Fitch revises Egypt's outlook to negative on fiscal and economic challenges

Port Said Street market in Cairo. Fitch says currency adjustments will again test the population's ability to absorb shocks. EPA

Fitch Ratings revised Egypt's outlook to negative and gave the country its first downgrade since 2013, citing the lack of economic reforms and challenges to its fiscal system.

The country's long-term foreign currency issuer default rating was revised to 'B' from 'B+', which is five levels below investment grade, the New York-based ratings agency said.

This is now at par with that from Standard & Poor's, which also revised its outlook to negative last month.

External financing risk for the country has increased because of “high external financing requirements, constrained external financing conditions and the sensitivity of Egypt's broader financing plan to investor sentiment”, it said.

“All this comes against a background of high uncertainty on the exchange rate trajectory and reduced external liquidity buffers.”

Fitch expects the Egyptian economy to slow down to 4 per cent in fiscal year 2023, from 6.6 per cent in 2022, before recovering to 4.5 per cent next year. It said inflation, foreign currency shortages, fiscal policy tightening and heightened economic uncertainty will be the main drags on growth.

Egypt, the most populous Arab country and one of the world's biggest wheat importers, has faced economic challenges since Russia invaded Ukraine in February 2022.

Inflation is one of the biggest for the economy and consumers: Egypt’s annual urban inflation climbed to its highest level in six years in March, mostly because of increasing food prices linked to the decline in the value of the pound, the nation's state statistics agency Capmas said last month.

Inflation climbed to 32.7 per cent in March from 31.9 per cent the previous month, it said.

Fitch sees “uncertainty about the timing of the inflation peak and its level, as well as the adjustment period for the economy to absorb further currency weakness”.

The agency projects average inflation to hit 24 per cent in fiscal year 2023, then decrease to 18 per cent in the following year.

The latest annual inflation is narrowly below the all-time high of 32.95 per cent in July 2017, less than a year after Egypt devalued its currency by half as part of a $12 billion support package offered by the International Monetary Fund.

“We see a risk that a further delayed transition to a flexible exchange rate will further undermine confidence and, potentially, delay the IMF programme,” Fitch said.

Inflation is also challenging social stability, Fitch said. While it views the current inflation situation as “transitory”, the timing and scale of further expected currency adjustments will again test the population's ability to absorb shocks.

“More broadly, the potential for political instability remains a significant tail risk, in our view, given structural problems, including weaknesses in governance and high youth unemployment,” it said.

The agency also cautioned on a “marked deterioration of public debt metrics, including a renewed deterioration in government interest costs/revenue, which, if not reversed, would put medium-term debt sustainability at risk”.

The Egyptian currency is also under severe pressure and has been devalued three times since March last year. The Egyptian pound has lost about 50 per cent of its value against the US dollar and is among the worst-performing currencies this year.

We see uncertainty about the timing of the inflation peak and its level, as well as the adjustment period for the economy to absorb further currency weakness

Fitch Ratings

Fitch acknowledged that while the pound has stabilised, this also reflects the reluctance of market participants to transact in the foreign exchange market, given high uncertainty around the future exchange rate level and interventions by public sector banks.

This is “further damaging confidence in the durably flexible exchange rate regime and the value of the currency”, Fitch said. It expects the exchange rate to depreciate further before stabilising in the financial year ending June 2024.

Fitch said Egypt's financing requirements remain large, and will become more challenging in fiscal year 2024 due to increasing government external debt maturities of around $7.2 billion, up from $4.3 billion in the previous year.

It expects a current account deficit of 3.3 per cent of GDP, equivalent to about $12 billion this year and next, compared to 3.5 per cent, or $16 billion, 2022.

Most of the improvement will come from stronger tourism and Suez Canal receipts, it said.