Moody’s has cut its outlook on Egypt’s credit rating to negative as tightening financing conditions puts pressure on the country’s ability to make external debt repayments, it said on Thursday. The ratings agency maintained Egypt’s B2 rating but warned that a further drop in foreign reserves could force it to downgrade its score for the first time since March 2013.

The rationale: “The negative outlook reflects the rising downside risks to the sovereign's external shock absorption capacity in light of a significant narrowing in the foreign exchange reserve buffer to meet upcoming external debt service payments,” Moody’s said. A prolonged rise in borrowing costs will heighten liquidity risks and reduce debt affordability, it added.

Moody's competitors S&P and Fitch both maintained their ratings with stable outlooks in April. S&P currently rates Egyptian debt at BB while Fitch has it one notch higher at B+.

Higher rates, lower reserves: Egypt has raised interest rates by 300 bps since March and let the EGP slip against the USD in a bid to keep inflation in check and remain attractive to the carry trade. Some USD 20 bn left the country since the start of Russia’s war in Ukraine. Foreign reserves have fallen almost 10% to USD 37.1 bn since February as the central bank intervened to cover foreign outflows, meet debt repayments, and purchase strategic goods.

Maybe easing the pressure: Recent financial support from the Gulf and the potential for a new IMF program. Saudi Arabia, the UAE and Qatar have committed USD 22 bn in investment and central bank deposits to support Egypt’s external position. At the same time, policymakers are in talks with the Fund for a limited amount of new financing, which could add USD 3-4 bn to the country’s reserve buffers — and see the Madbouly government double-down on its commitment to policy and other reforms.

On the plus side: The B2 rating is supported by the government’s “proactive crisis response and track record of economic and fiscal reform,” Moody’s said. Expectations of strong GDP growth will help Egypt to attract foreign direct investment, while the country’s large domestic funding base will help the government meet its high borrowing requirements, it said.

Privatization strategy gets a thumbs up: Moody's expects the government's privatization strategy — which aims to bring in USD 40 bn in fresh investments over the next four years — to help “bolster Egypt's FX reserve buffer in the future,” though it doesn’t expect “renewed large-scale inflows” in the short term.