Egypt’s recent measures including cash injections, currency devaluation, and interest rate hikes have yet to prompt Fitch to revise the country’s credit rating, according to the agency’s head of Middle East and Africa sovereigns speaking to Reuters.
Despite the North African nation’s efforts to address its prolonged economic crisis characterized by chronic foreign currency shortages, Fitch remains cautious. Egypt garnered attention in February with a $35 billion land development deal with Emirati sovereign wealth fund ADQ. It subsequently allowed the Egyptian pound to depreciate beyond 50 against the dollar and increased interest rates by 600 basis points, leading to an expanded $8 billion agreement with the International Monetary Fund.
However, Toby Iles of Fitch Ratings emphasized that these developments were “already sort of baked into the rating and its stable outlook.” Fitch downgraded Egypt to B- in November, maintaining a stable outlook.
Regarding potential positive rating actions, Iles highlighted the importance of reducing external vulnerabilities, an area where Egypt has made progress in the near term. However, the agency remains cautious about the resurgence of vulnerabilities.
Fitch is scheduled to review Egypt’s rating in May, although Iles suggested it might be premature to assess the trajectory of public finances at that time.
Credit ratings significantly influence countries’ borrowing costs. A shift to a positive outlook would indicate the potential for Fitch to upgrade Egypt’s credit rating in the near to medium term.
Iles emphasized the impact of the pound devaluation on remittances, a critical source of Egypt’s foreign exchange. This could offset income losses stemming from potential protracted conflicts, such as the ongoing tensions between Israel and Gaza.
However, Iles cautioned that without allowing the exchange rate to fluctuate and with persistently high inflation, recent gains could diminish, as seen following a devaluation in 2016. He stressed the importance of adopting flexible exchange rate policies to absorb shocks effectively.
Furthermore, Egypt’s debt trajectory is concerning, with interest costs approaching 50% of government revenue and debt-to-GDP nearing 100%. Iles suggested that stabilizing inflation, which exceeded 35% in February, could pave the way for interest rate reductions, subsequently lowering debt costs.
