Fitch ratings announced on friday 1/11/2024 that it has upgraded egypt’s long-term foreign-currency issuer default rating (idr) from b- to b:erm foreign-currency Issuer Default Rating (IDR) from B- to B, with a stable outlook. In related news, Standard and Poor’s Global Ratings has maintained Egypt’s rating at ‘B-/B’ with a positive outlook over the past two weeks.
According to State Information Service Egypt, Fitch attributed this upgrade to an increase in international reserves, which rose from $11.4 billion in March to $44.5 billion, and a recovery in the net foreign asset position, which has nearly balanced out from a deficit of $17.6 billion in January. This improvement was driven by $24 billion in new foreign currency from the Ras El-Hekma deal, which also strengthened Egypt’s support from Gulf Cooperation Council (GCC) partners. Additionally, there has been an estimated increase of nearly $17 billion in non-resident holdings of domestic debt since February.
The remaining $11 billion from the Ras El-H
ekma investment involved converting existing UAE foreign currency deposits at the Central Bank of Egypt (CBE), thereby reducing external debt. In February, Egypt signed its largest FDI deal with the UAE, valued at $35 billion, to develop the coastal area of Ras El-Hekma. This project is expected to draw in $150 billion in investments.
Fitch anticipates that foreign direct investment (FDI) in Egypt will average $16.5 billion over the next two fiscal years, supported by new investments from Saudi Arabia and the Ras El-Hekma project. These inflows should help cover the current account deficit, which widened by 4.2 percentage points in fiscal year (FY) 2024 to reach 5.4 percent of GDP. Fitch projects a reduction in this deficit to 5.2 percent in FY2025 and 4 percent in FY2026, constrained by a partial recovery in gas production and lower Suez Canal revenues.
Fitch projected that revenue from the Suez Canal will gradually recover to around half of the FY2023 level in FY2026, mitigating risks. Egypt is experienci
ng a 70 percent decline in the revenue it once earned from the Suez Canal. Additionally, Fitch estimates that foreign exchange reserves will be sufficient for 4.4 months of current external payments by the end of FY2026, down from 5.0 months at the end of FY2024 but still above the ‘B’ median of 3.8 months.
Fitch asserts that monitoring under the IMF program supports higher exchange rate (FX) flexibility in Egypt. It also emphasized that since the 38 percent depreciation of the official rate in March 2023, there has been no indication of foreign exchange intervention by the CBE, and the parallel market rate has remained stable. According to the CBE, the exchange rate between the US dollar and the Egyptian pound has surpassed EGP 49 for $1 for the first time since August.
Furthermore, interbank foreign exchange volumes have increased approximately tenfold from their stressed levels before currency unification, with no reported backlog in foreign exchange transactions at banks. Despite the recent low FX volat
ility, which may be partially attributed to FX demand management measures, Fitch does not expect significant currency misalignment. However, Fitch asserts that an external shock would significantly challenge the authorities’ commitment to maintaining this flexibility.
According to Fitch, general government debt is projected to decrease to 78.9 percent of gross domestic product (GDP) in FY2026, down from 89.1 percent in FY2024. Fitch also expected that the inflation would decrease to 12.5 percent at the end of FY 2025. Moreover, it anticipated that the GDP growth would rise from 2.4 percent in FY2024 to 4 percent in FY2025, driven by increasing confidence, real income gains, remittances, and FDI, reaching 5.3 percent in FY2026.