The head of the sovereign funds sector for the Middle East and Africa at Fitch Agency told Reuters that the huge cash flows witnessed by Egypt, the devaluation of the currency and the raising of interest rates are not enough to modify the country’s credit rating.
Egypt, which is suffering from a prolonged economic crisis linked to a chronic shortage of foreign currencies, surprised the markets in February with a $35 billion real estate and tourism development deal with ADQ Holding Company, one of Abu Dhabi’s sovereign wealth funds.
Shortly after the deal was completed, the country allowed the exchange rate to fall to more than 50 pounds to the dollar and raised interest rates by 600 basis points, before agreeing on an expanded $8 billion program with the International Monetary Fund.
Toby Ailes, head of the sovereign funds sector for the Middle East and Africa at Fitch Ratings Agency, said that these developments “are already factoring into the rating and its stable outlook.”
The agency lowered Egypt’s rating to (B-) in November, with a stable outlook.
“To think about a positive rating, one of the things we identified was reducing external vulnerabilities,” Ailes explained. “I think that has been achieved in the near term. The question is whether vulnerabilities will re-emerge.”
Fitch is scheduled to review Egypt’s credit rating in May. Ailes believes that it will be too early to determine the course of public finances by this time.
Credit ratings are a major factor in determining countries’ borrowing costs. The stability of the outlook may indicate the possibility of the agency raising Egypt’s credit rating in the near to medium term.
Ailes said that devaluing the pound “will have a very strong impact on remittances,” Egypt’s most important source of foreign exchange, which averaged about $30 billion annually between 2020 and 2022. This may help offset income losses resulting from the war in Gaza.
Ailes added that if the exchange rate is not allowed to move flexibly, and if inflation remains high, the gains of the past few weeks could be quickly eroded as happened after the 2016 devaluation.
“Some suggest there is already flotation, and that would obviously be positive, because it would mean there is an ability to absorb shocks, which didn’t exist before,” Ailes said.
He also pointed out that the debt path in Egypt has become “very harsh,” as the value of interest payments relative to government revenues is approaching 50 percent, and the debt-to-GDP ratio is approaching 100 percent.
Ailes explained that controlling inflation, which exceeded 35 percent in February, may allow interest rates and the cost of debt to be lowered.
Egypt is going through one of the worst economic crises in its history after the annual inflation rate recorded a record level, driven by the decline in the value of the local currency and a shortage of foreign currency in light of the import of the bulk of food.
Also, Egypt’s foreign debts have increased more than three times in the last decade, reaching $164.7 billion.
Recently, the disruption of navigation in the Red Sea due to Yemeni Houthi attacks on ships against the backdrop of the war in the Gaza Strip contributed to the severity of the crisis after the Suez Canal’s revenues declined by between 40 and 50%, which is one of the most prominent sources of foreign exchange in Egypt.
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