Moody's affirms Egypt's Caa1 ratings with positive outlook

Moody's  Ratings has confirmed the Government of Egypt's Caa1 long-term foreign and local currency issuer ratings and held the positive outlook. The ratings agency also affirmed Egypt's foreign-currency senior unsecured ratings at Caa1, and its foreign-currency senior unsecured MTN program rating at (P)Caa1.

The positive outlook, in place since March 2024, reflects the potential for an improvement in Egypt's debt service burden and external profile. The devaluation and flotation of the currency have strengthened Egypt's foreign exchange buffers, and borrowing costs have begun to decrease. The central bank's consistent policy stance with inflation targeting and a floating exchange rate regime has increased its credibility and effectiveness. This policy stance should allow policy rates to decrease, reducing the cost of debt, while creating a favorable environment for steady foreign-currency inflows.

Despite these improvements, credit vulnerabilities evident in the Caa1 ratings continue to pose a risk to Egypt's ability to achieve lasting improvements in fiscal and external positions. Egypt's high, albeit decreasing, debt ratio, very weak debt affordability compared to peers, and its consistently large domestic and external financing needs limit the credit profile. These constraints increase the economy's susceptibility to capital outflows in the event of external shocks that could challenge the authorities' commitment to a floating exchange rate policy. This could lead to the reemergence of external imbalances and erosion of foreign-currency buffers.

The backed senior unsecured ratings of the Egyptian Financial Corporation for Sovereign Taskeek sukuk company have been affirmed at Caa1 and its program rating at (P)Caa1. These are, in Moody's view, ultimately the obligation of the Government of Egypt. The positive outlook for the Egyptian Financial Corporation for Sovereign Taskeek sukuk company has been maintained, reflecting the positive outlook on the Government of Egypt.

The local-currency ceiling remains unchanged at B1, and the foreign-currency ceiling at B3. The three notch gap between the local-currency ceiling and the sovereign rating reflects a large and diversified economy with a large public sector footprint that inhibits private sector development and credit allocation amid nascent reforms to level the playing field with public sector entities. The two-notch gap between the foreign currency and local currency ceiling reflects transfer and convertibility risks given persistently large foreign currency financing needs and risks of capital flight.

Tightening the monetary supply

The central bank has implemented measures to tighten the money supply as outlined in the IMF program parameters. These include the suppression and repayment of direct central bank loans to public entities and a tightening in reserve money growth. The latter will serve as a useful indicator of future headline inflation trends, signaling the sustainability of disinflationary patterns under the central bank's inflation targeting regime adopted in March 2024 with a flexible exchange rate.

The Caa1 rating and positive outlook also include a set of fiscal measures that Moody's expects to be implemented and/or start yielding results. By the end of 2025, the government aims to complete subsidy reforms while expanding the Takaful and Karama cash transfer program, which supports 20% of the population as of 2024. Along with tax reforms, these measures will help the government achieve and maintain primary surpluses of 3.5% of GDP starting in fiscal 2025 (ending June 2025), in line with the track record of primary surpluses recorded since 2018. A future recovery in Suez Canal receipts should further expand the revenue base.

The positive outlook also reflects prospects of an improvement in Egypt's external position. Significant foreign direct investment inflows and future project development commitments, together with the shift to a market-based exchange rate regime, have boosted capital inflows and replenished Egypt's liquid foreign exchange reserve buffers to $36 billion (4.6 months of imports) in January 2025 and allowed it to regain access to international capital markets at affordable rates, which will help the economy to meet its large external financing needs.

The preservation of foreign currency liquidity buffers amid a flexible exchange rate regime in the context of large external financing needs would be credit positive. The prospect of a significant and durable improvement in debt affordability through a sustained increase in revenue, and confidence in a durable decline in borrowing costs, would support a higher rating level. Sustained foreign direct investment inflows amid improved export competitiveness would also boost confidence in Egypt's growth prospects and macroeconomic rebalancing potential, supporting a higher rating.

A rising likelihood of renewed capital outflows or diminished inflows which reduce the prospect of a durable improvement in Egypt's macroeconomic and external position would be credit negative. A renewed build-up in foreign currency shortages as a result of a sustained departure from the flexible exchange rate framework would also weigh on the rating. So would indications that Egypt's debt affordability as measured by interest to revenue or interest to GDP will not improve materially over time.