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Rating Action:

Moody's affirms Egypt's B2 rating, maintains stable outlook

29 Jul 2021

NOTE: On August 17, 2021, the press release was corrected as follows: In the List of Affected Ratings accessible via hyperlink from this press release, the Rating Solicitation value for debt IDs: 830359079 and 830359129 was changed to Unsolicited. Revised release follows.

New York, July 29, 2021 -- 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. The outlook remains 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 affirmation of the B2 ratings and stable outlook reflects Egypt's continued exposure to volatile financing conditions driven by weak debt affordability and high gross borrowing requirements, balanced against improving shock resilience evidenced during the pandemic as a result of the government's track record of economic and fiscal reform implementation. Egypt's broad domestic funding base and renewed build-up of foreign exchange reserves provide a buffer against volatile capital flows and support the government's structural economic reform agenda to improve export competitiveness and broaden the revenue base.

Egypt's local currency (LC) ceiling remains unchanged at Ba2 while the foreign currency (FC) ceiling was raised to Ba3 from B1 previously. The LC ceiling, three notches above the sovereign rating, acknowledges the public sector's large footprint in the economy that stifles private sector development and credit allocation, mitigated by the growing implementation of structural competitiveness reforms. The improvement in the FC ceiling to Ba3, narrowing the gap to the LC ceiling to one notch from two notches previously, reflects the progressive removal of remaining barriers to capital in- and outflows and a more flexible exchange rate both signaling in Moody's view a lower risk of future transfer and convertibility restrictions.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL451666 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 THE B2 RATING AFFIRMATION

VERY WEAK DEBT AFFORDABILITY AND LARGE GROSS FINANCING NEEDS DRIVE EXPOSURE TO DOMESTIC AND EXTERNAL FUNDING SHOCKS

Egypt remains exposed to potential liquidity and external financing shocks as a result of the evolving pandemic and volatile external liquidity conditions. Its debt affordability is very weak and susceptible to a sharp rise in financing costs; its external position remains sensitive to bouts of capital outflows. The renewed build-up of foreign exchange reserves provides a buffer against sharp capital flow reversals, but vulnerabilities persist.

Egypt's debt affordability as measured by interest/revenue at 46% and interest/GDP at 9% in general government terms estimated for fiscal 2021 is among the weakest of sovereigns rated by Moody's and underpins its exposure to potential funding shocks. Although improving from recent peaks, Moody's expects these metrics, and risks associated with such exposure, to remain elevated compared with B-rated peers.

Egypt's exposure to funding shocks is exacerbated by very high annual gross borrowing requirements at about 35% of GDP in fiscal 2021 and 2022. Funding risks are mitigated by the large banking system which represents a reliable domestic funding base for the government, by continued access to international capital markets at favorable terms and by the government's gradual maturity lengthening strategy which aims for an average domestic debt maturity at five years by 2025 from about 3.5 years in fiscal 2021. Nevertheless, annual gross borrowing requirements will remain among the highest of Moody's rated sovereigns for the foreseeable future.

On the external side, the structural narrowing in the current account deficit and renewed build-up of foreign exchange reserves to $36 billion at the end of fiscal 2021 after bottoming out at $32 billion in May 2020 (albeit still below the almost $42 billion in February 2020 before the outbreak of the pandemic) provides a buffer against future outflows, potentially related to a resurgence of the pandemic or to tightening international liquidity conditions. At these levels, Moody's expects the foreign exchange reserve buffer to remain sufficient to fully cover annual external debt service requirements accruing over the next three years.

IMPROVED TRACK RECORD OF GOVERNMENT EFFECTIVENESS SUPPORTS STRUCTURAL ECONOMIC REFORM AGENDA TO BUTTRESS EXPORT COMPETITIVENESS AND FISCAL REVENUE

The track record of improved governance and policy effectiveness supports the government's structural economic reform agenda to improve export competitiveness and broaden the revenue base, underpinning Moody's expectation of a renewed reduction in the debt/GDP ratio once economic growth reverts to trend starting in the 2022 fiscal year.

The government's flexible crisis response has sustained growth during the pandemic despite the sharp contraction in the tourism industry which accounted for about 10% of GDP in 2019, supported by continued public investment and strong remittance inflows. The government also maintained a primary surplus at an estimated 1% of GDP by raising revenue in fiscal 2021, keeping the debt/GDP ratio close to the 90% level in general government terms. Looking forward, Moody's expects the debt/GDP ratio to decline toward 84% of GDP by 2024 supported by continued primary surpluses and a return to economic trend growth of 5.5% starting fiscal 2022.

The government's National Structural Reform Program focuses on business environment reforms in order to incentivize domestic and foreign private sector investment and improve competitiveness in the non-hydrocarbon tradable sector. The progressive removal of structural impediments and a shift to a more inclusive, private sector-led growth model will be a gradual process that will be exposed to long-standing vested interests and the risk of reform reversal.

On the fiscal side, the implementation of the Medium-Term Revenue Strategy aims to raise the tax/GDP ratio by about two percentage points in four years mainly through the broadening the tax base and via revenue administration reforms instead of higher tax rates. Together with a gradual reduction in the interest bill as a result of lengthening price stability credentials and a concomitant reduction in domestic borrowing costs, Moody's expects these reforms to gradually improve debt affordability while allowing for higher spending allocation to health, education and social programs envisioned by the government.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook balances the credit profile's significant shock exposure with the demonstrated resilience to past shocks.

The government's restoration of primary surpluses and renewed build-up of domestic and external liquidity buffers supported by a large domestic funding base should help weather periods of capital outflows, wider risk premia and/or pressure on the exchange rate. However, given weak starting points on debt affordability and outstanding liquidity and external exposure, shifts in global investors' risk appetite will continue to test the resilience of Egypt's credit profile.

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 high exposure to environmental risks, reflected in its E-4 issuer profile score, mainly relates to high water risk through its water dependency on the Nile and the high degree of air pollution in densely populated cities. The Nile 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 in the future, with up to 10%-25% of the population or GDP exposed, thus increasing its sensitivity to environmental risk.

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. As part of the government's reform effort, social risks are being mitigated by a more targeted social safety net, although the breadth of coverage remains relatively narrow.

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$): 12,790 (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: -7.9% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.1% (2020 Actual) (also known as External Balance)

External debt/GDP: 34.1% (2020 Actual)

Economic resiliency: baa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 27 July 2021, 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 materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Evidence of continued fiscal consolidation and marked decline in the debt/GDP and in the interest/revenue ratio, in addition to a continued lengthening of the debt maturity profile would likely lead Moody's to upgrade the rating. Evidence of a sustained improvement in the labor market and in non-hydrocarbon exports would also support an upgrade by signaling higher competitiveness that would facilitate a more rapid improvement in fiscal metrics and further boost Egypt's resilience to shocks.

A renewed bout of capital outflows that significantly erodes the central bank's foreign exchange reserves and threatens external stability could prompt a downgrade; as would a deterioration in already weak debt affordability as measured by interest/revenue. Relatedly, an erosion in policy effectiveness and credibility or rising 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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.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. 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_ARFTL451666 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:

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Endorsement

• 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 ratings tab on the issuer/entity page for the respective issuer on www.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.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

Please see www.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 ratings tab on the issuer/entity page on www.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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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