Egypt's economy takes another hit with rating downgrade

A leading credit rating agency downgraded Egypt’s rating Tuesday.

Moody’s downgraded Egypt’s long-term foreign and local-currency issuer ratings from B2 to B3, indicating higher credit risk. The New York-based firm noted Egypt’s “reduced external buffers” as the economy transitions to an export and private sector-focused one with a flexible exchange rate. Moody’s also noted a decline in Egypt’s currency foreign reserves since the last rating in May of 2022. 

Moody’s also revised their economic outlook for Egypt from “negative” to “stable.” Moody’s said Egypt’s liquidity risks are “mitigated by the government's dedicated domestic funding base and the government's track record of consistently generating primary surpluses.” 

Moody’s retained Egypt’s B2 rating back in May of 2022 but changed the outlook to “negative” at the time, indicating they anticipated a change to the rating. 

The other leading credit rating agencies have rated Egypt similarly. S&P Global has Egypt rated at B for local and foreign currency in both the short and long term, indicating some risk. S&P has maintained this rating since 2018. 

Fitch maintained Egypt’s rating at B+ last November, also indicating some risk, but revised the outlook to “negative.” 

What it means: Issuer ratings refer to the ability of entities to pay their debt obligations. In this case, Moody’s downgraded Egypt’s rating for both the Egyptian pound and foreign currencies. 

Egypt’s “buffers” refer to the amount of liquidity the government has. Egypt’s foreign currency reserves decreased considerably last year and the budget deficit rose. The government has been selling state-owned industries as a result.

The “domestic funding base” refers to Egypt’s large tax base. Moody’s also noted that Egypt has had surpluses in the past. Egypt reported a primary surplus in 2022, for example, meaning government income was higher than spending. The “stable” rating indicates Moody’s is confident Egypt will remain at B3 for some time. 

Why it matters: Egypt has been in an economic crisis since early 2022, in part due to the supply chain shocks following the Russian invasion of Ukraine. High inflation has been a major feature of the crisis, and this prompted Egypt to raise interest rates a few times in 2022. 

Egypt is undergoing significant economic changes, per Moody’s assessment. Egypt agreed to a flexible exchange rate to the US dollar last October in order to receive a $3 billion aid package from the International Monetary Fund. The Egyptian pound has fallen considerably against the US dollar since then. 

Regarding the privatization, Egyptian Prime Minister Mustafa Madbouly said this month that Egypt plans to sell 20 more companies in 2023, Reuters reported. 

Credit ratings matter to countries for a few reasons. Moody’s has not downgraded Egypt since 2013, so the move could indicate less foreign investor confidence in the country moving forward. Lower credit ratings also typically lead to governments needing to pay back higher interest rates on bonds due to the heightened risk. 

Know more: Marc Espanol wrote in a memo for Al-Monitor PRO last month that Egypt’s stock market is soaring, despite the pound’s fall and rising inflation.