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Rating action

Scope Ratings GmbH (Scope) has today affirmed Egypt’s long-term issuer and senior unsecured debt ratings at B- in local and foreign currency and maintained the Negative Outlook. The short-term issuer ratings were affirmed at S-4 in both local and foreign currency with a Stable Outlook.

Summary and Outlook

The affirmation of long-term ratings with Negative Outlook is underpinned by additional financial assistance from the official sector and robust relations with international partners. The United Arab Emirates announced, through the Abu Dhabi Developmental Holding Company (ADQ), an investment plan of USD 35bn¹, equivalent to about 9% of 2023 GDP, that is expected to ease pressures on the balance of payments and contribute to cover gross financing needs. Moreover, Scope expects the IMF programme to be renegotiated given Egypt’s strategic importance for regional stability, paving the way for new disbursements and a credible policy anchor for the coming years. However, the ratings remain constrained by weakening debt affordability and high external liquidity risk, amid uneven progress on reforms.

The Negative Outlook represents Scope’s view that risks to the ratings are titled to the downside over the next 12 to 18 months. Additional support from the official sector is balanced by large gross financing needs, a significant increase in net interest payments relative to revenues, and a steady rise in general government debt-to-GDP.

The ratings could be downgraded if, individually or collectively: i) significant shortfalls in the execution of the reform agenda underlying the official sector’s financial assistance reduced net international reserves and aggravated foreign currency shortages; and/or ii) a firm upward trajectory in the interest burden and/or public debt-to-GDP undermined debt servicing capacity, for example, due to limited fiscal consolidation and/or lower GDP growth.

Conversely, the Outlook could be revised to Stable if, individually or collectively: i) the successful execution of IMF policy conditionality led to a sustained reduction in external risks, such as higher net international reserves and improved foreign currency liquidity; and/or ii) a sustained fiscal consolidation and/or higher-than-expected GDP growth lowered the interest burden and/or placed the public debt-to-GDP ratio on a firm downward trajectory.

Rating rationale

First driver of the affirmation: additional financial assistance from international partners

Egypt’s B- ratings reflect additional financial assistance pointing to robust relations with multilateral and bilateral partners. The IMF supported programme is expected to be successfully renegotiated given Egypt’s strategic importance for regional stability and large macro-economic imbalances, resulting in part from spillovers from the Israel-Hamas conflict. Scope’s understanding is that the authorities have made significant progress to renegotiate the IMF Extended Fund Facility approved in December 2022², which could include the completion of the first and second reviews as well as the rise of the financing envelope, to more than USD 10bn. Scope’s baseline is that the renegotiated IMF programme will contribute to fund large gross financing needs, at least in the near-term, and further act as a credible policy anchor, possibly until 2026-27. The authorities reiterated their commitment to implement policy conditionalities in a timely manner, which include greater exchange rate flexibility³, while ensuring social spending to protect most vulnerable populations.

Furthermore, large and upfront support from bilateral partners led by the United Arab Emirates is expected to ease pressures on the balance of payments and contribute to cover gross financing needs. A consortium led by ADQ, an Abu Dhabi-based investment and holding company, announced an investment plan of USD 35bn¹, equivalent to about 9% of 2023 GDP. The plan includes i) a USD 24bn acquisition of Ras El-Hekma development rights, which is expected to start in early 2025 and could attract over USD 150bn in investments according to the authorities; and ii) a USD 11bn investment in real estate and other prime projects, resulting from the conversion of deposits made by the United Arab Emirates at the Central Bank of Egypt. According to the authorities, the plan includes a USD 15bn upfront payment followed by a second payment of USD 20bn in two months. More than two thirds of the investment plan consist of new financing commitments (USD 24bn), which is substantial compared to the IMF Extended Fund Facility approved in December 2022 (about USD 3bn).

Second driver of the affirmation: weakening debt affordability, high external liquidity risk

The Negative Outlook on Egypt’s B- ratings captures significant fiscal challenges amid constrained access to debt capital markets. Public gross financing needs are estimated to exceed 40% of GDP by 2028 on average (against more than 35% projected in October) because of higher amortisation and net interest payments, projected at more than 70% of revenues on average. This reflects high government debt (92.7% of GDP in 2023) and challenging funding conditions on local and international capital markets. Depending on official financial assistance and progress on reforms, large financing needs may increase the risk of policy trade-offs between public debt service and recurrent spending such as compensation of employees and/or social expenditures, especially in case of higher inflation (31.2% year-on-year in January 2024, down from 45.0% in 2023). The authorities unveiled a social protection package effective March 1 (EGP 180bn, or about 2% of GDP⁴) that includes an increase in the minimum wage for public sector workers, pensions and tax exemption limit. The headline deficit is projected above 10% of GDP on average by 2028, up from 4.6% in 2023.

Furthermore, external gross financing needs are estimated at USD 22bn in 2024, from USD 17bn in 2023, and USD 19bn in 2025, which is large relative to gross international reserves (USD 35.2bn as of end-January 2024, or around 6 months of imports). Inadequate external buffers and a deeply negative net foreign asset position of the monetary system (around USD 27bn as of end-2023) may increase the risk of policy trade-offs between external debt service and imports of goods and services. Foreign currency shortages remain a key concern, as reflected in arrears accumulated vis a vis foreign oil suppliers and in the gap between official (EGP 31 per USD) and parallel rates (EGP 50-60), although it has been reduced substantially (from EGP 60-70) since ADQ’s investment plan was announced. Still, over the medium-term, foreign currency shortages could be aggravated by regional instability, clouding prospects for Suez Canal revenues, travel receipts and natural gas exports. This increases the risk of the authorities contemplating more uncertain funding strategies such as the issuance of debt instruments under multiple jurisdictions and currencies, including with partial guarantees from the official sector.

Additional rating drivers: resilient economy, robust growth momentum

Egypt’s B- long-term ratings reflect the following credit strength: a resilient economy through the Covid-19 pandemic and subsequent shocks of higher food and energy prices and significant regional instability. Real GDP growth is projected at 3.3% in 2024, down from 4.2% in 2023, and 3.8% in 2025 because of higher policy rates⁵ and the slowdown in megaprojects. Official sector financial assistance anchoring the implementation of reforms could further support domestic economic activity in the longer run.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses key sovereign credit fundamentals, provides a first indicative rating of ‘bb’ for Egypt. Under Scope’s methodology, the indicative rating receives i) no adjustment for the reserve currency, and ii) a two-notch negative adjustment for political risks. As such, the ‘b+’ indicative rating can be adjusted under the Qualitative Scorecard (QS) by up to three notches depending on the size of qualitative credit strengths or weaknesses relative to a peer group of countries.

Scope has identified the following QS relative credit strength for Egypt: i) growth potential and outlook. By contrast, the following credit weaknesses have been identified relative to peers: i) fiscal policy framework, ii) long-term debt trajectory, iii) debt profile and market access, iv) current account resilience, v) resilience to short-term external shocks, vi) financial imbalances, vii) social factors, and viii) governance factors.

The QS generates a two-notch negative adjustment and indicates B- long-term ratings for Egypt.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG issues in its rating process via the Sovereign Rating Methodology’s standalone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (SQM) and 20% weight in the methodology’s qualitative overlay (QS).

Under environmental-related factors, Egypt is highly vulnerable to climate change. Limited fiscal space and the exploitation of hydrocarbon resources could limit diversification of the energy mix. Yet, the authorities updated the Green Financing Framework following COP27 and launched the National Climate Change Strategy 2050. This underpins Scope’s ‘neutral’ assessment.

Under socio-related factors, Egypt has a low old-age dependency ratio, but a rapidly growing population represents a challenge in terms of labour market integration and youth unemployment. Absent private sector development and more inclusive growth, social challenges are expected to drag on public spending. This underpins Scope’s ‘weak’ assessment.

Under governance-related factors, Egypt has one of the lowest possible scores based on the World Bank’s Worldwide Governance Indicators. Following the re-election of President Abdul Fattah al-Sisi in December 2023, policy trade-offs and reforms required to tackle macro-economic imbalances could aggravate political and/or institutional risks. This supports Scope’s ‘weak’ assessment.

Rating committee
The main points discussed by the rating committee were: i) official sector financial assistance; ii) debt and fiscal trajectories; iii) external vulnerabilities; iv) structural reform momentum; and v) peers.

Rating driver references
1. ADQ-led consortium to invest USD 35 billion in Egypt, February 2024, ADQ
2. End-of-mission Statement on First and Second EFF-Review, February 2024, International Monetary Fund
3. Press Release, October 2022, Central Bank of Egypt
4. Press Release, February 2024, Presidency, Arab Republic of Egypt
5. Press Release, February 2024, Central Bank of Egypt

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model (ex CVS Model)), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months. 

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    NO
With access to internal documents                                  NO
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 31 March 2023. The Credit Ratings/Outlooks were last updated on 15 September 2023. 

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings. 

Conditions of use / exclusion of liability
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