Moody’s Investors Service has lowered the outlook on Government of Egypt to ‘negative’ from ‘stable’ mainly due to increasing risks and difficult macroeconomic and exchange rate rebalancing.
The rating agency affirmed the Caa1 long-term foreign and local currency issuer ratings, as well as the foreign-currency senior unsecured ratings at Caa1, and its foreign-currency senior unsecured MTN program rating at (P)Caa1.
Moody’s said it has also affirmed the backed senior unsecured ratings of the Egyptian Financial Corporation for Sovereign Taskeek sukuk company at Caa1 and its programme rating at (P)Caa1 which are, in Moody’s view, ultimately the obligation of the Government of Egypt.
The rating agency said that since its last rating action in October 2023, a significant increase in interest payments (projected to consume two thirds of revenue at the end of fiscal 2024) and mounting external pressure (with the gap between the official and parallel market exchange rates widening further) have complicated the macroeconomic adjustment process.
“Even with an anticipated increase in financial support from the IMF and the government’s continued commitment to primary surpluses, the negative outlook reflects the risk that policy actions and external support may prove insufficient to prevent a debt restructuring,” Moody’s said.
Looking ahead, the affirmation of the Caa1 rating captures the government’s track record of fiscal reform implementation capacity that Moody’s said it expects will unlock an enhanced financial support package from the IMF and other official lenders, and the potential for it to mitigate higher debt affordability and balance of payment risks.
The local-currency ceiling is unchanged at B1, and the foreign-currency ceiling at B3.
Moody’s explained that the three notch gap between the local-currency ceiling and the sovereign rating reflects a large and diversified economy with a large public sector footprint that generates significant financing requirement that inhibits private sector development and credit allocation, notwithstanding recent reforms to level the playing field with public sector entities.
It added that the two-notch gap between the foreign currency and local currency ceiling reflects transfer and convertibility risks given persistent foreign exchange shortages and weakening policy effectiveness.