Will Egypt default on its debts?

Egypt could default on its debt (Photo by Shutterstock).

Standard and Poor's warned of the possibility of Egypt defaulting on its debt. Ahmed Abdul-Rahman writes about the main issues confronting the country.

Amidst the violent foreign exchange crisis facing the Egyptian government since the first quarter of last year,  Standard & Poor's (S&P) announced that it had lowered its outlook for five banks from stable to negative.

Earlier this year, it also downgraded the credit rating of five Egyptian banks, namely the National Bank of Egypt (NBE), Banque Misr (BM), Banque du Caire (BDC), Commercial International Bank (CIB) and Bank of Alexandria (BA), following the downgrade of the country's credit rating. 

Last November, Fitch Ratings also announced that it had reduced its outlook for the Egyptian economy to negative due to what it described as increasing external weaknesses.This comes after it lowered its outlook on the Egyptian sovereign debt prospects from stable to negative, and warned of the dangers of the inability to meet the country's external financing needs if the economic reforms linked to the International Monetary Fund (IMF) loan programme were not implemented. The agency believes that the banks that have been rated do not bear any sovereign default on debt payments without also failing to fulfill their financial obligations.

Egypt has been witnessing a suffocating crisis in the exchange market since the first quarter of last year, with the announcement of the exit of more than USD20 billion in hot money from the market. This crisis caused a scarcity of the hard currency needed to secure imports, which prompted the Egyptian government to resort to the IMF and agree on new financing worth USD3 billion. During the past year, the Central Bank of Egypt (CBE) intervened in the exchange market and announced the implementation of a managed float policy, which caused huge losses for the Egyptian pound against the dollar.

High inflation also added more pressure to the banking sector, in light of the tendency to raise interest rates since the first quarter of last year. It also happened amid expectations of a continued tightening of monetary policy until inflation subsides and descends from the highest level the country has witnessed in more than five years.

Egyptian Prime Minister Mustafa Madbouly said in statements a few days ago that his country would not fail to pay any of its international commitments. Madbouly indicated that Egypt  intended to raise USD2 billion through the sale of state-owned assets. 

The government programme will commence just before the end of next June.

Reducing the outlook from stable to negative

A few days ago, S&P lowered its outlook for Egypt from stable to negative, but kept its rating at "B/B". In a recent report, the agency indicated that negative expectations reflected the fact that the risks that the policy measures implemented by the Egyptian authorities may not be sufficient to stabilise the exchange rate and attract the foreign currency inflows necessary to meet the sovereign's high external funding needs.

S&P has indicated that it may downgrade the ratings again over the next 12 months if funding support is more limited than expected. Moreover, S&P stressed that taking a negative evaluation action is a step that may also occur in the event of persistent inflationary pressures, which increases the risk of internal unrest.

Standard and Poor's warned of the possibility of Egypt defaulting on its debt. But it also said  that there is the possibility of revising expectations to stable if it is considered that meeting Egypt's needs for financing in foreign currency is likely. S&P also said that the Egyptian authorities' major reforms announced in December 2022 could lead to a steady inflow of foreign currency if they are fully implemented. Its forecasts indicate that the average growth of Egypt's economy in the next three years will reach 4 per cent.