3/8/24, 12:22 AM Moody's changes outlook on Egypt to positive, affirms Caa1 ratings | Rating Action | Moody's

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Moody's changes outlook on Egypt to positive, affirms Caa1

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Rating Action | 10 min read | 07 Mar 2024 Moody's Investors Service

New York, March 07, 2024 -- Moody's Ratings (Moody's) has today changed the outlook on the
Government of Egypt to positive from negative and affirmed the Caa1 long-term foreign and local
currency issuer ratings. Moody's has concurrently affirmed Egypt's foreign-currency senior unsecured
ratings at Caa1, and its foreign-currency senior unsecured MTN program rating at (P)Caa1.

In addition, Moody's has affirmed the backed senior unsecured ratings of the Egyptian Financial
Corporation for Sovereign Taskeek sukuk company at Caa1 and its program rating at (P)Caa1 which are, in
Moody's view, ultimately the obligation of the Government of Egypt. Moody's has concurrently assigned
a positive outlook to the Egyptian Financial Corporation for Sovereign Taskeek sukuk company, mirroring
the positive outlook on the Government of Egypt.

The change in Egypt's outlook to positive reflects significant official and bilateral support announced and
marked policy steps taken in the past week that will, if maintained, support macroeconomic rebalancing.
The very large front-loaded foreign direct investment contribution by the Government of United Arab
Emirates (Aa2 stable) significantly bolsters the economy's foreign exchange reserves to broadly cover
Moody's estimated external financing gap until fiscal 2026 (ending in June 2026). As a result, the
downside risks that prompted the change in outlook to negative in January are significantly reduced. In
addition, the positive outlook captures the marked change in economic policy with a large devaluation of
the currency and increase in interest rates that, if maintained, will help Egypt maintain an upsized IMF
program, reduce the risk of a renewed build-up of external imbalances and strengthen the economy's
shock resilience over time.

The affirmation of the Caa1 rating reflects the Government of Egypt's high debt ratio and very weak debt
affordability compared to peers that increase fiscal accounts' shock exposure and which Moody's
expects will improve only gradually. Moody's expects total interest payments will consume almost 65%
of revenue at the end of fiscal 2024, a ratio that may temporarily deteriorate further in light of the
observed official currency devaluation. The agreed allocation of a large share of divestiture proceeds
directly to the treasury to support debt sustainability will partly mitigate the highly-adverse metrics. The
government's large gross financing needs at over 30% of GDP especially in the local currency market
drive government liquidity risk in light of large T-bill rollovers at higher rates. Meanwhile, the repeated

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reliance on large external support packages since the November 2016 devaluation highlights persistent
Related Entities related to the economy's shock exposure and diminishing reform perseverance observed
vulnerabilities
in previous instances, especially with respect to currency reform.
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The local-currency ceiling is unchanged at B1, and the foreign-currency ceiling at B3. The three notch gap
between the local-currency ceiling and the sovereign rating reflects a large and diversified economy with
a large public sector footprint that generates significant financing requirement that inhibits private sector
development and credit allocation, notwithstanding recent reforms to level the playing field with public
sector entities. The two-notch gap between the foreign currency and local currency ceiling reflects
transfer and convertibility risks given persistent, albeit easing, foreign exchange shortages and
weakening policy effectiveness.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL486939 for

the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each
affected issuer.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE IN OUTLOOK TO POSITIVE

RECORD INVESTMENT BY REGIONAL PARTNERS AND MARKED CHANGE IN ECONOMIC POLICY SUPPORT
GRADUAL MACROECONOMC REBALANCING, IF MAINTAINED

The $35 billion (8.8% of GDP) foreign investment commitment by the Government of United Arab
Emirates (Aa2 stable) announced on 23 February includes $24 billion in new cash transfers over two
months for the acquisition of land development rights, and will broadly double Egypt's foreign exchange
reserves ($26.5 billion at the end of January) within a few weeks. The injection of fresh FX liquidity is
sufficient to help close the external financing gap until fiscal 2026 that Moody's estimates at about $15
billion, in addition to a $7 billion FX backlog that has accumulated since February 2022. The conversion of
$11 billion in UAE deposits at the central bank to foreign investments will also reduce the monetary
system's net foreign liability position by the same amount over the next few weeks.

This fresh capital injection forms the backdrop to the marked shift in economic policy that, if maintained,
will strengthen the economy's macroeconomic rebalancing over time under the umbrella of an enhanced
IMF program. On 6 March, the Central Bank of Egypt (CBE) floated the official exchange rate which
converged to the parallel rate at about EGP51 per USD from EGP30.9 per USD, and hiked the policy rate by
600 basis points to 27.25%, broadly aligning the policy rate with the 91-day T-bill rate. On the same day,
the IMF confirmed staff-level agreement with the Egyptian authorities on a set of comprehensive policies
and reforms needed to complete the first and second reviews under the Extended Fund Facility (EFF)
arrangement, paving the way for an augmentation of the original IMF program from US$3 billion to about
US$8 billion, subject to Board approval.

The CBE's policy rate hike brings monetary policy nearer to neutral after an extended period of negative
real interest rates. The tightening of fiscal policy and slowdown in infrastructure spending agreed with
the IMF should over time reduce inflation and support debt sustainability, while fostering an environment

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that enables private sector activity and restore investor confidence. Meanwhile, the removal of currency
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distortions by shifting to a managed float, and the shift to an inflation targeting regime, if maintained,
should ease FX shortages and promote renewed remittance inflows through official channels, and
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incentivize foreign investment and portfolio inflows in the future.

RATIONALE FOR THE Caa1 RATING AFFIRMATION

The affirmation of the Caa1 rating reflects the Government of Egypt's high debt ratio and very weak debt
affordability compared to peers that increase fiscal accounts' shock exposure and which Moody's
expects will improve only gradually. Moody's expects domestic borrowing costs will consume almost
65% of revenue at the end of fiscal 2024, a ratio that may temporarily deteriorate further in light of the
observed official currency devaluation. The agreed allocation of a large share of divestiture proceeds
directly to the treasury to support debt sustainability will partly mitigate the highly-adverse metrics.

The government's large gross financing needs especially in the local currency market drive government
liquidity risk in light of banks' already large government securities exposures. Meanwhile, the repeated
reliance on large external support packages since the November 2016 devaluation highlights persistent
vulnerabilities related to the economy's shock exposure and diminishing reform perseverance observed
in previous instances, especially with respect to currency reform.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Egypt's ESG Credit Impact Score of CIS-4 reflects high exposure to environmental, social and governance
risks. The sovereign's high debt burden, relatively low income levels and comparatively weak governance
strength constrain its capacity to respond to environmental and social risks, although remedy strategies
are being implemented.

Egypt's exposure to environmental risks reflected in its E-4 issuer profile score mainly relates to high
water risk through its water dependency on the Nile and the high degree of air pollution in densely
populated cities. The Nile flow has been affected by the decreasing rate of annual rainfall, leading to very
high fresh water resource depletion rates which the government seeks to address via the installation of
desalination plants and the application of strict rules for the cultivation of water-intensive crops such as
rice and sugarcane. As climate change intensifies, Egypt is also among the sovereigns most exposed to
rising sea levels in the future, with up to 10%-25% of the population or GDP exposed, thus increasing its
sensitivity to environmental risk.

Exposure to social risks (S-5 issuer profile score) has increased in the wake of the economic fallout from
the Russian invasion of Ukraine, resulting in sharp price increases and an erosion in households'
purchasing power. Low employment rates constrain the absorption of the young and expanding labor
force, resulting in high youth unemployment rates at over 25% of the labor force, including among
graduates. Relatively high poverty rates and gender inequality also contribute to social risks. As part of
the government's reform effort, social risks are being mitigated by a more targeted social safety net and
social protection measures, although the breadth of coverage remains relatively narrow.

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Egypt's governance profile score of G-4 reflects weak performance on voice and accountability and the
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perception of relatively few formal checks on the exercise of government power, including from the side
of civil society. In the second half of the last decade, significant progress in the implementation of fiscal
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reforms denote improvements in fiscal policy effectiveness, albeit constrained by high debt levels and a
large interest bill and after a period of relatively ineffective policy that had led to the build-up of
imbalances. The government has more recently committed to transition to a flexible exchange rate
regime to boost its competitiveness and expand its export base to enhance its external debt carrying
capacity, but high inflation and already high domestic borrowing costs complicate the transition to an
inflation targeting regime and a more flexible exchange rate.

GDP per capita (PPP basis, US$): 16,174 (2022) (also known as Per Capita Income)

Real GDP growth (% change): 6.7% (2022) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 13% (2022)

Gen. Gov. Financial Balance/GDP: -6.1% (2022) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.5% (2022) (also known as External Balance)

External debt/GDP: 32.8% (2022)

Economic resiliency: ba1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 06 March 2024, a rating committee was called to discuss the rating of the Egypt, Government of. The
main points raised during the discussion were: The issuer's economic fundamentals, including its
economic strength, have not materially changed. The issuer's institutions and governance strength, have
not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not
materially changed. The issuer has become less susceptible to event risks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

A sustained shift to a managed float and inflation targeting regime that restores confidence in the local
currency would support a higher rating. This would likely happen in the context of continued significant
external support from official partners in the region and from the IMF that help sustainably replenish the
economy's foreign exchange reserves and ultimately strengthen the economy's shock absorption
capacity. The durable replenishment of commercial banks' net foreign liability position would also be
credit positive. A marked and durable improvement in debt affordability, including via higher revenue
generation, would engender confidence in Egypt's ability to navigate the difficult decisions on
prioritization of government spending, paving the way for higher rating levels.

FACTORS THAT COULD LEAD TO A DOWNGRADE

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Evidence of backtracking on the announced reforms that deter official sector and bilateral partner
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support, undermine confidence and diminish the prospect of a durable improvement in Egypt's
macroeconomic and external position would prompt a return to a stable outlook, as would reduced
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confidence in the prospect of an improvement in Egypt's debt affordability metrics. Persistently weak
debt affordability that undermines confidence in the government's capacity to service its local currency
debt stock would likely lead to a downgrade, as would a renewed build-up in FX shortages as a result of a
larger than expected foreign exchange backlog or incomplete currency reform implementation. Reduced
confidence in the government's ability to reduce the very high interest bill without a debt restructuring
despite the significant foreign currency liquidity injection would warrant a lower rating level.

The principal methodology used in these ratings was Sovereigns published in November 2022 and
available at https://ratings.moodys.com/rmc-documents/395819. Alternatively, please see the Rating
Methodologies page on https://ratings.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if
applicable.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings.
For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited
Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected
Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click
on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL486939 for the List of
Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the
credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections
Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating
Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

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For ratings issued on a program, series, category/class of debt or security this announcement provides
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regulatory disclosures in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant to a program for which the ratings are derived
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exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a
support provider, this announcement provides certain regulatory disclosures in relation to the credit
rating action on the support provider and in relation to each particular credit rating action for securities
that derive their credit ratings from the support provider's credit rating. For provisional ratings, this
announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior to the assignment of the
definitive rating in a manner that would have affected the rating. For further information please see the
issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of
this credit rating action, and whose ratings may change as a result of this credit rating action, the
associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist
for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity,
Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no
amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the
related rating outlook or rating review.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the
Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for
each credit rating.

Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Matt Robinson
Associate Managing Director
Sovereign Risk Group

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JOURNALISTS: 44 20 7772 5456

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Client Service:

Releasing
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Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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Egypt, Government of
Egyptian Fin Co. for Sovereign Taskeek

2 Issuers

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