Fitch Ratings, a leading credit rating agency, is cautious about upgrading Egypt’s credit rating despite the country’s recent economic reforms. While acknowledging positive steps, Fitch emphasizes the need for sustained progress before considering an improvement.
Recent Economic Measures
Egypt has undertaken significant economic measures to address a prolonged currency crisis. These include a major land deal with the United Arab Emirates, devaluation of the Egyptian pound, and increased interest rates. Additionally, the country secured an expanded loan agreement with the International Monetary Fund.
Fitch, however, remains focused on the long-term sustainability of these reforms. The agency downgraded Egypt’s rating to “B-” in November 2023 and expressed concerns about potential future vulnerabilities.
“We need to see a lasting reduction in Egypt’s external weaknesses before considering a credit rating upgrade,” explained Toby Iles, Head of Middle East and Africa Sovereigns for Fitch Ratings. He added that a May 2024 review is likely too early to gauge the full impact of these recent changes.
Credit ratings significantly influence a country’s borrowing costs. A positive outlook from Fitch would suggest a potential credit rating upgrade in the near future, potentially lowering Egypt’s borrowing costs.
Balancing Currency and Inflation
Fitch views the devaluation of the Egyptian pound positively in the short term, but warns of potential long-term issues. While it may help generate foreign exchange through remittances, it could also exacerbate inflation if not managed effectively.
“A freely floating exchange rate would be a positive development,” said Iles. “This flexibility would allow Egypt to absorb external shocks more effectively than in the past.”
Egypt’s debt situation remains a major concern for Fitch. The country’s debt-to-GDP ratio is nearing 100%, and interest payments consume nearly half of government revenue. Lowering inflation could eventually enable reduced interest rates, easing this burden.
Looking Forward
Fitch’s cautious stance reflects the need for long-term economic stability in Egypt. While recent reforms are a positive step, the agency emphasizes the importance of sustained progress to achieve a credit rating upgrade.
Fitch’s upcoming review in May 2024 will be a crucial indicator of Egypt’s economic trajectory and its potential impact on the country’s creditworthiness.
Source: Reuters
