S&P revises Egypt's rating lower on slow progress of fiscal reforms

The agency expects 4% economic growth over the next three years, down from 6.6% in 2022

A baker at the Al Mgharblin food market in Cairo. Annual inflation in Egypt hit 38 per cent in September, marking the fourth consecutive month of record-high inflation numbers. Bloomberg

S&P Global Ratings has downgraded Egypt's rating further into negative territory, citing the slow progress being made on monetary and structural reforms.

The country's long-term foreign and local currency sovereign credit ratings were revised to “B-” from “B”, which is “highly speculative” and is six levels below investment grade, the New York-based ratings agency said on Friday.

Non-investment grade makes it more difficult for a country to access capital markets and raise funding that it needs when it wants to borrow.

S&P said the slow pace of the reforms has delayed the disbursement of multilateral and bilateral funds “critical to covering Egypt's high external funding needs”.

“The costs of delay include a foreign currency shortage, a wide gap between the official and informal exchange rates, lower remittance inflows and weaker private sector confidence and growth,” it said.

The ratings agency, however, maintained its stable outlook for Egypt.

The outlook “balances the risk that authorities may be unable to finance high external debt redemptions or address the country's foreign currency shortage against the possibility of an acceleration of key monetary and economic reforms that would help bridge Egypt's large external financing gap”.

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

Annual inflation in the Arab world's third-largest economy hit 38 per cent in September, marking the fourth consecutive month of record-high inflation numbers in the cash-strapped North African country, data from the country’s statistics agency had shown.

Egypt has devalued its currency three times since March 2022, and the pound has lost more than half its value since then. The country has been facing a dollar crunch and mounting foreign debt.

S&P said it could lower its ratings on Egypt further if authorities fail to implement the macroeconomic reforms required to reduce the country's economic imbalances and to unlock multilateral and bilateral funding.

“We could also lower the ratings if the government's already elevated interest costs rise further, increasing the risk of a distressed debt exchange,” it said.

On the other hand, an upgrade is possible if Cairo is able to reduce net government debt levels and gross external financing needs, through an acceleration of reforms that support competitiveness, growth and fiscal outcomes.

“Under such a scenario, we would expect renewed bilateral and multilateral financial support,” S&P said.

S&P expects Egypt's economic growth to average about 4 per cent over the next three years, from 6.6 per cent in 2022.

“The lack of foreign currency availability restricted imports, which depressed economic activity, particularly investment,” it said.

However, it pointed out that the projection will remain highly sensitive to exchange rate and inflation trends, as well as to the fallout on tourism stemming from the continuing Israel-Hamas conflict.

Tourism has been a vital source of income for the government: in fiscal year 2023, tourism revenue on the balance of payments hit a record high of $14 billion, supported by Egypt hosting the Cop27 climate change summit.

“A sharp decline in tourists from Russia and Ukraine was more than compensated by a pick-up in tourists from other countries, including Germany and Italy,” S&P said.

“The tourism sector is an important source of foreign currency earnings for Egypt. However, given the uncertainty around the exchange rate, we understand the associated foreign currency inflow for the most part has been kept by commercial entities rather than flowing through the financial system.”

With the foreign currency crunch, S&P expects GDP growth to slow further in fiscal year 2024. However, as the central bank's long-term strategy for the exchange rate becomes clearer, market confidence should improve, the agency said.

“We project growth to pick up over our forecast horizon to fiscal 2026. The construction and energy sectors could be key drivers of growth, along with IT and communications, wholesale and retail trade, agriculture, and health care,” it said.