S&P Global Ratings has affirmed Egypt’s B sovereign credit rating with a stable outlook, despite elevated external risks from covid-19, according to a research note over the weekend, leaving its ratings largely unchanged since April. S&P’s outlook rests on the expectation that “the weakening of external and government debt metrics will be temporary, and gradually improve from 2022, supported by higher GDP and current account receipts (CARs).”

Stable foreign exchange reserves + access to debt markets are enough to keep us relaxed for another year: Egypt’s store of foreign currency and access to debt markets are expected to cover financing needs and upcoming maturities for the coming 12 months, the agency said. Egypt’s foreign reserves have climbed steadily since June after plunging by almost USD 10 bn between March and May thanks to a global covid risk-off that saw investors exit emerging markets, rising to USD 39.22 bn in October from USD 36 bn at the end of May. Sovereign debt issuances, including the USD 5 bn eurobond sale and USD 750 mn green bond offering, as well as external loans such as the USD 8 bn in IMF support, have helped to buoy reserves.

But lower tourism, remittances will bite in 2021 before recovering “significantly” by 2022, S&P says: Government debt metrics are expected to weaken through 2021 as external debt rises and key sources of foreign exchange such as tourism and remittances shrink as a result of covid-19, leading to an expected account deficit of 3.5% in FY2020-2021. With improved global economic conditions anticipated starting 2021, these sources of income are expected to recover significantly by 2022 as receipts rebound. The agency projects external debt to rise to 125% of CARs in 2021, followed by a gradual decline reaching 100% in 2023, supported by higher oil prices and the promotion of non-oil exports.

Egypt enjoys strong medium-term growth prospects: Despite elevated external risks, central bank buffers remain strong even after reserves dipped by USD 7-8 bn earlier this year as the banking sector moved to absorb the impact of capital outflows. Monetary easing following lower inflation will also reduce government financing costs and support private-sector credit growth.

Are government growth projections ambitious? S&P said it expects a government primary surplus of 1% in FY2022-2023 — lower than the government’s projected 2% — which should nonetheless be enough to begin reducing the debt-to-GDP ratio.

The downside: The agency could downgrade Egypt’s rating if the economic fallout from covid-19 is more prolonged than expected and we start to run low on foreign reserves, hampering the issuing of debt and interest payments. A continued high debt-to-GDP ratio caused by the weakening of the EGP or higher borrowing costs could also lead to a lower rating.

The upside: The agency could upgrade Egypt’s rating if the economy’s medium-term growth outperforms its expectations or if economic reforms successfully reduce Egypt’s dependence on external financing.