Several hours have elapsed since Egyptian inflation figures revealed a record-breaking level of 36.5 percent in cities during July. Moody’s recently issued a statement stating that it would conduct a review of Egypt’s credit rating. This review focuses on assessing the progress made on the government’s reform agenda, particularly in relation to one of its two budgets, while also considering signs of declining foreign exchange liquidity in the country.
In its statement on Friday, Moody’s announced its ongoing review to potentially downgrade the Egyptian government’s long-term classification of foreign currency and local currency to “B3.”
The assessment took into account the progress made on the privatization agenda, as well as the government’s fiscal and structural reform efforts. However, it also considered evidence indicating a continued weakness in external liquidity, including the withdrawal of net foreign assets from commercial banks, which goes beyond the impact of recent asset sales.
Moody’s commenced the review for downgrading the credit rating of the State’s debt three months ago. The current classification stands at “B3,” which is six notches below the investment rating, placing it on the same level as Angola, Nicaragua, and Türkiye.
Lowest rating
After Moody’s downgraded Egypt in February, Egypt’s credit rating has been regarded as the lowest among the top three credit ratings agencies worldwide.
In a statement examined by Economy Middle East, Moody’s provided an explanation for their decision to proceed with the review. They cited concerns about persistent foreign exchange shortages, as demonstrated by the parallel currency market, and the effects of recent shocks in the terms-of-trade within the food and energy sectors.
These factors raise the probability of a potential devaluation of the official currency, which could lead to increased inflation, higher borrowing costs, and a rise in the ratio of public government debt. These outcomes would align with levels typically associated with a lower classification rating.
Review period
During the extended review period for Egypt’s downgrade, the assessment will primarily examine the extent to which revenues generated from recently concluded asset sales will contribute to replenishing foreign currency liquidity reserves, foreign exchange reserves, the net foreign asset position of the monetary system, foreign direct investment (FDI) inflows, and the dynamics of the exchange rate.
Read more: Egypt’s urban inflation climbs to 36.5 percent in July
Egypt initiated a program aimed at listing state-owned enterprises on the stock exchange to attract foreign currency. During the audit period, Moody’s will also assess the government’s capacity to effectively secure payments under the IMF program. This evaluation will consider the progress made in implementing structural reforms, fiscal reforms, improvements in the business environment, and the outcomes of recently concluded asset sales.
If the government can instill sufficient confidence in its ability to generate the required foreign exchange inflows, such as through the privatization program, to meet the growing external debt service payments in the coming two years and bolster the economy’s foreign exchange reserves, it would have a positive impact on credit.
Being able to prevent or minimize the emergence of heightened challenges to debt sustainability would instill confidence in Egypt’s capacity to mitigate persistent risks associated with consumption.
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