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Rating action

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

Summary and Outlook

The revision of the Outlook to Stable is driven by the successful renegotiation of the IMF Extended Fund Facility (EFF), which reflects robust financial support from international partners and strong commitment from the authorities to implement reforms, among which a flexible exchange rate regime, the tightening of monetary and fiscal policies, and a business environment fostering private sector led growth. Following the USD 35bn investment announced by an Abu Dhabi-based investment and holding company, and subsequent devaluation of the pound, the increase of the EFF from about USD 3bn to USD 8bn will further contribute to the replenishment of international reserves and act as a credible policy anchor by end-2026 to enhance external resilience. In Scope’s opinion, large and upfront financial support, recent policy actions from the Central Bank of Egypt (CBE) and the prospects for further progress on the economic reform agenda mitigate near-term financing pressures. However, the ratings are constrained by weak debt affordability, with a high interest burden relative to revenues, and high government debt.

The Stable Outlook represents Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The ratings/Outlook could be upgraded 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.

Conversely, the ratings/Outlook 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.

Rating rationale

First driver of the outlook change: renegotiation of the IMF programme

On 29 March, the IMF Executive Board approved the completion of the first and second reviews of the Extended Fund Facility (EFF) approved in December 2022^1,2, enabling the immediate disbursement of about USD 820m, and the increase of the programme from about USD 3bn to USD 8bn for the period 2024-26. This alleviates near-term financing pressures and points to the lack of residual financing gap by end-2026 thanks to large and upfront support provided by bilateral and other multilateral partners, among which an Abu Dhabi-based investment and holding company (USD 35bn), the European Union (EUR 7.4bn) and the World Bank (USD 3bn). Cumulative external support is estimated at more than USD 50bn over the period, or about estimated external gross financing needs, improving foreign currency liquidity.

Furthermore, external financial assistance is complemented by the devaluation of the pound conducted on 6 March, enabling the unification of the official and unofficial exchange rate (from EGP 31 to 48 per USD). In Scope’s opinion, the recalibration of the IMF programme and large external support, coupled with policy actions taken by the CBE, are expected to further support the gradual replenishment of gross international reserves (USD 40.4bn as of end-March 2024, or about 7 months of imports, against USD 35.3bn as of end-February). However, strengthening external resilience remains conditional upon timely disbursement of financial support from international partners and progress on the economic reform agenda.

Second driver of the outlook change: strong commitment to reform

The Egyptian authorities reiterated strong commitment to deliver on the economic reform agenda attached to the renegotiated EFF³. This includes a flexible exchange rate regime⁴ – while ensuring social spending to protect most vulnerable populations –, the tightening of monetary and fiscal policies, a business environment fostering private sector led growth and the implementation of the State Ownership Policy. Importantly, the authorities agreed that a flexible exchange rate regime would enhance resilience against external shocks and pave the way for a gradual transition towards inflation targeting. In Scope’s opinion, the sustained implementation of the economic reform agenda over the IMF programme period could structurally lower macroeconomic and external imbalances.

Furthermore, the authorities are committed to enhance transparency in public financial management about public procurement contracts, off-budget public sector investment and payment arrears. Amendment to the Unified Public Finance Law introduced the concept of “general government budget”, a legal ceiling for the "general government debt” and total public investments, strengthening Egypt’s fiscal framework. As part of the 2024-25 draft budget⁵, the government also announced the slowdown of infrastructure spending, including mega projects funded off-budget, and the allocation of half of the privatisation receipts to deleveraging, with the aim to reduce public debt to 80% of GDP by 2027. Nonetheless, uneven progress on reform remains a downside risk.

Additional rating drivers: weak debt affordability, high government debt

Egypt’s B- long-term ratings are anchored by weak debt affordability – with net interest payment accounting for about 70% of revenues on average between 2024 and 2028 – and high government debt – projected at 87% of GDP by 2028. This drives high public gross financing needs, estimated to exceed 40% of GDP on average over the period. Yet, 5-year CDS significantly declined year to date, around 620 basis points. The devaluation of the pound and financial package from international partners support foreign investment in local currency denominated debt.

Furthermore, fiscal challenges are reflected in the draft budget approved by the government for 2024-25⁶. Social expenditures and compensation of employees account for about 30% of state’s spending in the context of persistently high inflation (33.3% year-on-year in March 2024, down from 35.7% in February). The mobilisation of additional domestic revenues is part of the reform agenda but remains contingent on a more dynamic private sector led growth over the coming years.

The government targets a primary surplus of 3.5% of GDP for 2024-25 and a deficit declining to 6% of GDP over the medium-term. However, those targets are ambitious compared to past performance, with a primary surplus of around 1% on average between 2019 and 2023. Scope projects a primary surplus a 2.4% on average by 2028 and a fiscal deficit of around 10% of GDP.

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. IMF Executive Board Completes the First and Second Reviews of Extended Fund Facility Arrangement for Egypt, Approves Augmentation of the Arrangement, March 2024
2. IMF Executive Board Approves 46-months US$3 billion Extended Arrangement for Egypt, December 2022
3. IMF, Egypt: End-of-Mission Statement on First and Second EFF-Review, February 2024
4. IMF Staff and the Egyptian Authorities Reach Staff Level Agreement on the First and Second Reviews under the EFF Arrangement
5. State Information Service, Egypt Approves FY2024/25 Budget
6. President El-Sisi, PM, Finance Minister review draft budget for fiscal year 2024-2025

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 Version 3.0), 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 1 March 2024.

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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