CAIRO: Egypt is likely to devalue its currency to partially offset the impacts of rising inflation, credit rating agency Moody’s said in a report.
Food price inflation in the North African country has been witnessing an upward trend over the last two years, reaching 22 percent in July 2022.
The ability of monetary policymakers to gradually downgrade the Egyptian pound will depend on the degree and consistency of financial inflows mainly from Gulf Cooperation Council countries, the report added.
Moody’s explained that in order to effectively handle the state’s monetary situation, officials need to fend off the aggressive cycle driven by inflation, net capital outflows, currency depreciation, rising domestic and external borrowing costs, and debt servicing.
“However, this policy is not without risks as the inflexible exchange rate policy could further delay agreement on a new IMF program and restore access to global debt markets,” it said.
Egypt’s credit rating was set at B2 with a negative outlook by Moody’s, suggesting the country’s lack of ability to meet its financial commitments and therefore not of an investment grade.
This followed President Abdel Fattah El-Sisi’s appointment of Hassan Abdullah as the new central bank governor replacing Tarek Amer who recently stepped down.
The agency showed that the leadership change indicated broader policy changes to come in response to the escalating credit risks, a drop in foreign currencies, and the increasing payment risks.
The agency pointed out that the appointment of Abdullah, who established close regional relations during his tenure at the Arab African International Bank, especially with GCC countries, coincides with Egypt’s increasing financial exposure to those nations in light of the large inflows to compensate for the external flows from short-term investments in debt instruments.
According to Moody’s, Egypt’s exposure to the GCC countries exceeded $25.9 billion in liquid foreign exchange reserves at the end of last July.
Egypt seeks to rely on the Gulf countries to increase the value of foreign direct investment as an alternative to temporary funds, by selling stakes in Egyptian companies.