Fitch revises Egypt's Outlook to negative; affirms at 'B+'

CAIRO - 8 November 2022: Fitch Ratings announced Tuesday, revising its outlook on Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable, and affirmed the IDR at 'B+'.

 

The Rating Agency attributed the revision to the deterioration in Egypt's external liquidity position and reduced prospects for bond market access, leaving the country vulnerable to adverse global conditions at a time of high current account deficits (CADs) and external debt maturities.

 

It also referred to the decline in Reserves, noting that the Central Bank of Egypt (CBE) reserves were down to less than $32 billion by October 2022, from $35 billion in March and $40 billion in February, although they have stabilized in recent months. 

 

“The drop in external liquidity has been driven by outflows of non-resident investment in locally-issued government debt, which dropped to about $13 billion by September 2022, from over $17 billion in March and over $30 billion in 2021,” it stated.

 

According to Fitch, some recovery is likely on recent exchange rate devaluation, policy rate hikes, and agreement on a new 46-month $3 billion IMF extended fund facility. Nevertheless, at over 40 percent of reserves, these portfolio holdings remain a significant vulnerability.

 

Fitch expected the current account deficit to decline  to 3.1 percent of the gross domestic product (GDP) ($13 billion) in the fiscal year ending June 2023 (FY23), from 3.5 percent of GDP in FY22 and 4.4 percent of GDP in FY21. 

 

“The improvement in FY22 was helped by growth in shipping through the Suez Canal, a rebound in travel receipts and a widening hydrocarbon trade surplus. Further improvements in FY23 will be driven mainly by higher Suez Canal shipping fees and further growth in tourism,” it commented.

 

It stated that Egypt needs large fundings, clarifying that Egypt's financing challenge is compounded by public external debt maturities of about $6 billion in FY23 and $9 billion in FY24, excluding bilateral debt such as GCC deposits, which is likely to be rolled over. 

 

It added that the government has identified $6 billion in external non-market funding for FY23. This would cover Egypt's funding needs in FY23, assuming some return of non-resident portfolio flows and $10 billion in foreign direct investment supported by the government's privatization plan, mostly from the GCC.

 

“Egypt's 'B+' ratings reflect support from bilateral and multilateral partners. In addition to the $13 billion in GCC deposits received in March, which may be converted into longer-term investments, Egypt is expecting further investments from the GCC, with a total of $3.6 billion of equity acquisitions finalized so far in 2022. Egypt has performed well on past IMF programs,” the ratings agency stated.

 

It forecasted wider general government fiscal deficits of 6.3 percent of GDP in FY23 and 7.3 percent of GDP in FY24, from 6.2 percent of GDP in FY22, wider than the 'B' median, as growing primary surpluses are offset by higher interest costs in the near term. Tax revenues will be supported by recent reforms, including amendments to VAT and customs laws, while higher inflation will support revenues and should allow for an erosion of spending in real terms, as happened after the last major devaluation in 2016.