S&P Global Ratings has cut its outlook on Egypt’s debt to negative, warning that the country risks not being able to meet its external funding needs if it doesn’t deliver on economic reforms tied to its IMF assistance program. The downbeat forecast “reflects risks that the policy measures implemented by the Egyptian authorities may be insufficient to stabilize the exchange rate and attract foreign currency inflows,” the ratings agency said in its latest review on Friday, which held the country’s credit rating at B.

Some USD 37 bn is needed by June 2024: S&P estimates our external financing needs at USD 17 bn for FY 2022-2023 and USD 20 bn for the following year, with USD 26 bn of this required to finance the current account deficit. The ratings agency currently expects these requirements to “largely be met,” with almost USD 10 bn in FDI and the remainder to come from GCC investment, portfolio flows and fresh borrowing. “We assume that any external funding gaps will be covered by additional GCC government support,” S&P wrote.

Delivering on reform is key: There has been “relatively limited” evidence that authorities are implementing the IMF-backed reforms, which is placing further pressure on the EGP and increases the risk that lenders could “potentially delay or do not provide Egypt with the agreed funds,” the ratings agency said. Under its USD 3 bn program with the IMF, Egypt committed to maintaining a flexible exchange rate, reducing the state’s economic footprint via a large-scale privatization program, and improving the transparency of state- and military-owned companies.

Investors are looking for clarity on exchange rate policy + fair competition: Advancing the privatization program “hinges on more clarity from the authorities on exchange rate policy,” S&P wrote, adding that investors may also be concerned about doing business in Egypt if more isn’t done to increase transparency and level the playing field. Negotiations with Saudi Arabia, the UAE and Qatar to unlock the bns of USD of investment pledged last year have stalled in recent weeks amid currency uncertainty and signs that the country’s Gulf allies want to see more reform progress before investing.

S&P expects the EGP to fall further: The ratings agency expects the EGP to decline 53% in FY 2022-2023 and to continue to drop slightly in the following years. The official exchange rate has remained little changed since early March amid a continued shortage of foreign currency, causing the rate in the parallel market to widen and raising speculation that the central bank will have to further devalue the currency. The currency has fallen 39% so far this year, according to our math.

The IMF is also reportedly insisting on reform progress: Bloomberg reported earlier this month that the IMF will not go ahead with the first review of the loan program until authorities begin selling down state assets and transition to a flexible exchange rate. The review was initially scheduled to take place in mid-March.

S&P isn’t the first ratings agency to take negative action on Egypt in recent months: All three of the major ratings agencies have now issued warnings on Egypt’s debt sustainability in recent months, with Moody’s downgrading Egypt’s rating for the first time since 2013 in February and Fitch cutting its outlook to negative in November.

More from S&P:

  • GDP: The economy will grow at an average 4.0% clip over the next three years
  • Budget deficit: The budget deficit will widen from 6.1% to 7.0% of GDP this fiscal year before narrowing to 6.5% by FY 2025-2026.
  • Current account: The current account deficit will narrow to USD 13 bn this year and remain flat through to FY 2025-2026.
  • Debt: The country’s debt-to-GDP ratio will rise from 86.3% to 94.2% this fiscal year before declining to 77.5% by FY 2025-2026.
  • Inflation: Inflation will average 23.0% this year and fall to 18.0% in FY 2023-2024.

THE MARKET REACTS-

Egypt’s foreign-currency debt sold off following the report, with bonds of differing maturities comprising nine of the 10 worst performing emerging-market bonds on Friday, Bloomberg reports. The country’s USD-debt is down almost 9% so far in April, with only Argentina suffering steeper falls during the month, according to data collected by the business outlet. The yield spread between Egypt’s USD bonds and US treasuries has reached a record 1,258 bps, indicating rising concerns among investors about the country’s debt sustainability, according to a JPMorgan index, Bloombergreports.

Remember: Sovereign bonds are said to be trading in distressed territory when their yields are 1k bps higher than US treasuries.

This is weighing on other highly-indebted African nations, say analysts: The performance of high-yielding African sovereign debt is “very highly-correlated to Egypt’s,” Goldman Sachs analysts wrote in a note last week. Yields on Nigerian, Kenyan, Angolan and Senegalese bonds have been rising in parallel with Egypt’s, Bloomberg reports.

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