What does it mean for Moody's to reduce its outlook for Egypt to negative, and what is its impact on the economy?

Moody's lowered its outlook on the Egyptian economy, days after JP Morgan excluded Egypt from its (European) government bond index.

In response to Moody's lowering its outlook on Egypt from "stable" to "negative" and installing the sovereign credit rating at "Caa1" in an indication of more difficult conditions on the horizon, the Egyptian government defended its economic performance.

The impact of the reduction seemed to have a more severe impact on the economic situation, especially since it came days after the US bank JP Morgan decided to exclude Egypt from its index of government bonds in emerging markets, starting from January 31 of this year.

In its first comment, the Ministry of Finance confirmed - in a statement yesterday, Friday - that “the government is working to manage macroeconomic risks, with flexibility to contain successive external shocks, and is dealing with balance and extreme caution with the negative effects resulting from geopolitical tensions affecting economic activity.”

The statement refuted Moody's decision, which "did not take into account the current efforts of the (Egyptian) government when changing the future outlook to negative," noting that "the IPO program enhances Egypt's ability to meet financing needs during the next two years, and contributes to attracting more investment flows, and reducing... In need of external financing.

The Ministry of Finance estimated the value of the state’s exit from a number of economic activities at $3.5 billion within the IPO program, which helps increase foreign exchange flows to cover the needs of the Egyptian economy.

Problems facing the Egyptian economy

The strategic directions document for the Egyptian economy issued by the Council of Ministers, this month, stated that the continuation of the implementation of the public offerings program includes the state’s exit from 35 companies and assets owned by them from the first quarter of 2023 until the first quarter of 2024.

Regarding the four problems that are putting strong pressure on the Egyptian economy, the Ministry of Finance explained that it is working to put debt-to-GDP ratios on a downward path, as they are currently affected by inflation, high interest rates, and exchange rates.

Moody's attributed the downgrading of its outlook for Egypt from "stable" to "negative" to the increasing risks represented by the continued weakness of the country's credit position, amid the difficulty of rebalancing the overall economy and the exchange rate.

The agency fixed Egypt's credit rating at "Caa1", which means that obligations are weak and carry very high credit risks, noting that "the significant increase in interest payments and increasing external pressures have complicated the macroeconomic adjustment process."

This reduction comes three months after Moody's lowered Egypt's credit rating from (B3) to "CAA1", attributing this to the deterioration of the country's ability to bear debt, and setting Egypt's future outlook at "stable."

What does Moody's new decision mean and what is its impact?

Regarding lowering the future outlook to negative, economist Ibrahim Nawar says that it “reflects the slowness in implementing the reforms agreed upon with the International Monetary Fund, the lack of transparency of financial policy, and a warning signal that the credit rating may be downgraded one degree or another, if the current negative climate continues.”

He added, in his speech to Al Jazeera Net, that in credit ratings there are usually expectations for the horizon of creditworthiness, and this horizon may be positive, negative, or stable.

The review usually takes place after several months in light of developments in the credit climate. In the event of a negative expectation, the review is carried out by lowering the rating if the negative factors continue, or raising the creditworthiness score if the government succeeds in eliminating the negative factors.

But what does this mean for the average Egyptian citizen and local and foreign investors?

What might it entail in light of the economic and financial difficulties that Egypt is experiencing?

Nawar explained that the report raises the issue of lack of confidence in economic policy, the increase in the debt burden beyond the economy’s ability to repay, and the high ratio of interest to revenue to about two-thirds, which means that only a third of revenue goes to spending on all other expenses, including support, wages, investment, health, education, and so on.

The Ministry of Finance explained that it is working to put debt-to-GDP ratios on a downward path (Reuters)

The economist expected that other credit rating institutions, such as Fitch and Standard & Poor's, would follow Moody's example in the coming weeks if the IMF does not resolve its position regarding the additional financing requested by Egypt, or if it takes a conservative decision regarding increasing financing at a small amount that does not meet Egypt's needs.

Nawar expressed his belief that it is unlikely that Egypt will receive generous funding from the Gulf states or the European Union before a decision or strong positive signals are issued by the IMF.

He added that although there is an agreement to provide additional financing to Egypt, the purpose of this is to help it implement the measures required by the Fund and not to help it obtain more loans while the policy of exchange rate stagnation and restrictions on private sector activities remains, as She is on it.

Opening the door to speculators

In this context, Professor of Finance Economics at Cairo University, Hassan Al-Sadi, says, “The classification steps depend on the future outlook. If it is positive, it is likely that the credit rating will be raised one degree upon periodic review, and if it is negative, it may be followed by downgrading the rating to a lower degree and a stable future outlook. So we are faced with Possible downgrade of credit rating.

Regarding the impact of such decisions on Egypt, Al-Sadi explained in statements to Al-Jazeera Net that they will limit its ability to borrow from abroad and indicate that the risk of lending to Egypt has risen to a very high degree and will result in Egypt’s exit from other indicators, as happened when it exited the index. JPMorgan for government bonds in emerging markets, which provided an important market for issuing bonds.

Al-Sadi considered such a reduction a negative message to foreign investors.

He expected that global funds would refrain from investing in Egyptian bonds, which had been suffering from reluctance in the first place for about two years, in addition to opening the door for speculators to invest in bonds by tempting them by granting them very high interest rates higher than international markets. Egypt had previously issued such bonds last year. Bonds are 3x ahead of international markets;

This is a huge burden on the Egyptian economy.

He warned of the consequences of such decisions, which amount to a series of negative repercussions, and the one who pays the price for all of this is the economy, which is a state, a government, and a citizen.

Series of downgrading of Egypt's credit rating

In November 2023, Fitch downgraded Egypt's long-term foreign currency credit rating to "B-" from "B", citing increased risks to external financing.

The credit rating agency also revised its outlook on Egypt from “negative” to “stable.”

Last October, the international rating agency Standard & Poor's lowered Egypt's long-term sovereign rating from "B" to "B-negative", indicating increasing financing pressures on the country.

The agency placed Egypt's outlook at "stable," and this downgrade reflects the repeated delays in implementing monetary and structural reforms in the country, among other factors.

Source: Al Jazeera