S&P Global Ratings on Friday said it downgraded Egypt to B-/B with a stable outlook. The agency previously had a B/B rating on Egypt, and in April had downgraded its outlook on the nation to negative.

The downgrade reflects recurring delays in the country’s implementation of monetary and structural reforms, S&P said. The agency also said interest spending consumes about 40% of Egypt’s government revenues, calling the high debt servicing costs a potential challenge to debt sustainability.

“The stable outlook balances the risk that the Egyptian authorities may be unable to finance high external debt redemptions or address the country’s foreign currency shortage against the possibility of an acceleration of key monetary and economic reforms that would help bridge Egypt’s large external financing gap,” S&P said.

Egypt’s economic growth is expected to average 4% over the next three years, S&P said, but added the forecast is sensitive to exchange rate and inflation trends, as well any effect on tourism from the Israeli-Hamas conflict.

In the first half of 2023, Fitch Ratings downgraded Egypt’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to ‘B’ from ‘B+’, with the outlook accorded as negative.

In Fitch’s view, the country’s external financing risk has increased given high external financing requirements, constrained external financing conditions and the sensitivity of Egypt’s broader financing plan to investor sentiment.

All this comes against a background of high uncertainty on the exchange-rate trajectory, and reduced external liquidity buffers.

“We see a risk that a further delayed transition to a flexible exchange rate will further undermine confidence, and, potentially, delay the IMF programme.

“The rating action also captures a marked deterioration of public debt metrics, including a renewed deterioration in government interest costs/revenue, which, if not reversed, would put medium-term debt sustainability at risk”, Fitch said in its rating note.

Analysts said uncertainty around Egypt’s ability to meet its external financing needs has increased, reflecting still constrained prospects for market access and the lack of market confidence in the Central Bank of Egypt’s (CBE) new exchange rate regime, which has held back foreign currency (FC) inflows.

Noting an incomplete transition to a flexible exchange rate, foreign currency shortages resurfaced in February 2023, while the official exchange rate stabilised, following successive devaluations that had left the Egyptian pound against the US dollar about 50% weaker compared with the start of 2022.

“In our view, the stabilisation partly reflects the reluctance of market participants to transact in the foreign exchange (FX) market, given high uncertainty around the future exchange rate level, and also interventions by public sector banks, further damaging confidence in the durably flexible exchange rate regime and the value of the currency”.

Fitch assumes that the exchange rate will depreciate further before stabilising in the financial year ending June 2024 as external financing needs remain large.

According to Fitch, the country’s external financing requirement is more challenging in FY24 due to increasing government external debt maturities of around USD7.2 billion, up from USD4.3 billion in FY23, including USD2.1 billion of Eurobond maturities (compared with USD0.8 billion in FY23). However, external liquidity buffers remain weak, after a marked deterioration in 2022.