Moody’s expected Egyptian monetary policymakers to choose a gradual path to devaluing the local currency rather than a sharp decline to avoid exacerbating general inflation rates, as the country suffers from food price inflation of more than 22 percent in the year to July Past.
According to the agency, the effectiveness of this path will be determined by the continuation of financing inflows from Gulf Cooperation Council (GCC) countries and other official sources in order to avoid a vicious cycle characterized by net capital outflows, currency depreciation, inflation, rising domestic and external borrowing costs, and debt servicing.
“However, this policy is not without risks,” according to Moody’s, “because the inflexible exchange rate policy could further delay agreement on a new IMF program and restore access to global debt markets.”
Moody’s downgraded Egypt’s credit rating to B2 with a negative outlook, following the appointment of Hassan Abdullah as caretaker central bank governor to replace Tarek Amer, who stepped down a few days ago.
The change in central bank leadership coincided with broader changes in government, indicating a policy reset amid escalating credit risks, a continued decline in the foreign currency balance, and an increase in payments risks, according to Moody’s.
The agency highlighted that Abdullah’s appointment happens to align with Egypt’s increasing financial exposure to the GCC countries, as a result of large inflows from those countries to compensate for outflows of investments in short-term debt instruments.
Furthermore, Egypt’s exposure to GCC countries exceeded $25.9 billion in liquid foreign exchange reserves at the end of July, the report said.