S&P Global Ratings expects Egyptian authorities to 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. 

 

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.

 

Increased exchange rate flexibility, is a key element of the existing $3 billion IMF programme. 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.

 

Debt service

However, S&P notes 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.

 

Meanwhile, the Red Sea crisis will have a minimal impact on rated Qatari entities exposed to oil and gas, according to S&P.

 

"Barring the risk of a regional war, we believe that the impact on rated Qatari and other Middle Eastern entities exposed to oil and gas will be manageable. This is because most of their customers are in Asia," said S&P Global Ratings credit analyst Rawan Oueidat.

 

"Nevertheless, the closure of the Strait of Hormuz remains a risk. Even a partial closure would have a far more significant effect on rated Qatari entities exposed to oil and gas because it is their primary export route," Oueidat added.

 

More traffic diverted

So far, containerships in the Gulf of Aden have seen the sharpest decline compared with other bulker and tanker transit ships. However, more traffic is being diverted. In January 2024, media sources reported that QatarEnergy had stopped sending tankers through the Red Sea, although production continues.

 

Prolonged pauses and disruptions to traffic through the Red Sea could slow the delivery of Qatari liquefied natural gas (LNG) to Europe, as well as Russian and US LNG to Asia. Rerouting around the Cape of Good Hope seems to be the preferred alternative route, but this adds at least 10 days to the journey.

 

Regarding Egypt, 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, S&P expects Egyptian banks' foreign-currency liquidity positions will continue to deteriorate. S&P will monitor the situation, including developments in foreign currency controls.

 

As part of the IMF programme, 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 subsidised lending programmes.--TradeArabia News Service