Moody's affirms Egypt's credit rating as IMF approves $2.27bn funding facility

The B2 rating and stable outlook reflect the resilience of Egypt's credit profile amid the economic shock

epa08405603 An Egyptian man carries a wood rack full of bread on a bike, in Bulaq neighborhood, Cairo, Egypt, 06 May 2020.  EPA/KHALED ELFIQI

Moody’s Investors Service affirmed Egypt’s B2 rating on the resilience of its credit profile as the International Monetary Fund approved $2.77 billion (Dh10.17bn) of emergency funding on Monday to help it cope with the fallout from the Covid-19 pandemic.

The affirmation of the rating and stable outlook reflected Moody's view that the most populous Arab country's credit strength is not expected to change materially, relative to similarly-rated sovereigns, due to the global shock posed by the coronavirus pandemic.

While the pandemic underlines some of Egypt's credit vulnerabilities, “improvements in governance and policy effectiveness in recent years shore up the sovereign's credit profile resilience to the current shock”, Moody’s said in a statement on Monday.

The rapid spread of the coronavirus outbreak has devastated the global economy, which is set to slide into the deepest recession since the 1930s Great Depression. The pandemic has upended global trade and brought travel and tourism to a halt across continents. A decline in oil prices has further compounded economic woes while asset price declines have created credit shock across many sectors, regions and markets.

The IMF last month said the global economic outlook was worse than the 2008 financial crisis and recovery will begin only in 2021. The combined effects of these developments were unprecedented and for Egypt, the shock translates into pressure on the country's external financing requirements, diminished tourism receipts, a fall in remittances and slower growth, Moody's said.
"At this stage, Moody's assesses that a track record of economic and fiscal reform implementation and demonstrated capacity to manage significant shocks reduce the likelihood of global financial market disruption severely affecting Egypt," the rating agency said.

“In particular, a broad domestic funding base and robust foreign exchange reserves in excess of maturing liabilities provide buffers against significant capital outflows from emerging markets in the wake of the coronavirus pandemic,” Moody’s added.

Egypt's government has “acted swiftly” in responding to the crisis, allocating resources to tackle the health emergency and providing targeted support to the areas most affected, Geoffrey Okamoto, first deputy managing director and acting chairman of the IMF’s executive board, said on Monday.

Egypt’s central bank has cut interest rates and postponed repayments of existing credit facilities to allow banks to keep lending. The country has also expanded social safety net programmes for the most vulnerable. However, Mr Okamoto said the $2.77bn funding through the IMF’s Rapid Financing Instrument, was still needed to “correct large external and domestic imbalances”.

The pandemic poses “an immediate and severe economic disruption that could negatively impact Egypt’s hard-won macroeconomic stability if not addressed”, the IMF said.

Egypt, the IMF noted, faces a marked economic slowdown – especially within the tourism industry – as a result of the measures introduced to contain the spread of the virus.

The Washington-based lender last month said Egypt’s growth rate is set to slow to just 2 per cent this year, from 5.6 per cent in 2019. Purchasing Managers’ Index – a snapshot of the performance of the non-oil private sector economy – released last week fell to 44.2 in April, from 47.1 in March. A score above 50 represents economic expansion, and below 50 contraction.

“Emergency support under the Rapid Financing Instrument will help limit the decline in international reserves and provide financing to the budget for targeted and temporary spending,” Mr Okamoto said. Additional support from both multilateral and bilateral creditors would also be needed to help Egypt close its balance of payments gap, he noted.

Egypt entered into a three-year programme with the IMF in 2016, gaining access to a $12bn Extended Fund Facility after agreeing to a series of reforms that included a free float of its currency. The reforms helped to end a major dollar shortage, repaired overburdened finances and pulled the country out of an economic crisis, although Egyptians felt pressured by some of the austerity measures.

Egypt will need to take measures to lower debt once the crisis abates. It will need to continue implementing structural reforms "to increase the role of the private sector to achieve higher and inclusive private sector-led growth and job creation", Mr Okamoto said.