s third-largest economy reached 38% in September, according to data from the country’s statistics office, marking the fourth consecutive month of record inflation in the cash-strapped North African country. .
Gasoline prices increased by more than 14% on Friday, marking the second increase in 2023. The measures are expected to increase prices for most goods at a time when the economic downturn is making it difficult for many Egyptians to make ends meet.
Egypt has also devalued its currency three times since March 2022, and the value of the pound has fallen by more than half since then. The country faces a dollar shortage and rising external debt.
Fitch said confidence in the Egyptian pound deal “appears weak” due to foreign currency shortages at the official rate, the persistence of widely divergent parallel market rates, and hoarding of foreign currency by the private sector.
Egypt’s major banks last month suspended debit card withdrawals and foreign currency purchases in a bid to ease a currency crisis in response to weak economic growth.
“The stability of the official exchange rate since February contrasts with the Central Bank of Egypt’s commitment to a permanently flexible exchange rate,” the rating agency said.
Allowing the pound to float without rebuilding official market confidence and exchange availability “could lead to significant overshoots in interest rates and inflation, with adverse macroeconomic, social stability and fiscal implications.” ” said the report.
Rapid increase in tourists
“Delays in adjustment exacerbate these risks.”
Meanwhile, Egypt’s current account deficit sharply declined from 3.5% ($16.5 billion) of gross domestic product (GDP) to $4.7 billion, or 1.2%, in fiscal 2023 due to a surge in tourism and Suez Canal revenue. Fitch announced.
Tourism is an important source of income for the government, and thanks to Egypt’s hosting of the Cop27 climate change summit, tourism receipts in the balance of payments reached a record high of $14 billion in 2023.
However, most of the improvement was due to a $16 billion reduction in imports, which Fitch suggested was primarily related to restrictions on available foreign exchange.
The report said this is “increasingly difficult to sustain as it constrains economic growth and exports”, with the current account deficit expected to rise to 2.8% of GDP ($10.6 billion) in 2024 and 2.8% of GDP ($10.6 billion) in the following year. is expected to expand by 2.2% ($9 billion). .
Meanwhile, the ongoing Israeli-Hamas war poses “significant downside risks” to Egypt’s tourism sector, although Fitch factors in “some short-term damage” to its forecast.
“We expect a recovery in tourism, Suez Canal revenues and remittances to help dampen financial demands from large imports,” the report said.
Updated: November 4, 2023, 1:09 p.m.