Moody’s announced in a research note that emerging economies with short-term debt maturities and less fiscal capacity to manage rising debt costs are most vulnerable to a tightening of global financial conditions.
The study said that at a sovereign level, Egypt, Bahrain, Pakistan, Lebanon, and Mongolia are particularly at risk, while Sri Lanka and Jordan were heavily hit by the interest rate shock.
In particular, Moody’s ranked Egypt B3 STA, the second among the top 30 sovereigns that are exposed to a risk of premium shock, while Bahrain was ranked B1 NEG, fourth.
Meanwhile, the study revealed that at the regional level, Latin America, the Caribbean, and sub-Saharan Africa are the most exposed via weaker debt affordability.
The study of 125 sovereigns looked at two scenarios: a moderate rise in interest rates, and a sharper and more immediate increase in funding costs, both of which were assumed to last for four years.
Moody’s said that the moderate shock would generally be manageable, with limited impact on sovereigns’ debt affordability and debt burdens other than for those which already exhibit very low fiscal strength, pointing out that a severe shock would pressure a broader set of ratings.
Moody’s explained that the government debt burdens and affordability are set to improve for
advanced economies, but not for emerging and frontier markets.
Previously, the International Monetary Fund (IMF) revealed that 40% of low-income developing countries face “significant debt-related challenges.”
In general, sovereigns with debt of relatively short maturity, weak debt affordability, and/or high debt burdens are most exposed to shifts in financing conditions, according to Moody’s.
“We also find that within the largely low-rated sovereigns most exposed to higher cost of borrowing, debt affordability challenges come hand-in-hand with relatively low income levels,” Moody’s continued.
On the other hand, Amr El-Garhy, Egypt’s minister of finance, said last month that the government is considering relying more on long-term debt instruments represented in bonds with terms of five and seven years instead of focusing on short-term debt instruments, to take advantage of the low returns that provide better options for financing the budget deficit. He also said that the burden of reducing borrowing costs falls on the Central Bank of Egypt (CBE).
He also assured that the ministry is working on a medium-term plan to reduce public debt levels from 107% or108% of GDP in the last fiscal year to 80% by 2020.
For his part, CBE Governor Tarek Amer confirmed days ago that he has no concerns about the level of external debt and its servicing.
“And for those who say the debt became larger, I want to say to them that, on the other hand, the economy has also become larger, external debt is not of any kind of concern, and Egypt has never been late in the payment of external foreign obligations in the most difficult circumstances,” Amer assured.
Meanwhile, Mohamed Abu Basha, director of macroeconomic analysis at EFG Hermes told Daily News Egypt that Egypt’s public debt is considered high, though there are many trends and policies that indicate that the figure will change within the coming years.
He stressed that the percentage of the public debt now represents the past but said what is coming is more important. He pointed out that he expects the public debt to witness, by the end of this fiscal year, a slight decrease to fall under 100%, and this trend will continue, to eventually reach 80% of GDP by the end of 2020.
He also pointed out that this year is expected to witness an initial surplus in the state budget, as the budget deficit is decreasing.
Abou Basha added that he expects the interest rate will also fall within the coming two or three years to about 4-5%.
Finally, he stressed that the Egyptian economy is improving, citing Standard and Poor’s (S&P) changing Egypt’s credit rating on Friday to positive from stable and raising its sovereign credit rating to B from B-.