Moody’s has affirmed Egypt’s credit rating at B2 with a stable outlook that balances the country’s “significant shock exposure” with our track record of successfully weathering volatility, the ratings agency said in its latest review of Egypt’s credit rating on Thursday.

The rationale: The country’s “volatile financing conditions,” due to “very weak” debt affordability and rising gross borrowing requirements, are balanced out by “improving shock resilience” backed by the state’s economic and fiscal reforms, the ratings agency said. Also working in our favor are Egypt's broad funding base, growth of FX reserves and narrowing budget deficit, which provide a shield against future capital outflows, boost export competitiveness and increase state revenues.

FX liquidity is likely to remain a buffer: FX reserves are expected to “remain sufficient to fully cover annual external debt service requirements accruing over the next three years,” Moody’s said. The IMF earlier expected foreign reserves to continue to rise and hit USD 44.1 bn by the end of the current fiscal year, before surpassing pre-pandemic levels in FY2022-2023.

Moody’s expects the Egyptian economy to grow at a 5.5% clip during the current fiscal year, slightly higher than the 5.4% targeted by the government and the IMF’s forecast (pdf) for 5.2% growth.

And debt-to-GDP is expected to fall further: The country's public debt is expected to fall to 84% of GDP in FY2023-2024. Public debt already dropped to 90.6% of GDP in FY2020-2021 and the government expects this trend to continue during the current fiscal year, with debt falling to 89.5% of GDP by the end of June 2022.

The recovery of FX reserves means that Egypt now has a better buffer against large capital outflows, but it remains exposed to liquidity and external financing shocks. Egypt has one of the weakest debt positions in the world when measured by interest / revenue and interest / GDP, while its susceptibility to funding shocks is made worse by its high gross borrowing needs, which now amount to some 35% of GDP. Egypt’s large banking sector mitigates funding risks though, thanks to the Finance Ministry’s shift to longer tenor debt, which has lengthened from 1.3 years before June 2017 to 3.45 years as of June 2021.