In the middle of last week, the “Fitch” credit rating agency revised its outlook for Egypt to “negative” (Reuters)

CAIRO – The new measures announced by Egypt regarding adopting a more flexible exchange rate regime and raising the interest rate by 2% – in addition to reaching an agreement with the International Monetary Fund on another economic program – did not bear direct positive results for the Egyptian economy.

More than two weeks after the issuance of decisions to confront the foreign currency shortage crisis, revive the confidence of foreign investors in the country’s economy and restore liquidity in the markets, economists say that the positive effects quickly faded and the negative news continued.

And the Fitch rating agency for Egypt – last Tuesday – modified its outlook for Egypt to “negative” after it was “stable”. Egypt’s credit rating is at “B+” (B+).

What are the reasons for lowering Egypt’s rating?

Fitch stated that the reserves of the Central Bank of Egypt fell to less than $32 billion by October 2022 from $35 billion in March and $40 billion in February of the same year, noting that the reserve coverage is weaker than average and sufficient. 4 months.

The credit rating agency’s report indicated that foreign investments in Egyptian debt instruments fell to about $13 billion by September 2022, from $17 billion in March, and more than $30 billion in 2021.

Some recovery in foreign inflows due to the recent exchange rate devaluation, interest rate hikes and the agreement of a new $3 billion 46-month extended loan facility by the International Monetary Fund remains subject to expectations so far.

And at the end of last May, Moody’s changed the outlook for the Egyptian economy to negative instead of stable, but kept its rating at “B2”, warning that a further decline in foreign reserves with the central bank might push it to Downgrading the country’s rating for the first time since March 2013.

Since the beginning of the year, Egypt has witnessed an outflow of $20 billion in capital, specifically since the US Federal Reserve started raising interest rates, but it has received urgent support of about $12 billion from Gulf countries in the form of deposits and investments, according to Egyptian Prime Minister Mostafa Madbouly.

What does lower outlook mean?

Sherif Othman, founder and president of the investment advisory firm Boise Investments in Washington, says the timing of Fitch’s issuance of the credit rating after Egypt obtained a loan from the International Monetary Fund is inappropriate.

Othman added, in his interview with Al-Jazeera Net, that this classification indicates a weak external economic position, whether with regard to more borrowing or perhaps the ability to pay future obligations, and the decline in the prices of Egypt’s dollar bonds in the global financial markets.

Meanwhile, data from the Central Agency for Public Mobilization and Statistics in Egypt showed – at the end of last week – that annualĀ inflationĀ in cities rose more than expected last October to 16.2%, recording the highest level in 4 years, while the Egyptian Minister of Finance revealed He reported that his country faces a $16 billion external financing gap.

Why are the positive indicators absent?

The delay in positive and rapid reactions to the recent decisions prompted some financial institutions and economists to assert that they are not sufficient to extricate the Egyptian economy from its acute ordeal, in contrast to what happened in the aftermath of the flotation in November 2016, when direct foreign financial flows continued.

This is what the US Bloomberg Agency indicated in a report a few days ago that the wave of good news – in reference to the recent decisions of the Egyptian Central Bank – that caused euphoria in the market quickly faded, as Egyptian bonds began to decline, and the cost of securing the country’s debts against default rose. about payment.

The report went on to say that the promises made by the Egyptian government alone are not sufficient for bond holders, and investors are demanding evidence that the state is taking the necessary strict steps to bridge financing gaps and reduce debt.

In light of the negative indicators, Othman believes that the Central Bank’s recent measures regarding the exchange rate of the local currency and the agreement with the International Monetary Fund on financing – albeit relatively small – are not sufficient to restore matters to normal.

According to the banking expert, what is badly needed to achieve a real breakthrough in the foreign currency is to limit imports to necessities only (medicine, treatment needs, foodstuffs until we can rely on ourselves), and completely stop importing disposable goods.

In order for positive indicators to appear on the ground, Egyptian Finance Minister Mohamed Maait hopes that his country’s government will be able to provide sufficient funds to cover all its needs thanks to the agreement it recently reached with the IMF worth $3 billion, which would open the door to an influx of financing from abroad.

When will the Egyptian bonds rebound?

Todd Schubert, head of fixed income research at the Bank of Singapore, bet the recovery of Egyptian bonds to “improving the global climate for risky assets and a more realistic plan on how the country deals with its financing needs that are not large,” especially in light of the monetary tightening cycle in the United States led by the Federal Reserve that works to weaken Enthusiasm to invest in risky assets, particularly frontier markets such as Egypt.

The participation of the International Monetary Fund in an economic program does not by itself fix any of the problems of external financing, according to the report, as the success of the program depends to a large extent on the implementation of the privatization agenda and foreign direct investment, which investors are still skeptical about due to their previous frustrations.

In turn, the director of the International Center for Development Studies, Mustafa Youssef, attributed the investors’ lack of response to the recent decisions and the decline of Egyptian bonds in the markets to several reasons, on top of which is “the lack of clarity of vision among investors about how the Egyptian government can provide the necessary funding to finance local needs.”

In his interview with Al-Jazeera Net, Youssef confirmed that the classification of the “Fitch” agency may be followed by another rating from other agencies that complicate matters for financial and economic policy makers in Egypt, and slow down the arrival of foreign investors until the exchange rate of the pound stabilizes and the government implements its promises of structural economic reforms, and the investment climate improves internationally. generally.

Fund loan and stimulating investors

Youssef – who is also a researcher in political economy – believes that the absence of positive results from the Fund’s loan and the Central Bank’s decisions, because they came at a lost time and in fatal circumstances, made many investors exit Egyptian debt securities and refrain from entering because of the high risks resulting from this decision in the presence of alternative markets. More stable and attractive like US bonds.

He called for stopping the government’s huge spending, offering real estate assets represented in new cities such as El Alamein and the new administrative capital for sale, offering state companies to the private sector and local investors, and removing the army’s hand from the economy.

Egypt needs $28 billion until the end of 2023 to refinance its maturing debts, pay interest and finance the current account deficit, according to Deutsche Bank research, with an additional $20 billion needed the following year that the current cash reserve of just over $33 billion cannot afford. , which means continuing to resort to debt markets.

Egypt is – according to Moody’s – one of 5 countries threatened with inability to pay its foreign debts, amounting to more than $150 billion.

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