Fitch Downgrades Egypt to 'B'; Outlook Negative
Fitch Ratings has downgraded Egypt's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'B' from 'B+'. The Outlook is Negative.
A full list of rating actions is detailed below.
KEY RATING DRIVERS
The downgrade of Egypt's IDRs and the Negative Outlook reflect the following key rating drivers and their relative weights:
High
Downgrade, Negative Outlook: In Fitch's view, external financing risk has increased given high external financing requirements, constrained external financing conditions and the sensitivity of Egypt's broader financing plan to investor sentiment. All this comes against a background of high uncertainty on the exchange-rate trajectory, and reduced external liquidity buffers.
We see a risk that a further delayed transition to a flexible exchange rate will further undermine confidence, and, potentially, delay the IMF programme. The rating action also captures a marked deterioration of public debt metrics, including a renewed deterioration in government interest costs/revenue, which, if not reversed, would put medium-term debt sustainability at risk.
External Financing Under Pressure: Uncertainty around Egypt's ability to meet its external financing needs has increased, reflecting still constrained prospects for market access and the lack of market confidence in the Central Bank of Egypt's (CBE) new exchange rate regime, which has held back foreign currency (FC) inflows.
Incomplete Transition to Flexible Exchange Rate: FC shortages resurfaced in February 2023, while the official exchange rate stabilised, following successive devaluations that had left the Egyptian pound against the US dollar about 50% weaker compared with the start of 2022.
In our view, the stabilisation partly reflects the reluctance of market participants to transact in the foreign exchange (FX) market, given high uncertainty around the future exchange rate level, and also interventions by public sector banks, further damaging confidence in the durably flexible exchange rate regime and the value of the currency. Fitch assumes that the exchange rate will depreciate further before stabilising in the financial year ending June 2024.