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RIYADH: Global credit rating agency Moody’s has affirmed Egypt’s Caa1 long-term foreign and local currency rating with a positive outlook, citing improved debt service prospects.

A report from the organization said the move was driven by the country’s stronger foreign exchange reserves and lower borrowing costs following the currency’s devaluation and flotation.

Moody’s awards a Caa1 rating to countries with poor quality and very high credit risks, but the positive outlook reflects the measures taken by the government to control inflation and interest rates.

According to the agency, some factors negatively affecting the credit profile include Egypt’s high, albeit declining debt ratio, very weak debt affordability compared to peers, and persistently large domestic and external financing needs. 

Egypt’s credit rating is much lower than that of its Middle East and North African neighbors, such as Saudi Arabia, which was ranked Aa3 with a stable outlook in November, and the UAE, which was rated Aa2 in the same month. 

Explaining its decision regarding Egypt, the Moody's report said: “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. This should allow policy rates to decline, bringing further relief on the cost of debt, while maintaining an environment favorable to steady foreign-currency inflows.” 

It added: “However, credit vulnerabilities reflected in the Caa1 ratings continue to pose risk to Egypt achieving durable improvements in fiscal and external positions.” 

According to Moody’s, some of the additional factors that played a crucial role in maintaining the positive outlook include the implementation of measures by the central bank to tighten the money supply as outlined in the International Monetary Fund program parameters. 

Some of those measures include suppression and repayment of direct central bank loans to public entities and a tightening in reserve money growth. 

The positive outlook also reflects prospects of an improvement in foreign direct investments in the country. 

“Significant foreign direct investment inflows and future project development commitments, together with the shift to a market-based exchange rate regime, have boosted capital inflows and replenished Egypt’s liquid foreign exchange reserve buffers to $36 billion in January 2025,” said Moody’s. 

In December, the IMF announced that it reached an agreement with Egyptian authorities, allowing the North African nation to access about $1.2 billion to strengthen its troubled finances. 

The IMF added that the funding access is subject to executive board approval. 

The high inflation rate and low revenue from the Suez Canal have drastically affected Egypt’s economy over the last few months. 

Speaking at the Rome MED — Mediterranean Dialogues conference in November, Egypt’s Minister of Foreign Affairs Badr Abdelatty said that the country had incurred losses amounting to $8 billion due to a significant drop in the Suez Canal revenues. 

The US-based agency added that the constraints faced by Egypt’s economy could raise its susceptibility to capital outflows in times of external shocks. 

“This vulnerability is further compounded by ongoing risks to fiscal consolidation and sustained improvements in debt and debt affordability, taking into account large contingent liabilities in the public sector and very limited fiscal room to meet social spending needs while maintaining primary surpluses,” the report added. 

Moody’s also highlighted some possible scenarios that could lead to an upgrade of the country’s ratings, including the prospect of a significant and durable improvement in debt affordability through a sustained increase in revenue. 

The analysis added that sustained foreign direct investment inflows in the country could also boost confidence in Egypt’s growth prospects and macroeconomic rebalancing potential, supporting a higher rating.

Regarding the factors that could lead to a downgrade, Moody’s said: “A rising likelihood of renewed capital outflows or diminished inflows which reduce the prospect of a durable improvement in Egypt’s macroeconomic and external position would be credit negative.”