Egypt – Ratings Affirmed; Outlook Remains Stable

(MENAFN- Capital Intelligence Ltd) Rating Action

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Egypt’s Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) at ‘B’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term (ST) FCR and ST LCR at ‘B’. The Outlook on the ratings remains Stable.

Rating Rationale

The ratings reflect Egypt’s gradually strengthening shock absorption capacity and easing external liquidity strains, underpinned by sustained reform momentum and substantial financial support from the IMF, the World Bank, the European Union, and Gulf partners. These factors have enabled the government to maintain a more flexible exchange rate and increase official reserves to a level that now provides full coverage of short-term external debt on a remaining maturity basis. The ratings remain supported by the moderate level of gross external debt, improving investor sentiment, ongoing efforts to improve data compilation and quantify the informal economy in order to tax it, the resilience of the banking system, as well as the government’s commitment to fiscal reforms aimed at placing central government debt on a downward trajectory.

Notwithstanding the positive developments, the ratings remain constrained by moderately weak external strength, with high regional geopolitical risks weighing on current account performance and on Egypt’s ability to meet its external financing needs primarily from non-debt creating sources. The ratings are further constrained by considerable weaknesses in the public finances, including very high government debt and interest expense, as well as large socioeconomic vulnerabilities such as low GDP per capita and widespread poverty.

Short- to medium-term external financing risks have continued to moderate since our last assessment, supported by sustained reform momentum, the availability of reform-linked external financial assistance, and improving investor sentiment. The government has maintained a flexible exchange rate regime since March 2024 and rationalised subsidies and current spending. As a result, the IMF in March approved the latest USD1.2bn tranche under its 46-month USD8bn Extended Fund Facility (EFF) programme, alongside USD 1.3 billion under its Resilience and Sustainability Facility and EUR 1 bn from the EU. Investor confidence has strengthened, as reflected in the sharp decline in Egypt’s five-year credit default swap spreads to 474 bps in August 2025 from 580 in December 2024 and compared to a peak of 1,885 bps in May 2023.

CI expects the country’s external financing requirements to decline to a still-high 15.0% of GDP in FY26, from 19.6% in FY25. This reflects persistent current account vulnerabilities and upcoming maturities of medium- and long-term public external debt, totalling USD12.0bn in FY26. While CI acknowledges that reform-linked financing of USD6.7bn annually over the same period will help to partially relieve external financing pressures, the government would need to attract average net foreign direct investment (FDI) of around 5% of GDP in FY26 to bridge the remaining external financing gap without relying on external debt issuance or volatile portfolio inflows. Although the government successfully mobilised net FDI inflows of USD6.0bn in H125, CI believes that further FDI growth will be contingent upon sustained reform momentum. In particular, this requires the preservation of a flexible exchange rate regime, accelerated divestment efforts, and enhancements in the business environment.

Gross external debt remains moderate at an expected 166.0% of current account receipts in FY25. Official foreign exchange reserves increased to USD48.7bn in June 2025 (from USD46.4bn a year earlier), providing modest coverage (110.7%) of short-term external debt on a remaining maturity basis.

Fiscal strength remains low and fiscal space limited due to very high levels of interest expense and central government debt. Having declined significantly in FY24 due to one-off factors – in particular windfall revenues from the Ras El Hekma agreement – the central government budget deficit is projected to have increased to 7.5% of GDP in FY25 (from 3.6%). The primary fiscal balance is projected to have remained in surplus at 3.5% of GDP in FY25, reflecting ongoing fiscal consolidation efforts. Looking ahead, the government is expected to continue adjusting administered fuel prices and public service tariffs, while accelerating tax policy reforms to enhance revenue mobilisation. In addition to revenue-enhancing measures, expenditure reduction efforts (including the reduction of subsidies and the rationalisation of public spending) will be critical to improving the public finances. As a result, the budget deficit is projected to decline to approximately 6.4% of GDP in FY27.

Central government debt declined to 85.6% of GDP in FY25, from 90.1% in FY24, thanks in part to the primary fiscal surplus. Interest expense remains very high – estimated to have reached 75.5% of revenues in FY25. Further progress in debt reduction will depend on continued fiscal discipline and a sustained economic recovery. Liquidity risks remain partially mitigated by the willingness of the country’s relatively liquid banks to purchase sovereign debt, in addition to the availability of significant reform-linked external support from international organisations. Efforts to improve the debt structure are ongoing, with the average time to maturity of outstanding debt increasing to around 3.5 years in FY25.

Economic strength remains moderate, with real GDP growth projected to have recovered to around 4.0% in FY25, from 2.4% in FY24, supported by improving domestic demand, decelerating inflation, and a more stable exchange rate. Moving forward, the economy is expected to expand by an average of 4.5% in FY26-27, fuelled by foreign investment and improving net exports as well as domestic demand. We expect CPI inflation to remain above the Central Bank of Egypt’s target of 7% in the short to medium term; however, it is projected to decelerate to an average of 12.5% in FY26 and 10.0% in FY26, assuming exchange rate stability and the absence of significant external shocks.

The Egyptian banking sector continues to weather the challenges posed by the operating environment, with risks declining slightly following the easing of foreign currency shortages and improving economic conditions. However, a significant contingent credit risk comes from the high level of government securities held by most banks (28.0% of total assets in March 2025). The aggregate capital adequacy ratio of banks remained unchanged at 18.3% in March 2025, while NPLs declined to 2.2% of gross loans with good loan-loss reserve coverage maintained. It should be noted, however, that the capital ratios of all Egyptian banks are flattered by the zero-weighting of government securities. Egyptian banks maintained their profitability, with a return on assets of 2% in December 2024

Rating Outlook

The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months. The outlook balances Egypt’s large – albeit declining – external financing needs and weak fiscal strength against the availability of external support as well as continued reform implementation to reduce fiscal and external vulnerabilities.

Rating Dynamics: Upside Scenario

The ratings could be upgraded in a year’s time if Egypt manages to lower its external financing risks and vulnerability to external shocks significantly by building up a higher than currently projected level of foreign exchange reserves, supported by a credible exchange rate regime and stronger than projected FDI from the planned sale of government assets. Durable fiscal reforms that reduce central government debt and interest expense at a faster than projected pace would be additional positive rating drivers.

Rating Dynamics: Downside Scenario

Conversely, the ratings could be lowered in the next 12 months if the government reverses key reforms, jeopardising future disbursements of financial assistance and leading to a reduced capacity to absorb external shocks. The ratings could also be lowered in the event of a deterioration in the public finances and central government debt metrics, or if there is a substantial increase in external financing risks (due, for example, to the materialisation of geopolitical risk factors) and/or a significant decline in the level of foreign exchange reserves.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst; E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst

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