New York, May 26, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the long-term foreign- and local-currency issuer ratings of the Government of Egypt at B2 and changed the outlook to negative from stable. Moody's has also affirmed Egypt's foreign-currency senior unsecured ratings at B2, and its foreign-currency senior unsecured MTN program rating at (P)B2.
The negative outlook reflects the rising downside risks to the sovereign's external shock absorption capacity in light of a significant narrowing in the foreign exchange reserve buffer to meet upcoming external debt service payments. While the economy's external position remains supported by significant financial commitments pledged by Gulf Cooperation Council (GCC) oil-exporting sovereigns and the prospect of a new IMF program, tightening global financing conditions increase the risk of weaker recurrent inflows than Moody's currently anticipates to shore up Egypt's external position. Susceptibility to event risks is broad-based and includes political risk, especially in the context of a sharp increase in food price inflation which, if not mitigated, could raise social tensions according to Moody's assessment of the relevance of social risks for sovereign credit; while rising domestic borrowing costs, if sustained, will exacerbate liquidity risks and debt affordability challenges, both long-standing weaknesses of Egypt's credit profile.
The B2 rating remains supported by the government's pro-active crisis response and track record of economic and fiscal reform implementation over the past six years. Egypt's broad and dedicated domestic funding base helps weather tightening financing conditions. Egypt's strong trend GDP growth supports economic resiliency and the prospect of attracting foreign direct investments in line with the government's privatization strategy.
Egypt's local-currency (LC) and foreign-currency (FC) ceilings remain unchanged. The LC ceiling at Ba2, three notches above the sovereign rating, acknowledges the public sector's large footprint in the economy that inhibits private sector development and credit allocation, mitigated by a growing track record of implementation of structural competitiveness reforms. The FC ceiling at Ba3, one notch below the LC ceiling, reflects the progressive removal of remaining barriers to capital in- and outflows and a more flexible exchange rate which in Moody's view signal a low risk of transfer and convertibility restrictions, notwithstanding the tighter foreign currency liquidity environment.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL466319 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
NARROWER FOREIGN LIQUIDITY BUFFER AMID TIGHTENING EXTERNAL FUNDING CONDITIONS INCREASES BALANCE OF PAYMENTS RISKS
The capital market dislocation triggered by Russia's invasion of Ukraine, compounded by tightening global monetary policy, has led to a renewed bout of capital outflows by non-resident investors across frontier markets, including in Egypt's local currency market, further drawing down the economy's external liquidity buffers which had already been weakened during the pandemic. The narrow foreign exchange reserve buffer in comparison with upcoming external debt service payments, and net foreign liability positions at the central bank and in the commercial banking system raise downside risks to the sovereign's external shock absorption capacity amid tight global funding conditions.
The fallout from the Russian invasion of Ukraine has triggered non-resident outflows of almost $14 billion as of mid-April from holdings of $31 billion in mid-February. In contrast to previous instances of sharp capital outflows driven by external shocks such as in the second half of 2018 or at the onset of the pandemic in March 2020, the most recent external shock has materialized when the economy's liquid foreign exchange reserve buffer at $29.3 billion in April [1] was already weakened by the pandemic and higher imports to fuel the recovery. The absorption of capital outflows through the banking system has created a net liability position in the monetary system comprising both the central bank and commercial banks of $12 billion in March, a reading not recorded since before the flotation of the pound in November 2016. In Moody's assessment, the coverage of this net liability position with foreign exchange reserves to buttress banks' counterparty risk standing reduces the amount of usable reserves to meet renewed external shocks.
Immediate balance of payment risks are mitigated by $22 billion in financial commitments by GCC sovereigns - of which $11 billion are already deposited in support of FX reserves, and the remainder pledged as Foreign Direct Investment (FDI) and asset purchases - and by the prospect of a new IMF program. However, in Moody's assessment continued foreign exchange reserve coverage of upcoming external debt service payments over the next three years at about $25-30 billion (including short-term plus medium/long-term external debt maturities) will depend on continued inflows from abroad. While Moody's expects the government's privatization strategy aiming for $10 billion in FDI inflows annually over four years to help bolster Egypt's FX reserve buffer in the future, the likelihood of renewed large-scale inflows is low in the near future in Moody's assessment, raising downside risks.
INFLATION SHOCK RAISES BORROWING COSTS, EXACERBATING DEBT AFFORDABILITY CHALLENGES, AND SOCIAL RISKS
Already weak debt affordability as measured by interest/revenue is exacerbated by higher domestic borrowing costs amid rising inflation, increasing funding needs and, over time, crowding out spending for social, investment or security purposes.
Egypt's debt affordability as measured by general government interest/revenue Moody's estimates at over 45% and interest/GDP at about 9% in fiscal 2022 is very weak globally, exposing fiscal accounts to tightening borrowing costs. Over the past two months the central bank of Egypt has raised the monetary policy rate by a cumulative 300 basis points in response to surging inflation at 13.1% year over year in April [2], driven by the fallout from pandemic-related supply disruptions, soaring global food and energy prices, and the repercussion of the depreciation of the Egyptian pound by about 14% in March. The already large interest bill and the large gross borrowing requirements at over 30% of GDP characterize Egypt as among the sovereigns most sensitive to tightening funding conditions, especially in the local currency market.
While Moody's projects the central bank's monetary policy actions to keep inflation expectations in check thereby contributing to a stabilization and eventual improvement in debt affordability, over time, the larger interest bill crowds out other spending for social, investment or security purposes. Combined with the negative impact of inflation on living standards - food accounts for more than 30% of the consumption basket -, this points to potentially increasing social risks in Moody's assessment.
RATIONALE FOR AFFIRMING THE B2 RATING
The B2 rating incorporates Egypt's track record of economic resiliency based on strong economic growth projected at 5.5% in fiscal 2022 and 4.5% in fiscal 2023 before reverting to trend growth at 5% thereafter, and on the government's crisis management capacity underpinning its institutions and governance strength.
The track record of improved policy effectiveness supports the government's structural economic reform agenda to enhance export competitiveness, broaden the revenue base, and a shift to targeted income support measures as well as the maintenance of primary surpluses underpinning Moody's expectation of a renewed reduction in the debt/GDP ratio starting fiscal 2023. Despite the larger interest bill, Moody's projects the general government debt ratio to resume its downward trajectory toward 85% of GDP in 2025, after a renewed increase to 93.5% of GDP in fiscal 2022 as a result of the valuation effect from the currency depreciation.
The B2 rating also incorporates the large and dedicated domestic funding base to meet the government's large borrowing requirements, including during times of non-resident outflows, supported by a lengthening maturity profile, a more diversified investor base and the maintenance of market access.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Egypt's ESG Credit Impact Score is highly negative (CIS-4), reflecting high exposure to environmental and social risks respectively. The sovereign's high debt burden, relatively low income levels and moderate governance strength constrain its capacity to respond to environmental and social risks, although remedy strategies are being implemented.
Egypt's highly negative exposure to environmental risks (E-4 issuer profile score) mainly relates to high water risk through the country's dependency on the Nile and the high degree of air pollution in densely populated cities. The Nile's flow has been affected by the decreasing rate of annual rainwater, leading to very high fresh water resource depletion rates which the government seeks to address via the installation of desalination plants and the application of strict rules for the cultivation of water-intensive crops such as rice and sugarcane. As climate change intensifies, Egypt is also among the sovereigns most exposed to rising sea levels, with up to 10%-25% of the population or GDP exposed over the next decades.
Exposure to social risks is high (S-4 issuer profile score), driven by low employment rates that constrain the absorption of the young and expanding labor force, resulting in high youth unemployment rates at over 25% of the labor force, including among graduates. Relatively high poverty rates and gender inequality also contribute to social risks which have been exacerbated by the large economic reform adjustment costs borne by consumers over the past few years. Although the breadth of coverage remains relatively narrow, as part of the government's reform effort, social risks are being mitigated by a more targeted social safety net.
Egypt has a moderately negative governance profile score (G-3 issuer profile), reflecting weak performance on voice and accountability and the perception of relatively few formal checks on the exercise of government power, including from the side of civil society. In recent years, significant progress in the implementation of economic and fiscal reforms denote some improvements in government effectiveness.
GDP per capita (PPP basis, US$): 12,823 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.7% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -7.8% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2020 Actual) (also known as External Balance)
External debt/GDP: 33.9% (fiscal 2020)
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 23 May 2022, a rating committee was called to discuss the rating of the Egypt, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade is unlikely in the near future. Evidence of a renewed build-up in the monetary system's net foreign asset position that is likely to be sustained and a strengthening foreign exchange reserve buffer to meet external debt service payments and commensurate with Egypt's adopted economic model based on an open capital account and relative exchange rate stability would likely lead Moody's to stabilize the outlook. Over time, evidence of a sustained improvement in non-hydrocarbon exports/GDP would also contribute to positive momentum by signaling higher competitiveness while also supporting Egypt's external debt affordability.
Worsening balance of payment dynamics that further erode liquid foreign exchange reserves and threaten external stability would likely prompt a downgrade, as would a persistently negative net foreign asset position in the monetary system. A sustained and material deterioration in already weak debt affordability would also be credit negative. Relatedly, an erosion in policy effectiveness and credibility or rising social and political risk that contributes to raising the cost of government debt and/or eroding competitiveness, would also exert negative pressure on the rating.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL466319 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
• EU Endorsement Status
• UK Endorsement Status
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
REFERENCES/CITATIONS
[1] Liquid foreign exchange reserves defined as gross reserves minus gold minus SDR. Source: Central Bank of Egypt and Haver Analytics.
[2] Source: Central Agency for Public Mobilization and Statistics (CAPMAS) and Haver Analytics.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
