After Moody’s lowered Egypt’s credit rating to a new low and the president of the IMF advised Cairo against delaying another currency devaluation, Egypt’s government bonds recovered from an initial steep decline on Friday.

Moody’s, which has been considering a potential downgrade for months, completed the procedure late on Thursday by lowering it one rung into the Caa1 band of “substantial risk,” which is seven rungs below “junk.”

The rating firm had cited the country’s worsening debt problems amid a bruising economic crisis that has triggered a string of devaluations, record inflation and more of its citizens to seek risky routes out of the country.

The initial market reaction saw some of the government’s international bonds, which are denominated in dollars, fall nearly 3 cents to their lowest levels since May before a rebound started and left most down just 0.2-0.5 cents.

Responding to the Moody’s cut, Egyptian Finance Minister Mohamed Maait said in a statement that the government was undertaking structural reforms to address its economic challenges and taking measures to stimulate investment.

He added that Egypt had contained spending in the financial year that ended in June, despite the knock-on effects from the war in Ukraine that have included driving up prices of key imports like fuel and some food.

The country has repeatedly devalued its currency since last March leaving it at half its former value. But on Thursday, International Monetary Fund (IMF) Director Kristalina Georgieva said in an interview that it will continue to “bleed” reserves unless it does so again.

The IMF agreed a $3 billion bailout a year ago and Georgieva said in the interview with Bloomberg there had been “constructive engagements” with Cairo and that she expected “more systematic work” in the coming weeks.

FINANCING GAP

Analysts at JPMorgan said the timing of Moody’s downgrade had come as a bit of a surprise, given that it was well within a 90-day review period Moody’s had given itself to decide.

There could be more too. Moody’s grade is now two notches below those of S&P Global and Fitch. S&P’s next review though is in two weeks time on Oct 20 followed by Fitch on Nov 3. Both have ‘negative outlooks’ – effectively downgrade warnings – on their ratings.

COVID-19 hammered Egypt’s key tourism industry and this year’s recovery has been offset by the surge in global interest rates which has left its external loans, which quadrupled to over $160 billion in the seven years to 2022, harder to manage.

“Given the little progress on the IMF program review front, FX pressures and the upcoming elections along with the recent global risk off environment, we believe Egypt sovereign bonds will continue to remain under pressure,” JPMorgan’s analysts said.

At least two Egyptian banks suspended use of pound debit cards abroad this week to stem the forex drain, and more are expected to follow suit.

Egypt’s IMF bailout is contingent on letting the currency float and selling state assets. But asset sales have been slow, and leaders are reluctant to devalue the pound, potentially invoking public ire, before the presidential election .

Economists said the downgrade and Georgieva’s comments would make it tougher to attract cash into the country in the short term.

“The delays to the IMF reviews and the rating downgrade raise further concerns over Egypt’s large external financing gap,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, told Reuters.

“Significant and broad-based reforms will be needed to raise investor confidence and capital inflows.”

Some also warned that the downgrade could force some investors to sell the bonds they hold. That could drive up local borrowing costs and amplify the fiscal deficit. Such a move could also damage capital adequacy ratios for local banks.