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Sunday, 29 January 2023

S&P Global affirms Egypt’s rating on exchange rate flexibility amid IMF, GCC support

S&P Global Ratings has affirmed Egypt’s B credit rating with a stable outlook, saying it expects fresh financial support from the IMF and the GCC will help us meet our external funding needs. The rating agency believes that Egypt will be able to rely on lenders to satisfy its FX needs — sitting at roughly USD 17 bn for FY 2022-2023 — thanks to the Madbouly government’s commitment to reform and the country’s solid growth prospects. The stable outlook also assumes that inflation will progressively subside and that the Central Bank of Egypt will remain committed to maintaining a flexible exchange rate.

FDI is expected to do the heavy lifting: The majority of the country’s foreign currency inflows will come through FDI, according to S&P, which estimates that Egypt will pull in close to USD 10 bn in FDI during the current fiscal year, up from USD 8.9 bn the year before. This is in addition to USD 6 bn in fresh external borrowing. The rating agency breaks our FX financing requirement down to USD 13 bn in current account deficit and USD 4 bn in sovereign debt principal payments.

Injections of more than USD 13.7 bn to cover our external funding gap: The rating agency anticipates that gross government external borrowing will amount to USD 10 bn during FY 2022-2023 with the bulk coming from multilateral and bilateral lenders. By the end of June, we are expected to have secured USD 3.7 bn in net external loans from the international bond market, including Eurobonds. S&P expects our GCC allies to cover the remainder in our external gap. The UAE, Saudi Arabia and Qatar have together pledged more than USD 22 bn to help us weather the implications of the war in Ukraine.

BUT- The rating agency will consider downgrading Egypt’s rating over the next 12 months if we fall short of funding targets or our external position comes under further pressure.

Thumbs up for the float: “The ongoing exchange-rate adjustment suggests that Egypt is committed to implementing the conditionality of the IMF program,” the rating agency writes. Following the most recent depreciation of the EGP against the greenback, it expects “confidence in the currency’s short-term price to improve, and for the private sector, banks and businesses to increase trade in USD.”

Where’s economic growth coming from? Construction and energy sectors will drive growth, alongside IT and communications, wholesale and retail, agriculture, and health. S&P sees the economy growing 4% in the short term.

The current account deficit will narrow by 20% to USD 13 bn in FY 2022-2023, down from USD 17 bn, while remaining unchanged as a share of GDP due to the devaluation of the EGP. The rating agency expects “import prices to moderate, while export volumes and remittances from Egyptians living abroad remain robust.”

The budget deficit will remain high at roughly 7% of GDP over the next three years, the rating agency wrote, raising its forecast by a full percentage point from its last report in October.

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