Egypt's Pound Dives on the Black Market as Moody's Cuts Debt Outlook

Zijia Song and Mirette Magdy
·3 min read

(Bloomberg) -- Egypt’s credit outlook was cut to negative from stable by Moody’s Investors Service while the pound’s weakening on the black market accelerated, in a sign of the country’s worsening economic plight.

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Moody’s affirmed Egypt’s rating of Caa1, or seven notches into junk, according to a statement late Thursday. Even as Egypt holds talks with the International Monetary Fund to increase a $3 billion rescue program, little of which has been disbursed, Moody’s warned it might be insufficient.

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“While a debt restructuring in the near term is not Moody’s current baseline expectation, the risks have increased,” analysts Elisa Parisi-Capone and Matt Robinson said.

That’s “despite an anticipated increase in financial support from the IMF” and the government running a fiscal surplus when debt payment are excluded, they said. They cited “very weak debt metrics and elevated exposure to foreign exchange and interest rates risks.”

Egypt is in the grip of its worst economic crisis in decades at a time when the war between Israel and Hamas next door is adding to the pressures. Now, revenues from Suez Canal — a critical source of foreign currency — are slumping as many ships avoid the waterway to protect themselves from Red Sea attacks from Yemen’s Houthi militants.

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Moody’s estimates interest payments will absorb two-thirds of Egypt’s revenue at the end of this fiscal year, which ends in June.

The pound, meanwhile, fell to 60 per dollar on the black market this week, having been around 50 in early December. The parallel rate’s now around 50% weaker than the official one of 30.9.

That underscores the dire shortage of hard currency in the nation of 105 million people, even as foreign investors reduce bets on a near-term devaluation.

“People are hoarding FX because they want to protect themselves against a weakening pound or because they want to make profit,” said Farouk Soussa, an economist at Goldman Sachs Group Inc. “Either way, it’s a signal that they have little confidence in the pound’s future.”

Some Egyptian banks are having to sharply limit overseas transactions.

JPMorgan Chase & Co., citing problems for investors when it comes to converting pounds to foreign exchange, will soon exclude Egypt from local-currency bond indexes tracked by billions of dollars worth of funds.

The extent of the pound’s depreciation on the black market “points to the potential for even sharper macro rebalancing requirements than projected in Moody’s central scenario,” the rating company said.

It added that a rating downgrade is possible if there are concerns about the government’s ability to service its local currency debt or boost foreign reserves. An upgrade could occur if the government manages to attract inflows of foreign exchange.

Moody’s said it assigns “a high likelihood” of the IMF program being boosted to as much as $10 billion, which would broadly cover what it estimates is Egypt’s external funding gap in the 2024 and 2025 fiscal years.

“Rebuilding confidence will take an improvement in economic policy,” Goldman’s Soussa said.

(Updates with comments starting in third paragraph.)

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