African markets

Fitch Revises Egypt Outlook to Negative; Confirms at ‘B+’

Fitch Ratings has revised the outlook for Egypt’s long-term foreign currency issuer default (IDR) rating from stable to negative, and affirmed the IDR at ‘B+’.

Main rating factors

Weakening liquidity, funding risks: The revised outlook to negative reflects Egypt’s deteriorating external liquidity position and reduced prospects for bond market access, leaving the country vulnerable to adverse global conditions for a era of high current account (CAD) and external deficits. debt maturities.

Falling reserves: Reserves at the Central Bank of Egypt (CBE) had fallen to less than $32 billion in October 2022, from $35 billion in March and $40 billion in February, although they declined. stabilized in recent months. With just over three months of current external payments, reserve coverage is lower than the “B” median (four months). The CBE’s foreign currency assets excluding reserves, mostly deposits in local banks, had recovered to $2 billion in October from $1.5 billion in March, still well below their February level of $9 billion. .

Non-resident portfolio outflows: The decline in external liquidity was driven by outflows of non-residents’ investment in locally issued government debt, which fell to around $13 billion in September 2022, from more than $17 billion in March and over $30 billion in 2021 Some recovery is likely following recent exchange rate devaluation, policy rate hikes and agreement on a new expanded $3 billion funding facility dollars from the IMF over 46 months. Nonetheless, at over 40% of reserves, these portfolio holdings remain a significant vulnerability in our view.

reduction of the external deficit; Still important: We expect the CAD to shrink to 3.1% of GDP ($13 billion) in the fiscal year ending June 2023 (FY23), from 3.5% of GDP in in FY22 and 4.4% of GDP in FY21. The improvement in FY22 was helped by growth in shipping through the Suez Canal, a rebound in revenue travel and a growing hydrocarbon trade surplus. Further improvements in FY23 will be driven primarily by higher Suez Canal navigation costs and continued growth in tourism.

Significant financing needs: Egypt’s financing challenge is compounded by public external debt maturities of approximately $6 billion in FY23 and $9 billion in FY24 , excluding bilateral debt such as GCC deposits, which are subject to rollover. The government has identified $6 billion in non-market external financing for FY23. This would cover Egypt’s financing needs in FY23, assuming some return of non-resident portfolio flows and $10 billion in foreign direct investment backed by the government’s privatization plan, mainly from the GCC.

Liabilities of major central banks: The CBE’s net foreign assets (NFA) remain significantly lower than gross reserves, falling to a liability position of nearly $9 billion at end-September 2022, from nearly $6 billion in March and an asset position of over $8 billion in February. We believe that the negative NFA represents a constraint on Egypt’s external financing flexibility and shock absorption capacity, although we continue to view gross reserves as the most relevant indicator of its external liquidity.

Most of the CBE’s liabilities are medium to long term and tend to be rolled over. In addition to GCC bilateral deposits, which increased by $13 billion to $28 billion in March 2022, CBE liabilities include a currency swap with the People’s Bank of China and repurchase agreements with international banks. .

The Bank’s external position is also weaker: the Bank’s NFA had weakened significantly before the Ukraine shock, with public sector banks effectively funding CAD and Egypt maturities, keeping CBE reserves stable. . The banking NFA weakened further to reach USD 14 billion in September 2022, compared to USD 7 billion in March and USD 12 billion in February. However, as with the CBE, the majority of banks’ external liabilities are long-term in nature.

Strong international support: Egypt’s “B+” ratings reflect support from bilateral and multilateral partners. In addition to the $13 billion in GCC deposits received in March, which could be converted into longer-term investments, Egypt expects new investments from the GCC, with a total of $3.6 billion. dollars worth of equity acquisitions completed so far in 2022. has performed well on past IMF programs.

High budget deficits despite reforms: We project wider general government budget deficits of 6.3% of GDP in FY23 and 7.3% of GDP in FY24, up from 6, 2% of GDP in FY22, wider than the “B” median, as growing primary surpluses are offset by higher short-term interest costs. Tax revenues will be supported by recent reforms, including changes to VAT and customs laws, while higher inflation will support revenues and should allow spending to erode in real terms, as has happened after the last major devaluation in 2016.

Debt high, but declining: The devaluation will keep the public debt-to-GDP ratio around 87% in FY23, consistent with FY22, but we expect debt to gradually decline thereafter, thanks to primary surpluses and nominal GDP growth. Debt metrics are well above ‘B’ medians, with interest/income around 40%, but most external debt is owed to multilateral institutions, and domestic banks are big captive investors in local debt.

Large Economy, Solid Growth: Egypt’s ratings are supported by its large economy and robust growth, which we expect will remain above the ‘B’ median at 4.5% in FY23-24 , down from 6.6% in FY22. Tighter monetary conditions and the availability of financing pose significant risks to growth.

Inflation, monetary tightening: the move to a more credible floating exchange rate regime and the depreciation of the currency at the end of October weaken the EGP/USD exchange rate by around 30% compared to 2021 levels. This will further fuel the inflation after a previous round of devaluations and rising commodity prices. We forecast overall consumer price growth of 17% year-on-year on average in FY23 and 12% year-on-year in FY24, assuming a modest appreciation of the Egyptian pound against EGP24/USD, but the risks are on the upside. The CBE has raised its policy rates by a cumulative 500 bps since the end of 2021, to 13.25%, and further hikes are possible.

Political and social risks: The potential for political instability remains a significant tail risk, in our view, given structural issues, including weak governance and high youth unemployment. The government has sought to mitigate this through targeted social spending and economic reforms, while space for political opposition and freedom of expression is restricted, in our view.

ESG – Governance: Egypt has an ESG relevance score of “5” for political stability and rights, as well as rule of law, institutional and regulatory quality, and control of corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary sovereign rating model. Egypt has a low WBGI ranking in the 28th percentile.


Factors that could, individually or collectively, lead to a negative rating action/downgrade:
– External finance: New strains on external financing jeopardize the reconstitution of international reserves and other liquidity reserves.

– Public finances: inability to resume a trajectory of public deficit reduction and public debt/GDP reduction, for example, due to higher interest rates and weaker growth.

– Macro: a prolonged hit to economic growth and/or a setback in the country’s economic reform program, for example on exchange rate flexibility, which could lead to greater risks to macroeconomic stability and could undermine the program IMF or Egypt’s debt reduction progress.

Factors that could, individually or collectively, lead to positive rating action/improvement:
– External finance: reduction of external vulnerabilities, for example, through improved access to the bond market, reduction of the current account deficit and the building up of international reserves or other liquidity reserves, supported by an exchange rate framework credible.

– Public finance and macro: Progress in fiscal consolidation and economic reforms supporting the performance of the IMF program and a further reduction in the gross public debt-to-GDP ratio to a level closer to the “B” median in the medium term.

– Structural: Significant improvement in medium-term structural factors, such as governance standards, business environment and per capita income, to levels closer to ‘B’ and ‘BB’ rated sovereigns.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch’s proprietary SRM assigns Egypt a score equivalent to a ‘B+’ rating on the Long Term IDR Scale in Foreign Currency (LT FC).

Fitch’s Sovereign Rating Committee did not adjust the SRM score output to arrive at the final IDR of LT FC.

Fitch’s SRM is the agency’s proprietary multiple regression scoring model that uses 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to an LT FC IDR. The Fitch OQ is a forward-looking qualitative framework designed to allow adjustment of the output of the SRM to assign the final score, reflecting factors in our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Best/Worst Case Evaluation Scenario

Global credit ratings of sovereign, public finance and infrastructure issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of one. three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of three notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from “AAA” to “D”. Worst case and worst case credit ratings are based on historical performance. For more information on the methodology used to determine industry-specific best-case and worst-case scenario credit ratings, visit