Fitch Ratings downgrades Egypt’s credit rating to B-; outlook stable

Updated 11/4/2023 10:08:00 AM

Arab Finance: Fitch Ratings has downgraded Egypt’s long-term foreign-currency issuer default rating (IDR) to ‘B-’ from ‘B’, with a stable outlook, the leading credit rating provider revealed in a press release on November 3^rd.

Fitch attributed its decision to the country’s high external financing needs that reflect soaring risks to macroeconomic stability.

It added that the credibility of exchange rate policy has been weakened by the slow progress on reforms, which includes the delay in the transition to a more flexible exchange rate regime and the International Monetary Fund's (IMF) program reviews.

Additionally, the slow progress has made external financing constraints worse at a time when government debt repayments abroad are on the rise.

The agency also highlighted that the path to policy adjustment has become more complex and that downward pressures on the currency have increased.

“The Stable Outlook reflects Fitch's baseline expectation that reforms - including privatization, slowdown of megaprojects, and exchange rate adjustment - will accelerate after presidential elections in December, likely paving the way for a new and potentially larger IMF program and additional support from the GCC,” the statement said.

Without making foreign exchange available in the official market, floating the Egyptian pound could lead to sharp inflation and interest rate overshooting, which would be detrimental to social and macroeconomic stability, the credit rating agency explained.

Fitch expected the maturities of the general government's (GG) external debt will increase significantly, from $4.3 billion during the elapsed fiscal year (FY) 2022/2023 to $8.8 billion in the current FY 2023/2024 and $9.2 billion during the next one.

It also forecast the current account deficit to grow to 2.8% of the gross domestic product (GDP) during the current FY and to hit 2.2% of GDP during the next FY 2024/2025.

“We expect receipts from tourism, the Suez Canal, and a recovery of remittances will help contain financing needs from larger imports. In Fitch's view, the Israel-Hamas war poses significant downside risks to tourism, although we build in some near-term hit,” the statement added.

As a result of the government's privatization plan, which aims to generate $5 billion in proceeds by the end of FY 2023/2024, net foreign direct investment (FDI) inflows are projected to increase to $12 billion in FY 2023/2024 from $9.7 billion in FY 2022/2023.