Fitch Ratings has downgraded Egypt’s sovereign credit rating for the first time since 2013, cutting it one level to B from B+ and maintaining its negative outlook. The downgrade comes on the back of “high external financing requirements, constrained external financing conditions and the sensitivity of Egypt’s broader financing plan to investor sentiment,” the ratings agency said on Friday.

The Big Three are feeling downbeat: Fitch Ratings’ decision comes a few months after a similar move by Moody’s which in February cutEgypt’s rating to B3, and two weeks after S&P Global Ratings downgradedits outlook to negative.

The rationale: Uncertainty about our ability to secure external funding. Limited access to debt markets and weak foreign currency inflows — largely due to a lack of investor confidence in our exchange rate regime — are weighing on the country’s ability to meet its needs for external financing. “We see a risk that a further delayed transition to a flexible exchange rate will further undermine confidence, and, potentially, delay the IMF program,” Fitch wrote, noting that it had detected a “marked deterioration” in the country’s public debt indicators which will “put medium-term debt sustainability at risk” if not reversed.

The FX market is key: Investors are reluctant to participate in the foreign exchange market due to “high uncertainty [regarding] the future exchange rate level [and] interventions by public sector banks,” the report said. The USD-EGP exchange rate has remained unchanged since mid-March following three devaluations that have caused the EGP to more than halve in value against the greenback. Fitch “assumes that the exchange rate will depreciate further before stabilizing in the financial year ending June 2024.”

How much external financing do we need? The government seeks to drum up some USD 10 bn annually in FDI starting in the current fiscal year — in addition to an unspecified amount of portfolio inflows — to cover the current account deficit. Around USD 7.2 bn worth of external government debt will mature in FY 2023-2024 — up from USD 4.3 bn this year — exerting further pressure on our external financing needs, according to Fitch.

Gulf inflows key: “We continue to believe GCC support to Egypt’s economy is strong, and successful divestment deals with Gulf partners would help restore confidence and unlock further investments,” Fitch wrote.

REMEMBER- Egypt’s attempts to sell state assets to Saudi Arabia, the UAE and Qatar have stalled in recent weeks amid uncertainty about both the exchange-rate and progress on economic reform. The three Gulf states last year pledged to provide more than USD 20 bn in investment and funding for Egypt to help shore up the country’s FX reserves following the economic shock triggered by the war in Ukraine.

More from Fitch:

  • Inflation will average 24% this fiscal year before steadily declining to 18% in FY 2023-2024, in part due to a favorable base effect;
  • Debt-to-GDPwill climb to 96.7% this year from 86.6% in FY 2021-2022, before falling to 87.3% next year, partly thanks to negative real interest rates;
  • Economic growth will slow to 4.0% in FY 2022-2023 from 6.6% last year before bouncing back to 4.5% next year;
  • The current account deficit will narrow to 3.3% of GDP (USD 12 bn) this fiscal year and the next, down from 3.5% (USD 16 bn) in FY 2021-2022, thanks largely to rising tourism and Suez Canal revenues.

The news got ink internationally:Bloomberg | AFP | The National | Dow Jones.

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