Egypt faces a credit rating downgrade for the first time since 2013... What are the implications?

CAIRO –

The economic crisis that Egypt is going through has reflected on its credit rating after Moody’s changed the future outlook to negative instead of stable, but kept its rating at “B2”, warning that further decline in reserves. The foreign policy of the central bank may push it to downgrade the country’s rating for the first time since March 2013.

The foreign reserves of the Central Bank of Egypt have decreased by 10% to reach $37.1 billion since last February, with the Central Bank’s intervention to compensate for foreign outflows, pay debt service and purchase strategic goods.

Since the beginning of the year, Egypt has witnessed the exit of capital (hot money) worth 20 billion dollars, specifically since the US Federal Reserve began raising interest rates, but it received urgent support by about 12 billion dollars from the Gulf countries in the form of deposits and investments, according to Mostafa Madbouly, the Egyptian Prime Minister.

Higher domestic borrowing costs will exacerbate liquidity risks and debt sustainability challenges (Reuters)

But what does Moody's negative outlook mean?

It means the high risk of a decline in the country's sovereign ability to absorb external shocks in light of the significant decline in foreign exchange reserves to meet the upcoming foreign debt service payments.

Although the external position of the economy continues to be buoyed by the large financial commitments made by the oil-exporting governments of the Gulf Cooperation Council and the prospect of a new IMF program, according to Moody's, the tightening of global financing conditions increases the risk of weaker outflows than the agency currently expects.

However, Moody's noted that further risks include political risks "particularly in the context of a sharp increase in food price inflation, which, if not mitigated, could increase social tensions, according to Moody's assessment, of the importance of social risk to sovereign credit."

The agency stressed that "the high costs of domestic borrowing, if it continues, will exacerbate liquidity risks and debt sustainability challenges, both of which are long-term weaknesses in Egypt's credit file."

Moody's is the first to reduce its outlook for Egypt to negative;

Last April, Fitch and Standard & Poor's (S&P) maintained Egypt's credit rating at "BB" and "B+" (B+), respectively, with a stable outlook. , despite pressures on the balance of payments due to the war in Ukraine.

Government data indicate that Egypt's external debt rose by the end of last year to $145.5 billion, and the total debt and interest payments represent 86% of the state's revenues in the current fiscal year's budget.

According to Moody's, the "B2" rating continues to be backed by the government's proactive response to the crisis and a track record of implementing economic and financial reform over the past six years, and it is likely that Egypt's broad and dedicated domestic funding base will help overcome tight financing conditions.

 The official Egyptian position

The Egyptian government welcomed the report with regard to fixing Egypt's credit rating, but it ignored the other aspect related to changing the future outlook from stable to negative. Deputy Finance Minister Ahmed Kajouk said that the report reflects the presence of a variety of positives, the most important of which are the proactive policies taken by the Egyptian government. In dealing with the repercussions of the current complex crises facing the global economy in general.

Kjok explained, in a statement last Friday, that the report praised the high and strong growth rates achieved, and Egypt's ability to attract more foreign direct investment flows in light of the Egyptian state's decision to expand and activate the exit process from some activities and put up many projects and assets for the private sector.

The price of the Egyptian pound continued to decline against the dollar to its lowest level in more than 5 years, specifically since February 2017, and the purchase price of one dollar in local banks’ transactions, today, Sunday, was 18.58 pounds, and the selling price was 18.63 pounds.

Since last March 21, the Egyptian pound has lost about 19% of its value, which led to an escalation in inflation rates - which recorded 13.1% last April - and prompted the Central Bank to raise interest rates by 3% in two consecutive meetings with the aim of controlling inflation and attracting investments. Foreign instruments of Egyptian debt.

However, after annual inflation rose to 13.1%, interest rates on the Egyptian pound turned negative - when adjusted according to prices - for the first time since 2018, according to the Bloomberg economic website.

Egypt estimates the cost of the direct impact of the Russian-Ukrainian war on its budget at 130 billion pounds annually (about 7.1 billion dollars), according to the Egyptian Prime Minister, who also clarified that the cost of the indirect impact of the Russian-Ukrainian war on Egypt’s budget is estimated at 335 billion pounds annually (about 18.3 billion dollars). ).

The fact of classification B2

International finance and investment consultant, Dr. Alaa El-Sayed, says, "First we have to explain that this (B2) rating is the 15th out of 20 positions in Moody's long-term government credit rating list, which is divided into several groups, and each group has features and indications related to degrees of certainty in ability to repay and levels of risk.

He explained, in statements to Al Jazeera Net, that the ratings of the American Moody's Corporation of grades "B1, B2, B3" (B1, B2, B3) mean that the credit obligations of this country or institution classified in these degrees are uncertain obligations (risk) or It is based on mere guesswork and has a high credit risk.

Alaa El-Sayed believes that the risk of amending the rating to negative will cause an increase in interest on new foreign loans expected for the state and its institutions, and even for Egyptian banks and companies.

Due to the high degree of risk and uncertainty of repayment

Al-Sayed added, "This classification is a deterrent to foreign investments and a disincentive to local investments, and the most dangerous... It is a classification that repels financing agencies."

He pointed out that the risk of amending the rating to negative will cause an increase in interest on new foreign loans expected for the state and its institutions, and even for Egyptian banks and companies.

Because of the high degree of risk and uncertainty of repayment.

The bitter truth - according to the economic expert - is that dropping the rating to negative is the most serious international blow to the Egyptian economy in many years and will have very negative effects that may not be borne by the government nor the people who suffer from the repercussions of stagflation, price tsunami and disguised unemployment.

Debt eats up the budget

The expansion of the Egyptian government in internal and external borrowing led to the acquisition of government debt interests and installments at 54% of the total spending in the new budget for the 2022/2023 fiscal year, which begins early next July.

Meanwhile, a Reuters report said that high interest rates, a weak currency and broader investor warnings from emerging markets indicate that Egypt may pay exorbitant sums to finance an expected deficit of $30 billion in the fiscal year budget that begins next July.

In 2021, Egypt ranked 158th out of 189 countries in debt-to-GDP ratio, and 100th in debt per capita.

In January, the government debt-to-GDP ratio reached 91.6 percent, up from 87.1 percent in 2013.