Fitch Ratings has raised Egypt’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B-‘, highlighting improvements in external finances driven by notable foreign investments and strengthened policy initiatives. Significant developments include the Ras El-Hekma investment, which added $24 billion, along with a considerable rise in non-resident ownership of domestic debt.
The upgrade reflects the following key rating drivers and their relative weights:
Lower external risk, policy adjustment
Egypt’s external financial position has strengthened due to the Ras El-Hekma foreign investment, inflows from non-residents into the debt market, and new financing from international financial institutions (IFIs). These developments have been facilitated by improved policy measures, including increased exchange rate flexibility and tighter monetary conditions. Foreign exchange (FX) buffers have rebounded, instilling greater confidence that the more flexible exchange rate policy will be more sustainable than in previous instances. Risks to public finances have been moderately alleviated by initiatives aimed at curbing off-budget public investment and broadening the tax base, alongside an anticipated significant reduction in Egypt’s exceedingly high domestic debt interest burden.
Replenished external buffers
International reserves increased by $11.4 billion in the first nine months of 2024, reaching $44.5 billion. Additionally, the banking sector’s net foreign asset position has nearly balanced, recovering from a deficit of $17.6 billion in January. This recovery is attributed to $24 billion of new foreign-currency inflows from the Ras El-Hekma deal, which also bolstered Egypt’s support from Gulf Cooperation Council (GCC) partners, as well as an estimated nearly $17 billion rise in non-resident holdings of domestic debt since February. The remaining $11 billion from the Ras El-Hekma investment converted existing UAE foreign currency deposits held at the Central Bank of Egypt (CBE), thereby reducing external debt.
New capital inflows
Financing from IFIs unlocked since March includes an augmented $8 billion from the IMF Extended Fund Facility (EFF) and €7.4 billion in three-year EU support. Projections indicate foreign direct investment (FDI) will average $16.5 billion across the fiscal years ending in June 2025 (FY25) and FY26, driven by new investments from Saudi Arabia and in Ras El-Hekma. These inflows are essential for financing the current account deficit, which widened by 4.2 percentage points in FY24 to 5.4 percent of GDP. It is anticipated that this deficit will narrow to 5.2 percent in FY25 and 4 percent in FY26, constrained by only a partial recovery in gas production and subdued Suez Canal receipts. Fitch estimates that FX reserves will cover 4.4 months of current external payments by the end of FY26, down from 5.0 at the end of FY24, but still above the ‘B’ median of 3.8 months.
More flexible exchange rate
Monitoring under the IMF program has helped maintain a greater degree of exchange rate flexibility. There is no evidence of CBE intervention in the foreign exchange market since the 38 percent depreciation of the official rate in March, and the parallel market rate has remained stable. Interbank FX volumes have surged approximately tenfold from their stressed levels prior to currency unification, with no reported backlog at banks. While it is possible that recent low exchange rate volatility is partly due to FX demand management measures, Fitch does not view this as indicative of significant currency misalignment. Nonetheless, an external shock would pose a substantial test of the authorities’ commitment to maintaining greater flexibility.
Falling inflation, extreme debt interest
Inflation decreased to 26.4 percent in September from 35.7 percent in February, with forecasts suggesting a decline to 12.5 percent by the end of FY25, supported by substantial base effects, better-anchored expectations, and overall currency stability, and further to 10.6 percent by the end of FY26. The policy interest rate, currently held at 27.25 percent following an 800 basis point increase in the first quarter of 2024, is expected to be lowered to align with a real rate of approximately 4 percent. Given the short maturity of domestic debt, this will lead to a reduction in the general government debt interest-to-revenue ratio (which is lower than that at the central government level) to around 37 percent in FY29, down from a peak of 61 percent in FY25, although this remains significantly higher than the current ‘B’ median of 13.9 percent.
Initial steps to contain fiscal risks
Financing for large capital expenditure projects has decelerated, accompanied by a decree that caps overall public investment at EGP 1 trillion (a real-term reduction from EGP 0.88 trillion in FY23). The planned inclusion of 59 economic entities into the general government perimeter in the FY25 budget is also expected to enhance the management of broader public spending. Fitch has not adjusted fiscal metrics to reflect this definition, which would result in a near halving of the interest-to-revenue ratio. Initiatives to enhance tax administration, increase VAT, and reduce fuel subsidies are anticipated to help manage the general government deficit, which outperformed expectations in FY24, estimated at 3.4 percent of GDP.
Egypt’s ‘B’ IDRs also reflect the following key rating drivers:
Greater geopolitical risk
The potential escalation of regional conflict poses a significant risk, primarily through diminished revenues from the Suez Canal and tourism. Recovery in Suez Canal revenues is expected to be gradual, reaching around half of FY23 levels by FY26, which would mitigate some risks. Tourist revenue has remained relatively stable, showing little change in FY24. Escalating conflict presents a moderate risk to the base case that the government will manage any large-scale influx of refugees. Furthermore, high inflation and structural challenges, including weak governance and high youth unemployment, contribute to persistent risks of increased social instability, which could hinder reform efforts.
Moderate reform
Fitch anticipates GDP growth will rise from 2.4 percent in FY24 to 4 percent in FY25, driven by enhanced confidence, real income growth, remittances, and FDI, reaching 5.3 percent in FY26, which is moderately above Egypt’s trend rate. Comprehensive structural reforms, particularly those aligned with IMF EFF measures aimed at boosting private sector activity and competitiveness, are crucial for fostering sustainable growth and preventing a renewed accumulation of external imbalances in the medium term. The current administration, perceived as somewhat more technocratic than its predecessors, is believed to remain broadly committed to the EFF, despite its newly articulated intention to renegotiate some targets.
High but falling public debt
Fitch projects the general government deficit will widen to 7.5 percent of GDP in FY25, influenced by last year’s one-off revenue from Ras El-Hekma (3.3 percent of GDP) and increased debt interest and capital expenditures, which will offset revenue mobilization efforts of nearly 1 percentage point, before narrowing to 7.1 percent in FY26. General government debt is expected to decrease to 78.9 percent of GDP by FY26, down from 89.1 percent in FY24, yet still significantly exceeding the ‘B’ median of 56.4 percent. These projections incorporate annual stock-flow adjustments of 1.5 percent of GDP to account for Egypt’s history of off-budget fiscal spending. The large, complex, and still opaque broader public sector presents considerable additional contingent liability risks.
Banking sector resilience
The robust and liquid banking sector offers financing flexibility for the sovereign. The loan-to-deposit ratio stands at a low 60 percent at the end of the first half of 2024, with expectations of strong deposit growth, aided by improving foreign currency supply, and banks are likely to allocate most of this liquidity toward government securities. The common equity tier 1 (CET1) ratio declined by 150 basis points following the March currency depreciation but rebounded to 11.5 percent at the end of the first quarter of 2024, with further improvements anticipated in the second half of the year and net profits expected to grow by more than 50 percent in 2024.
ESG Governance
Egypt has received an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. These scores reflect the significant influence of the World Bank Governance Indicators (WBGI) in Fitch’s proprietary Sovereign Rating Model (SRM). Egypt ranks low on the WBGI, at the 25th percentile, particularly struggling with the score for voice and accountability.
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