Moody’s downgraded Egypt’s credit rating yesterday for the first time since 2013 due to “reduced external buffers and shock absorption capacity.” In its first rating action since last May, the agency said it was lowering its rating to B3 from B2 and changed its outlook to stable from negative.

Why now? FX reserves have declined since the agency cut its outlook to negative in May 2022 and the banking system’s net foreign liability position has increased, heightening vulnerability, the agency says, at a time of uncertainty for the global economy. Liquid reserves have fallen to USD 26.7 bn from USD 29.3 bn since April while net foreign liabilities are now at USD 20 bn, compared to USD 13 bn.

No quick fix: The agency notes that while the renewed privatization momentum injected by the recent IMF agreement will create more sustainable sources of capital inflows, the process of reducing the country’s external vulnerabilities are going to take time. “While the situation may stabilize, Moody's does not expect Egypt's liquidity and external positions to rebound quickly,” it said.

The rationale behind “stable”: Higher domestic borrowing costs, tight conditions in the international capital markets, and rising social spending will be balanced by the government’s strong domestic funding base and good track record of delivering primary budget surpluses. Delivering on the structural reforms in the IMF agreement and boosting exports and FDI is an upside risk in Moody’s forecast.

Exchange-rate switch will be good for the medium term, but: “Adhering to a fully flexible exchange rate will be credit positive for Egypt over the medium term” though this will be complicated by high inflation and rising domestic borrowing costs, the agency said. “This complexity raises questions about the central bank's and government's capacity to manage the full consequences of the transition.”

Watch these for an upgrade: Moody’s will consider upgrading its rating if structural reforms produce a shift towards a sustainable model of FX generation. Rising non-oil exports and strengthening FX reserves fuelled by non-debt creating inflows will be credit positive, as will improving fiscal indicators.

And for a downgrade: Egypt’s rating could be further downgraded if reform commitments fail to materialize or if there is a significant deterioration in the country’s debt/GDP or interest/revenue metrics.

S&P wasn’t quite as downbeat when it issued its latest rating last month: The agency affirmed the country’s B rating with a stable outlook, saying that fresh support from the IMF and the GCC will bolster Egypt’s ability to cover its funding needs.

And Fitch? The third of the big three rating agencies cut its outlook to negative in November due to rising external vulnerabilities and said that further strains could result in a downgrade.