Fitch upgrades our credit rating to ‘B’
Fitch Ratings upgraded our credit rating from ‘B-’ to ‘B’ with a stable outlook 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 greater confidence in the durability of our structural reforms, the credit ratings agency said in a statement.
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Our commitment to a flexible exchange rate played a key role: Fitch’s report noted that limited intervention in FX markets since the EGP’s float in March has given the ratings agency “somewhat greater confidence that the more flexible exchange rate policy will prove more durable than in the past.” It also noted the country’s replenished international reserves and a more positive debt outlook as among its reasons for the rating hike.
Government efforts have helped: Fitch notes that government efforts including expanding the tax base, cutting subsidies, and limiting off-budget public investment have all moderately reduced risk to public finances. The report also noted a resilient banking sector as a key source of financing flexibility for the state.
Still, the economy faces key challenges: The ratings agency was less sanguine about the potential impact of further regional conflict, which has already affected revenues through falling Suez Canal receipts. Fitch noted that revenues from the Suez Canal are only expected to recover to around half of the FY 2022-23 level in FY 2025-26. “Social instability” was also noted as a risk factor, with the ratings agency pointing to continued high inflation and structural challenges like youth unemployment as potentially limiting reform.
Fitch still has concerns about our debt burden: Interest costs to general government revenue are projected to remain well above the 13.9% median for ‘B’-rated countries, with Fitch penciling in the country’s interest to revenue cost for FY 2028-29 at around 37%, down from an expected high of 61% in FY 2024-25. The ratings agency expects a similar trend to hold for our debt-to-GDP ratio, anticipating it to fall to 78.9% by FY 2025-26 from 89.1% in FY 2023-24, but remain above the median ‘B’ rating of 56.4%.
The ratings agency also weighed in on the potential renegotiation of our IMF agreement, writing that despite the government’s “newly-stated intent to renegotiate some targets,” it believes that the state “remains broadly committed” to the structural reforms agreed to as part of the agreement.
What’s going to get us our next rating upgrade? Fitch pointed to a narrowing current account deficit, higher FX reserves, continued exchange rate flexibility, and fiscal consolidation as key improvements that might lead to a ratings increase.