Moody’s has downgraded Egypt’s sovereign credit rating further into junk territory, citing worsening debt affordability and the impact of the FX crunch on our ability to meet our repayments. It’s the second time the ratings agency has taken action on Egypt this year, cutting its rating by one notch to Caa1 from B3 with a stable outlook, indicating “substantial risk.” This is seven rungs into junk territory and four above default.

What they said: “The downgrade reflects the government of Egypt's worsening debt affordability trend and the persistence of foreign currency shortages in the face of increasing external debt service payments over the next two years, amid increasingly constrained policy options to rebalance the economy without exacerbating social risk,” the rating agency wrote.

Remember: We will need to marshal some USD 29.2 bn to meet our debt-service obligations in 2024, according to an Enterprise review of central bank figures out last week. That’s equal to almost a fifth of our total external debt and almost 85% of our USD 34.97 bn stockpile of foreign reserves.

Inflows will come if Egypt perseveres with reforms, says Moody’s: The rating agency expects the Madbouly government will eventually unlock funding from the USD 3 bn IMF assistance program and attract inflows from the Gulf. Progress on the asset sale program and regulatory reforms — such as lifting tax exemptions on some state companies — as well as expected currency flexibility will open the door to further financial support and bolster FX reserves.

FinMin responds: In a statement, Finance Minister Mohamed Maait emphasized the government’s progress on reforms and pledged to do more. He attributed the ongoing economic problems to the covid-19 pandemic and the spillover effects from the war in Ukraine.

This the second time Moody’s has lowered Egypt’s credit rating this year: The rating agency in February cut its rating to B3 from B2, and changed its outlook to stable from negative.

S&P + Fitch reviews coming soon: Fitch earlier this year lowered its rating on Egyptian debt to B, two notches above Moody’s grade, with a negative outlook. S&P Global Ratings is the only of the big three rating agencies not to have downgraded Egypt this year, though it did change its outlook to negative in April. S&P will conduct its next review on 20 October and it’s Fitch’s turn two weeks later on 3 November, according to Reuters.

MARKET REAX-

Egyptian debt was volatile in trading on Friday: Egypt’s USD-denominated bonds plunged in early trading on Friday before paring much of their losses later in the session. Some of the government’s bonds fell as much as 3 cents to lows not seen since May, before rebounding to leave the majority down by just 0.2-0.5 US cents, according to Reuters.

There will be less appetite for Egypt’s FX debt among some investors: The downgrade now puts Egyptian bonds out of reach of some institutional investors such as pension funds, who usually refuse to take on such high risk, according to Bloomberg.

Why the late buying activity? “Egypt was already trading like a CCC credit before the downgrade,” one analyst told the business news information outlet. “This doesn’t change the default probabilities over the next 12 months so investors view it as a buying opportunity.”

Don’t be surprised to see the sell-off continue in the coming days and weeks: “Given the little progress on the IMF program review front, FX pressures and the upcoming elections along with the recent global risk off environment, we believe Egypt sovereign bonds will continue to remain under pressure,” JPMorgan analysts said in a note picked up by Reuters.

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