Standard & Poor’s (S&P) has painted a more pessimistic picture of the Egyptian economy due to growing external financing risks, warning that delays in implementing reforms have put pressure on the Egyptian pound, expecting a further decline in its value, while reducing the country’s outlook to negative.
S&P announced that it had reconsidered its estimate of Egypt’s debt outlook from “stable” to “negative” due to its “significant external financing needs.”
Egypt’s sovereign debt credit rating is still B/B but could be revised in the next 12 months.
In February, Moody’s downgraded Egypt’s debt to non-investable. This was preceded in November by Fitch revising its outlook for the country’s economy from stable to negative.
The agency justified its forecast that the Egyptian government will need significant funding in 2023 as well as 2024, estimated at $17 billion and twenty billion dollars respectively.
“We estimate that the Egyptian government allocates 40 percent of the total revenues collected to pay interest on its debt,” it said, noting that “the bulk of these payments are related to domestic debt servicing and not international obligations.”
“About 70 percent of Egypt’s government debt is domestic and in local currency. The main source of financing for this domestic debt is the Egyptian banking system, which, in our view, remains liquid and can increase its holdings of government debt, if necessary, despite its already high exposure. Deposit growth is high, averaging 15 percent annually over the past three years, partly due to the low base of financial inclusion. We estimate that local Egyptian banks – among which are the two state-owned banks, the National Bank of Egypt and Banque Misr, account for nearly half in terms of total assets – hold more than 60 percent of the general government debt.
Read: Egypt pressed to implement reforms before IMF first review
Growing pressure on the pound
Currently, “relatively limited evidence of reforms has increased pressure on the Egyptian pound,” the agency said.
Major reforms, announced in December 2022, could lead to a steady flow of foreign currency if fully implemented.
These reforms are backed by a $3 billion program under the IMF’s Expanded Fund Facility, which includes fiscal consolidation, the implementation of adequate conditions to allow for a fully flexible exchange rate, and a plan to sell mostly minority stakes in selected state-owned enterprises.
“However, the relatively limited evidence of reform implementation has increased pressure on the Egyptian pound, especially given Egypt’s high external financing needs. In our view, lack of progress increases the risks that multilateral lenders and foreign investors, including key GCC countries, may cause delays or non-supply to Egypt with agreed funds, with implications for imports, inflation, interest rates, government debt stock, and interest payments,” the agency said.
The IMF expects growth of 3.7 percent in 2023 compared to 6.6 percent in 2022, and inflation of 21.6 percent on an annual basis, compared to 8.5 percent in 2022.
The IMF looks forward to Egypt taking further measures it has pledged ahead of the first review of its support program.
The agency expects the Egyptian pound to depreciate by about 53 percent by the end of fiscal 2023, compared to the previous fiscal year, followed by a modest decline in subsequent years.
“Significant progress on the sale of state-owned assets is likely to hinge on greater clarity by the authorities on exchange rate policy,” S&P said.
It believes that one of the main reasons that placed the Egyptian currency under pressure recently is that “companies save their profits in foreign currency, given the uncertainty about the value of the pound.”
“While industries that earn in dollars cling to it, the interbank lending market is experiencing relatively limited availability of foreign currency, given reduced satisfaction by domestic and international banks with the level of uncertainty about monetary policy,” the IEA report added.
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