Moody’s Ratings has upheld Egypt’s Caa1 long-term foreign and local currency issuer ratings, maintaining a positive outlook due to progress in external and fiscal rebalancing, according to a recent statement.

The agency also reaffirmed Egypt’s foreign-currency senior unsecured ratings at Caa1 and its foreign-currency senior unsecured MTN program rating at (P)Caa1.

“The positive outlook, in place since March 2024, continues to reflect the prospects for an improvement in Egypt’s debt service burden and external profile,” Moody’s stated. 

The rating agency noted that Egypt’s currency devaluation and flotation have bolstered its foreign exchange reserves, while borrowing costs have begun to decrease.

“Monetary policy credibility and effectiveness is increasing as the central bank maintains a policy stance consistent with inflation targeting and a floating exchange rate regime,” Moody’s added. This approach is expected to drive further reductions in policy rates, easing debt costs while supporting steady foreign-currency inflows.

Egypt’s government is advancing fiscal consolidation efforts, including measures to boost tax revenues, with a target to achieve a primary surplus of 3.5% of GDP.

However, Moody’s cautioned that credit vulnerabilities reflected in the Caa1 ratings continue to threaten Egypt’s ability to achieve sustainable fiscal and external improvements.

The agency pointed to Egypt’s high, albeit declining, debt ratio, weak debt affordability compared to peers, and substantial domestic and external financing requirements as key challenges.

These vulnerabilities, Moody’s warned, could expose Egypt to capital outflows in the event of external shocks, potentially undermining the authorities’ commitment to a floating exchange rate policy. Such risks could lead to renewed external imbalances and a depletion of foreign-currency reserves.

The local-currency ceiling remains at B1, while the foreign-currency ceiling is set at B3.

Moody’s explained that the three-notch gap between the local-currency ceiling and the sovereign rating reflects Egypt’s large and diversified economy but highlights a significant public sector presence that restricts private sector growth.

Meanwhile, the two-notch gap between the foreign-currency and local-currency ceilings accounts for “transfer and convertibility risks given persistently large foreign currency financing needs and risks of capital flight.”