Moody’s Investors Service (Moody’s) has confirmed Egypt’s long-term foreign and local currency issuer ratings at B2, with the outlook remaining stable.
Moody’s has also confirmed Egypt’s foreign currency senior unsecured ratings at B2, and its foreign currency senior unsecured medium—term note (MTN) programme rating at (P)B2.
Minister of Finance Mohamed Maait said the Moody’s decision to maintain Egypt’s rating and stable outlook reflects continued international and ratings institution confidence in the Egyptian economy’s ability to deal with the coronavirus (COVID-19) crisis.
Maait attributed this to the government’s economic, monetary and financial reforms of the past years. These have given the Egyptian economy a degree of solidity and flexibility enabling it to deal with challenges, and internal and external shocks.
He added that the Moody’s decision reflects their experts and analysts’ confidence in policies adopted by the government to manage the current economic and health crisis. It adds to an accumulated balance of trust due to the implementation of a comprehensive economic reform programme over the past few years.
Maait emphasised that the Moody’s decision indicates the institution’s confidence in Egypt’s ability to efficiently manage economic situations and deal with local and external crises.
The rating also reflects Egypt’s ongoing credit strengths and challenges that Moody’s does not expect to change materially relative to similarly-rated sovereigns through the global shock of the coronavirus pandemic.
While the global pandemic exposes Egypt’s credit vulnerabilities, recent improvements in governance and policy effectiveness shore up the sovereign’s credit profile resilience to the current circumstances, Maait said.
Moody’s highlighted that the pandemic’s rapid global spread, deteriorating global economic outlook, falling oil prices, and asset price declines are creating generally severe and extensive credit shockwaves.
The combined credit effects of these developments are unprecedented. The effects on are a pressure on external financing requirements, diminished tourism receipts and remittances, and slower growth.
The Egyptian government’s large funding requirements and weak debt affordability driven by a high interest bill expose it to a sharp tightening in financing conditions triggered by the coronavirus.
At this stage, however, Moody’s expects that a track record of economic and fiscal reform and demonstrated capacity to manage significant shocks reduce the likelihood of global financial market disruption severely affecting Egypt.
A broad domestic funding base and robust foreign exchange reserves in excess of maturing liabilities protect against significant capital outflows from emerging markets in the wake of the coronavirus pandemic.
Egypt’s foreign-currency bond, foreign-currency deposit and local-currency bond and deposit ceilings remain unchanged at B1, B3, and Ba1 respectively. The short-term country ceilings for foreign-currency bonds and deposits remain unchanged at Not Prime (NP), according to Moody’s.
Deputy Minister of Finance Ahmed Kouchouk noted that in its latest report, Moody’s expects to continue financial control efforts in the coming period, but at slower rates than previous targets.
Kouchouk added that the Moody’s assessment sees that the coronavirus outbreak will delay, but not derail, the government’s fiscal consolidation efforts, keeping the debt/GDP ratio on a medium-term downward trajectory.
He pointed out that Moody’s expects Egypt’s total deficit to reach 7.9% of GDP for the current fiscal year (FY), and 8.5% of the GDP for the next FY. Moody’s also anticipates the Egypt’s financial ability to continue achieving initial surpluses, even if they are less than previously targeted percentages.
Moody’s also anticipates debt affordability will remain challenging, with interest to revenue exceeding 45% over the next two years before gradually declining. This will mainly be driven by weaker than earlier anticipated revenue generation.
Moody’s also expects the primary balance to remain in surplus in both years, although to a smaller degree than previously anticipated.
The government’s budget position will continue to benefit from the completion of the energy subsidy reform from July 2019 and the broadening of the revenue base, such as the VAT introduction in recent years.
Similarly, the restoration of foreign exchange buffers in recent years positions Egypt to weather the sharp capital outflows experienced over the past two months.
Moody’s assumes that capital flows will stabilise without further eroding the banking system’s total net foreign asset position.
It also estimates that Egypt’s liquid foreign exchange reserve buffer will decline to about $30bn at the end of FY 2019/2020. This comes on the back of increased external funding needs and reduced capital inflows at these levels, down from $42bn in February before the outbreak of the crisis.
At these levels, foreign exchange reserves will remain sufficient to cover the economy’s upcoming annual external liabilities over the course of the next few years.