This report does not constitute a rating action.
DUBAI (S&P Global Ratings) Jan. 25, 2024--Egypt's (B-/Stable/B) already constrained foreign-currency position is suffering from the reduction in traffic through the Suez Canal, resulting from attacks on international shipping in the Red Sea. Royalties from traffic through the Suez Canal contribute nearly 8% to the Egyptian government's revenue and generate a sizeable share of the country's foreign-currency earnings (see chart 1).
Chart 1
The restricted foreign-currency availability in the Egyptian economy puts additional pressure on Egyptian banks' funding profiles. Many banks have further reduced foreign-currency credit card limits. While these limitations do not yet warrant a selective default, we expect Egyptian banks' foreign-currency liquidity positions will continue to deteriorate. We will monitor the situation, including developments in foreign currency controls.
We expect Egyptian authorities will further devalue the Egyptian pound (EGP) from 31 EGP/USD to a level that is more in line with the parallel market rate, which is currently at about 60 EGP/USD. Increased exchange rate flexibility, is a key element of the existing $3 billion IMF program. Subject to exchange rate adjustment, we believe the IMF loan funding could be disbursed, while the loan itself may be extended. We think more clarity on exchange rate policy would benefit trade and economic growth and trigger an increase in remittance inflows.
However, we note that tighter monetary conditions, which are unlikely to ease in the aftermath of a devaluation, have led to a sharp increase in the government's debt service on local-currency debt over the past few months.
As part of the IMF program, the Egyptian government has already implemented key structural reforms, including a law to improve the business environment by ending preferential tax, fees, and custom treatments for the economic and commercial activities of state-owned enterprises, such as military companies. The government has also begun to reduce its dominance, and that of the military, over much of Egypt's productive sectors, while the Central Bank of Egypt has discontinued its subsidized lending programs.
Related Research
- Red Sea Disruptions: Impact On Rated Qatari Entities Exposed To Oil And Gas, Jan. 25, 2024
- CreditWeek: How Will The Red Light In The Red Sea Affect Supply Chains And Inflation?, Jan. 18, 2024
- Emerging Markets Monthly Highlights: Red Sea Tensions Hinder Disinflation, Jan. 18, 2024
- Egypt Downgraded To 'B-' On Mounting Funding Pressures; Outlook Stable, Oct. 20, 2023
| Primary Credit Analyst: | Trevor Cullinan, Dubai + (971)43727113; trevor.cullinan@spglobal.com |
| Secondary Contacts: | Ravi Bhatia, London + 44 20 7176 7113; ravi.bhatia@spglobal.com |
| Regina Argenio, Milan + 39 0272111208; regina.argenio@spglobal.com | |
| Additional Contact: | Sovereign and IPF EMEA; SOVIPF@spglobal.com |
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