Egypt risks first downgrade since 2013 as Moody’s turns negative

EGYPT risks having its credit rating downgraded for the first time in almost a decade after Moody’s Investors Service lowered its outlook to negative, warning the country remains vulnerable even after winning support from its Gulf allies and seeking out a program with the International Monetary Fund.

Moody’s kept Egypt’s debt score at B2, five notches into junk territory and on par with Bolivia, Jamaica and Rwanda. S&P Global Ratings has it at the same level, while Fitch Ratings puts it one step higher.

The outlook change from stable to negative “reflects the rising downside risks to the sovereign’s external shock absorption capacity in light of a significant narrowing in the foreign exchange reserve buffer to meet upcoming external debt service payments,” Moody’s said late on Thursday.

A negative outlook means Moody’s is more likely to cut its rating rather than to raise it or keep it stable. Egypt was last downgraded by any of the three major credit assessors in 2013.

A major food importer, Egypt is grappling with record grain prices fueled by Russia’s invasion of Ukraine. While the economy has been supported by billions of dollars of aid from Egypt’s Gulf allies and the prospect of a new program with the IMF, tightening global financing conditions “increase the risk of weaker recurrent inflows” and make its debt less affordable, Moody’s said.  

Egypt’s central bank last week delivered its biggest interest-rate hike in nearly half a decade, an attempt to tackle soaring inflation and restore the allure of its local debt with foreign investors. A high rate differential had spurred a wave of foreign investment in the local debt market in recent years.

But after annual inflation climbed to 13.1% in April, both Egyptian policy rates turned negative — when adjusted for prices — for the first time since 2018. The government says there’s been $20 billion in outflows this year.

Investors took the news of Moody’s outlook cut in stride. Egypt’s dollar-denominated bond due 2027 rose for a sixth day, its longest winning streak since March 17. The yield on the security fell 29 basis points to 9.7% on Friday.

Egypt is looking at external debt service payments of $25 billion to $30 billion over the next three years, Moody’s said. It estimates the size of Egypt’s debt as a ratio of gross domestic product was likely to reach 93.5% in fiscal year 2022.  

The rating company also cited growing political risk “especially in the context of a sharp increase in food price inflation which, if not mitigated, could raise social tensions.”

In March, the central bank allowed the pound — which had been stable against the dollar for about two years — to weaken by more than 15%, and raised interest rates for the first time since 2017.

Crisis Response

Moody’s said Egypt’s rating continues to benefit from “the government’s pro-active crisis response and track record of economic and fiscal reform implementation over the past six years.” The country is seeking billions of dollars in private sector investments and will set new policies on government ownership as it moves to boost the economy.

Officials are in discussions with Gulf nations on converting part of deposits they’ve made in Egypt into investments, while stakes in two army-owned firms and 10 other companies will be offered on the stock market by year-end, Prime Minister Mostafa Madbouly said this month.

“Egypt’s broad and dedicated domestic funding base helps weather tightening financing conditions,” Moody’s said. Egypt’s strong trend GDP growth supports economic resiliency and the prospect of attracting foreign direct investments in line with the government’s privatization strategy.” — Bloomberg