Moody’s downgraded Egypt’s credit rating Tuesday to B3 from B2 due to the country’s “reduced external buffers and shock absorption capacity.” The last time Egypt’s rating was at the B3 level was in 2013.
The ratings agency also changed the country’s outlook to stable from negative and downgraded its foreign-currency senior unsecured ratings to B3. According to Moody’s, Egypt’s economy is undergoing a structural change toward a more export- and private-sector-led growth model under a flexible exchange rate regime.
The North African country’s economy is increasingly vulnerable to fragile global conditions, Moody’s said, adding that since Egypt was given a negative outlook in May 2022, its foreign exchange reserves have declined and foreign exchange liquidity buffers in the monetary system have dwindled.
In December last year, the International Monetary Fund (IMF) said authorities are on the path toward a flexible exchange rate. But while this will support a structural adjustment and help generate sustained non-debt-creating capital inflows to meet increased external debt service payments over the next two years, these measures will ultimately take time to reduce the country's external vulnerability risks tangibly.
Moody’s added that notwithstanding the clear commitment to a fully flexible exchange rate, the government’s capacity to manage the implications for inflation and social stability is yet to be established. Meanwhile, it said adhering to a fully flexible exchange rate will be credit positive for Egypt over the medium term.
The country’s high inflation and domestic borrowing costs are already complicating the shift to a durably flexible exchange rate regime, the ratings agency said, adding that this is being exacerbated by the sharp unwinding of previous real effective exchange rate misalignments.
“In [our] view, this complexity raises questions about the central bank's and government’s capacity to manage the full consequences of the transition,” the ratings firm said.
