S&P trimmed Egypt’s credit outlook to stable, bringing the rating agency’s forecast in line with Fitch Ratings, which reaffirmed its stable outlook over the weekend. S&P Global Ratings revised Egypt’s outlook to stable from positive and maintained its B-/B rating — six notches into junk territory — for Egypt’s long- and short-term local and foreign currency debt, it said in a disclosure. The ratings agency pointed to high debt-servicing costs and a still-vulnerable external position amid heightened global market volatility and geopolitical risk.

Fitch Ratings also maintained its stable outlook for the country’s credit rating at B — five notches into junk territory —citing “weak public finances, including exceptionally high debt interest/revenue, sizeable external financing needs and volatile commercial financing flows,” it said in a commentary over the weekend.

REMEMBER- S&P upgraded our outlook from stable to positive in March 2024 shortly following the float of the EGP, citing “significant steps” taken by authorities to address the country’s macroeconomic imbalances as well as FX inflows. Afterwards, it maintained the positive outlook and rating in October. Fitch ratings on the other hand upgraded our credit rating from ‘B-’ to ‘B’ with a stable outlook last November — for the first time since 2019 — citing FX inflows from the USD 35 bn Ras El Hekma agreement, our expanded USD 8 bn IMF program, and the EU’s EUR 7.4 bn aid package, alongside better structural reforms.

What changed: S&P’s revision reflects persistent fiscal and external deficits, elevated borrowing needs, and high debt-sevicing costs — government interest payments are projected to consume 58% of revenues in the fiscal year 2024-2025, declining only gradually to 45% by FY 2027-28 — all of which exacerbated by US President Donald Trump’s sweeping tariffs. Although keeping its assessment the same, Fitch echoed the same concern, projecting that “government debt interest/revenue will peak near 61% in FY26, before falling to 38% in FY29.”

The concern isn’t just fiscal: S&P flagged a potential pullback by foreign portfolio investors amid tightening global financial conditions, warning that “risk-off positions” could pressure the EGP bond market.

ICYMI- Debt markets saw outflows last week after the scope of the Trump tariff war became clear — as some investors opted to lock in gains and move to cash or other less-risky assets in a time of uncertainty.

Still, both agencies acknowledged progress on structural reforms: While the global financial context remains turbulent, S&P noted Egypt has pushed ahead with meaningful policy shifts throughout the previous year, saying “the foreign currency market has largely been driven by market forces, supporting competitiveness and an improvement in economic growth.” Fitch echoed this sentiment, stating that “greater exchange rate flexibility has been maintained since the March 2024 depreciation of the official rate, with no re-emergence of FX backlogs or a significant differential with the parallel market rate.”

The two were in agreement that the 10% US tariff on Egyptian exports is unlikely to cause major disruption: “Egypt’s goods export exposure to the US is relatively low,” S&P said, with exports making up “less than 6% of goods exports and less than 0.5% of GDP” in 2023. Similarly, Fitch pointed out that the country “has relatively limited direct exposure to US tariffs and cuts in US economic aid.” The new tariff could affect a narrow band of Egypt’s exports — including textiles, carpets, iron and steel, vegetables, and glass — but is expected to have a limited macroeconomic impact.

Some think we could even stand to gain from it: Sources we spoke to believe the tariffs could present an unexpected chance for Egypt’s industrial base, particularly in manufacturing, as firms seek to sidestep higher duties by relocating operations to lower-tariff countries like Egypt. We have more on this in last week’s Inside Industry, which you can check out here.

The bigger concern is global contagion: “Secondary effects of tariff barriers on other countries globally, alongside market volatility, will likely have a downward impact on global financing conditions, as well as those in emerging markets like Egypt,” S&P warned. A dip in global energy prices should provide some relief though, given Egypt’s position as a net energy importer.

An upgrade could still be in the cards: S&P said it could raise Egypt’s rating if “net government or external debt positions improve faster than we currently expect,” naming higher FDI, state asset sales, and robust growth as some of the ways the Madbouly government could improve its debt position. Fitch also said it could upgrade our rating if there is “further reduction in external vulnerabilities” and “lower debt issuance costs and fiscal consolidation.”

A downgrade is also very much possible if reform momentum slips: Both agencies warned that any sign the government is backtracking on macroeconomic reforms — especially exchange rate flexibility — or allowing foreign currency shortages to re-emerge could trigger a negative rating action. S&P also flagged debt distress as a risk, noting a downgrade could happen “if the elevated interest costs prompt the government to undertake a debt exchange that we consider to be distressed.” Meanwhile, Fitch flagged “further escalation of regional conflict… with a larger negative spill-over impact on tourism, Suez Canal receipts, investor sentiment,” as potential negative triggers.

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