After entering the circle of downgrading the credit rating.. Are the institutions prejudiced against Egypt?

CAIRO – Egypt fears the continuation of downgrading its credit rating from one agency to another, and the resulting negative repercussions on its economy, which is going through difficult times after a series of domestic and global economic crises. This angered the Egyptian government because of the pressures that these reports raise on the economy.

The last of these reports was that Moody 's placed Egypt's long-term sovereign debt rating in foreign and local currencies under review, in preparation for downgrading the rating.

This report – which amounts to sounding the alarm – comes days after Fitch Ratings lowered Egypt's rating for the first time since 2013 by one notch.

What are the implications of lowering Egypt's credit rating?

Moody's evaluation reflected directly and quickly on Egyptian dollar-denominated bonds, and led to an unprecedented decline, according to Bloomberg , which confirmed that Egypt's troubled bonds threaten to downgrade its rating.

According to economists who spoke to Al-Jazeera Net, the downgrade of the credit rating directly affects Egypt's creditworthiness and its ability to repay debts, and reduces its investment attractiveness to attract investors' money, especially in debt instruments such as bonds and treasury bills.

The negative re-evaluation of the rating also increases the cost of insuring its debts, reduces the value of its sovereign bonds due to the high risks, and its inability to issue new bonds, and undermines confidence in the value of the local currency, and the resort to cash reserves.

Economist Ibrahim Nawar told Al-Jazeera Net that all international credit rating institutions now agree on the negative rating of Egypt, and this reflects the lack of confidence in government policy, the high cost of external debt, and exposing the local banking system to severe risks.

What are the recent ratings for Egypt?

  • In May 2023, Fitch Ratings lowered Egypt's rating – for the first time in a decade – by one notch from "B+" (B+) to "B", and revised its outlook from stable to negative.
  • In April 2023, Standard & Poor's downgraded its outlook on Egypt from stable to negative, but maintained its rating at "B".
  • In February 2023, Moody's downgraded – for the first time in 10 years – Egypt's sovereign credit rating to "B3" (B3) from "B2", and revised its outlook to "stable" from "negative".

The "Fitch", "Moody's" and "Standard & Poor's" credit rating agencies are the 3 most famous American credit rating institutions, and they dominate the global ratings market by about 95%.

What are the agencies' justifications for downgrading the rating?

The downgrade of Egypt's credit rating was not surprising to the country's economic decision-makers. Rather, it was preceded by signals and warnings from those same institutions of the possibility of downgrading the rating, which is a dangerous and negative indicator, by adjusting the future outlook to negative.

Nawar adds that all indications have been warning of Egypt falling into a major funding crisis since March 2022, which led to a depreciation of the local currency at that time by at least 15% in an attempt to attract the largest amount of investor money.

In May 2022, Moody's changed Egypt's outlook to negative instead of stable, but kept its rating at "B2", and it is the first to reduce its outlook for Egypt to negative.

The justifications of the rating agencies can be summed up for several reasons, including:

  • High financing risks, tightening of its terms, and increasing financing needs.
  • Slow progress in the state's plan to divest from assets according to the state ownership policy document.
  • The public debt reached high levels and the decline in external liquidity reserves.
  • Ambiguity surrounds the path of exchange rates and the existence of more than one exchange rate.
  • Shortage of foreign currency and decline in foreign exchange inflows.

The Egyptian government reached an agreement with the International Monetary Fund in December 2022 to obtain a financial support package worth $3 billion, which has not yet yielded positive results.

How did the Egyptian government respond?

The Egyptian government defended the economic situation, and blamed it on external causes. Such as the Corona pandemic and the Russian war on Ukraine. Egyptian Finance Minister Mohamed Maait said that the Egyptian economy is "standing on its feet" in the face of external shocks.

He expressed his optimism about his country's ability to get out of the crisis, recalling that Egypt has gone through many previous crises, stressing that the country will overcome these global challenges.

Although Egypt praised the reports of international institutions regarding its economic situation on more than one occasion, it described the recent reports as biased against it. Maait told local media, "There is prejudice against Egypt by credit rating agencies."

However, he acknowledged that the Egyptian economy was subjected to great pressures, and attributed all of them to external rather than internal causes, referring to the two crises of Corona and the Russian-Ukrainian war, noting that the Corona pandemic consumed the gains of the economic reform plan over two years.

Are the agencies prejudiced against Egypt?

This confidence was described by Professor of Economics at the American University of Auckland, Mustafa Shaheen, as "excessive and misplaced confidence, and it was preceded by similar and repeated statements after every crisis, but it did not result in any improvement in the situation of the economy, but rather makes the situation more difficult."

He added – in his speech to Al-Jazeera Net – that "the minister should stay away from grandiloquent statements and cosmetic numbers, as there are deceptive secondary numbers, and there are disastrous basic numbers that pushed the rating agencies towards a consensus on the existence of difficulties and challenges that Egypt may not be able to overcome except at a high cost."

Shaheen called on the Egyptian government to correct its fiscal and monetary policy and correct the course of spending priorities, because there is a great contradiction between all of the above, and it has no choice but to print money or continue to borrow at a higher cost, and then no progress will occur, but things will get worse, and it must From a pause on adjusting economic policies.

What is Egypt's plan to overcome the crisis?

In view of past international reports, the Egyptian government pledged to continue fiscal discipline and achieve financial targets for the year 2022-2023 despite the large and complex external shocks, noting that had it not been for the change in the exchange rate of the pound against the dollar, the debt to GDP would have decreased this year to less than 80% instead of 95%.

The Minister of Finance affirmed that Egypt is continuing to implement an integrated package of reforms, to enhance the safe economic path in the face of external shocks, and that there is a package of financial, monetary and structural measures to deal positively with providing the country's external financing needs, in addition to full commitment to the economic reform program supported by the International Monetary Fund. .

The Egyptian government is counting on meeting the financing needs – according to the minister's statement – as indicated by the "Fitch" agency, through:

  • Increase Egyptian exports of natural gas.
  • An increase in the proceeds of non-oil exports.
  • recovery of the tourism sector.
  • Increase the revenues of the Suez Canal.

He pointed to an increase in the balance of foreign reserves, to reach $34.5 billion by the end of April 2023.

What are the new financial burdens?

Egypt faces the burden of increasing its expenditures by 34% in the new fiscal year 2023-2024 to 2.990 trillion pounds. It also expects interest on its debts to rise to 1.120 trillion pounds, an increase of 44.5% over the budget for the current fiscal year (the dollar equals 30.9 pounds).

The value of domestic and foreign public debt interests that must be paid during the next year amounts to 1120 billion pounds, and the value of the installments that must be paid from the domestic and external public debt for the same year is 1316 billion pounds.

The total public debt increased during the next fiscal year to 2436 billion pounds, or about 79 billion dollars, compared to 1741 billion pounds, or about 56 billion dollars, during the current fiscal year, an increase of 40%.

Debt interest payments are expected to exceed 54% of total government revenue in the next fiscal year 2023-2024, according to Fitch Ratings, one of the highest debt service ratios among countries in the agency's ratings.

While Fitch expects the Egyptian government's general debt to increase to 96.7% of GDP in fiscal year 2023, compared to 86.6% in the last fiscal year, the Egyptian Minister of Finance expects it to reach 95% of GDP in the new budget. Because of the high rate of inflation, which led to an increase in the cost of debt servicing.

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