S&P Global Ratings has become the second rating agency this month to downgrade our sovereign credit rating, announcing on Friday that it had lowered its long-term rating to B- from B on the back of the FX shortage and rising uncertainties about debt sustainability. The rating agency revised its outlook to stable from negative because of the possibility of the government delivering on structural reforms; it also left our short-term sovereign credit rating at B.

We were warned this may be coming: The rating agency changed its outlook to negative in April, warning us that “policy measures implemented by the Egyptian authorities may be insufficient to stabilize the exchange rate and attract foreign currency inflows.”

Moody’s downgraded our credit rating to Caa1 from B3 earlier this month. This is one grade deeper into junk than S&P’s B- rating.

Fitch is next: The rating agency’s review is scheduled to come out on Friday, 3 November.

FinMin reax: The Madbouly government is already working on implementing more structural reforms to address S&P’s concerns,Finance Minister Mohamed Maait said yesterday, highlighting recent moves to eliminate tax exemptions for state companies and progress in the privatization program.

THE RATIONALE-

Slow progress on reforms = less international financing: The IMF has delayed two reviews of our USD 3 bn assistance program after we failed to meet several conditions of the loan, including a commitment to implement a fully flexible exchange rate. S&P also warned that our Gulf allies may not be so generous going forward as they’re beginning to focus more on “greater conditionality and achieving economic returns” for their investments.

And less international financing = less money to service our debts: “We have less confidence that additional financing will be forthcoming in a timely manner to cover all external funding gaps,” S&P said. Egypt will need to marshal some USD 29.2 bn to meet its debt-service obligations in 2024 — that’s equal to almost a fifth of our total external debt and almost 85% of foreign reserves.

DECISION TIME-

What S&P says we should do: The rating agency said it could backtrack on its downgrade provided “Egypt reduces net government debt levels and gross external financing needs, via an acceleration of reforms that support competitiveness, growth, and fiscal outcomes.” S&P added that “under such a scenario, we would expect renewed bilateral and multilateral financial support.”

And what we shouldn’t: S&P warned it “could lower the ratings if the authorities fail to implement the macroeconomic reforms required to reduce Egypt’s economic imbalances and to unlock multilateral and bilateral funding.” The rating agency added that if interest costs rise further and increase the risk of a distressed debt exchange, we could also face another downgrade.

More from S&P:

  • GDP: Economic growth will slow to 3.5% this fiscal year from an estimated 4.0% in FY 2022-23, before inching back up to 3.8% for FY 2024-25.
  • Budget deficit: The budget deficit will widen to 6.8% of GDP this year from an estimated 5.8% the year before. That’s markedly more optimistic than the IMF, which expects a 10.7% deficit this year.
  • Debt: Debt will fall to 89.8% of GDP this year from an estimated 95.2% in FY 2022-23. The ratio is projected to further shrink to 82.3% in FY 2024-25 and 79.4% the year after.

The global press has the story:Bloomberg | Reuters.

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