Egypt's key credit challenges, including weak finances, large financing need, and high borrowing cost, drive exposure to interest rate shocks as well as large domestic funding cost to remain high, Elisa Parisi-Capone, vice president and senior analyst at Moody's Investors Service, told Daily News Egypt. Moody's believes that interest rate cut will be a step towards reducing the borrowing costs, in addition to the anchoring of inflation expectations, especially after the currency flotation, according to Capone. "In our view that will be a key to sustainable borrowing costs," she stated. Debt affordability remains a challenge as it creates exposure to interest rates shocks, Capone stressed. Egypt's large domestic lending base has been a buffer against volatile capital markets, but still the participation of foreign investors in international currency bills remains volatile yet manageable, Capone explained. Egypt's foreign currency share of debt currently stands at 30%, lower than other emerging markets such as Tunisia where it registers at 60% of the debt. "The key for monetary policy is keeping price stability, anchoring inflation, while not stifling the nominal exchange rate adjustments to retain competitiveness," she said. On the sovereign side, Moody's have issued a positive outlook in August 2018, and in a recent report by the credit rating agency, it forecasts GDP growth to reach 5.5% in fiscal year (FY) 2018/19, and 5.8 in FY 2019/20, on the back of tourism recovery and increase in investments and exports. Furthermore, the report indicated that the ongoing economic reforms, such as new investment and bankruptcy legislations and an improved land allocation process, have contributed to Egypt's higher World Economic Forum's competitiveness ranking. Moody's is closely monitoring the sustainability of such improvements, once the initial boost from devaluation fades if there will be some structural changes that will bring the Egyptian economy on a higher growth path before a credit upgrade can take place.
