Fitch downgrades Egypt's rating for second time in 2023 as financial risks rise

The move reflects concerns over external financing, macroeconomic stability and the trajectory of already-high government debt

People outside a currency exchange office in Cairo. Egypt has devalued its pound three times since March 2022, and the currency has lost more than half its value since then. EPA
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Fitch Ratings has downgraded Egypt's credit score for the second time in 2023, citing rising financial risks as progress on fiscal reforms have remained slow.

The country's long-term foreign currency issuer default rating was lowered to "B-" from "B", which is "highly speculative" and is six levels from both default territory and investment grade, according to the New York-based agency's ratings scale.

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.

Fitch said the downgrade reflects heightened risks to Egypt's "external financing, macroeconomic stability and the trajectory of already-high government debt".

"The slow progress on reforms, including the delay on the transition to a more flexible exchange rate regime and on IMF [International Monetary Fund] programme reviews, have damaged the credibility of exchange rate policy and exacerbated external financing constraints at a time of increasing external government debt repayments," it said.

Cairo had turned to the IMF for help, reaching a deal in 2022 for a $3 billion loan to shore up its finances. The Washington-based fund agreed to the deal in return for major reforms, including a flexible foreign exchange regime and the private sector being allowed a greater economic role.

"Downward pressures on the currency have increased and the path to policy adjustment has become more complicated," Fitch said.

Negative outlook

The latest ratings action comes after Fitch revised Egypt's credit score lower in May – the first downgrade it gave the country since 2013 – with a negative outlook, and after S&P Global Ratings also downgraded Egypt last month.

Fitch, however, updated its outlook to stable, on expectations that reforms – which include privatisation, the slowdown of megaprojects and adjustments in the exchange rate – will accelerate after December's presidential elections.

These will likely pave the way for a "new and potentially larger IMF programme and additional support from the GCC".

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.

On Friday, petrol prices were raised by more than 14 per cent, the second increase in 2023 – a move expected to lift the cost of most goods at a time when the weakening economy is making it harder for many Egyptians to make ends meet.

Egypt has also 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.

Fitch said confidence in the Egyptian pound's arrangement "appears weak", due to foreign currency shortages at the official rate, the persistence of a widely different parallel market rate and the hoarding of foreign currency by the private sector.

Last month, Egypt’s largest banks suspended debit card withdrawals and purchases made in foreign currency in a bid to mitigate a foreign exchange crunch as it contends with struggling economic growth.

"The stability of the official exchange rate since February contrasts with the Central Bank of Egypt's stated commitment to a durably flexible exchange rate," the ratings agency said.

Floating the pound without rebuilding confidence and forex availability in the official market may be associated with "significant overshooting of interest rates and inflation, to the detriment of macroeconomic and social stability and public finances", it said.

Tourism surge

"Delays in adjustment aggravate these risks."

Egypt's current account deficit, meanwhile, narrowed sharply to 1.2 per cent of gross domestic product to $4.7 billion in fiscal 2023, from 3.5 per cent ($16.5 billion) a year earlier, boosted by a surge in tourism and Suez Canal receipts, Fitch said.

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.

However, a large part of the improvement is due to a $16 billion import contraction that Fitch suggested is largely related to limited foreign currency availability.

This will be "increasingly difficult to sustain as it constrains economic growth and exports", it said, forecasting the current account deficit to expand to 2.8 per cent of GDP ($10.6 billion) in fiscal 2024 2.2 per cent ($9 billion) the following year.

The continuing Israel-Hamas war, meanwhile, poses "significant downside risks" to Egypt's tourism sector, although Fitch has built in "some near-term hit" in its projections.

"We expect receipts from tourism, the Suez Canal and a recovery of remittances will help contain financing needs from larger imports," it said.

Updated: November 04, 2023, 1:09 PM