Fitch Ratings Agency affirmed Egypt's long-term sovereign rating in foreign currencies at "B", with a "stable" outlook, pointing to the steadfastness of foreign reserves and the flexibility of the exchange rate, in contrast to weak public finances, high debt interest burdens, and external financing needs.
The agency said, in its report issued Thursday, that the classification is based on the relatively high growth potential of the Egyptian economy, strong support from bilateral and multilateral partners, and the large size of the economy compared to its counterparts in the “B” category, while it is limited by weak public finances, a high debt interest-to-revenue ratio, large external financing needs, volatility of trade financing flows, high inflation and geopolitical risks.
Fitch indicated that Egypt's total international reserves increased by $5.5 billion during the first eight months of 2026 to $54.4 billion, while the net foreign assets of the Central Bank rose to $19 billion in August, an increase of $5.6 billion.
She said that the flexibility of the exchange rate was tested with the outbreak of war in Iran, as the authorities maintained the free convertibility of the currency, which strengthened the credibility of monetary policy. The conflict caused the exit of more than $6 billion from foreign holdings of government debt, causing the Egyptian pound to fall by more than 14 percent against the dollar, before money flows quickly returned and most of the decline was reversed.
On the other hand, the agency expected the current account deficit to widen to 5.1 percent of GDP in fiscal year 2026, compared to 4.2 percent in the previous fiscal year, driven by the deterioration of the trade balance as a result of the rise in energy import prices, despite the growth of tourism revenues by 10 percent and remittances by 18 percent.
Fitch expects average inflation to rise to 12.3 percent in fiscal year 2027 from 11.6 percent in fiscal year 2026, as a result of the impact of commodity prices and the war in Iran, with inflation resuming its decline in fiscal year 2028 to less than 10 percent.
Debt and public finance
Fitch expected the general government deficit to rise to 5.8 percent of output in fiscal year 2027, from 5.3 percent in fiscal year 2026, with debt service costs continuing to rise despite strong revenues and containment of capital spending.
The agency expected government debt to decline by about 8 percentage points by the end of fiscal year 2028 to 72 percent of output, but it would remain much higher than the “B” category average of 57 percent.
It also expected the ratio of debt interest to revenues to decline to 52 percent in fiscal year 2028 from 63 percent in fiscal year 2026, but it will remain significantly higher than the average of Egypt’s counterparts of 14 percent.
On the other hand, Fitch expected the Egyptian economy to continue to grow, albeit at a slower pace, after GDP growth accelerated to 5.1 percent in fiscal year 2026, and growth was likely to slow to 4.7 percent in fiscal year 2027, with private consumption and investment declining.
The agency said that it does not expect the success of a new program that provides financing to Egypt to replace the two International Monetary Fund programs, the “Extended Fund Facility” agreement and the “Flexibility and Sustainability” program, after their expiration in November 2026, but it expects the continuation of the current policy mix, including positive real interest rates, the primary surplus, and exchange rate flexibility.
She explained that raising the rating may become possible if there is a sustained and noticeable decline in inflation, a decrease in external vulnerabilities, in addition to reducing the costs of issuing debt and achieving financial control that leads to a clear reduction in the ratio of debt interests to revenues and debt to output.
Japanese stocks fell by more than one percent, Thursday, as local investors continued to exit foreign bonds, in a shift that reflects the growing attractiveness of returns inside Japan after many years of financial institutions heading to foreign markets in search of higher profits.
The losses came amid fears of continued monetary tightening in Japan and the United States, escalating geopolitical tensions and rising oil prices, while a strong auction of 30-year Japanese government bonds helped calm the debt market.
Ministry of Finance data showed that Japanese investors sold foreign bonds for a net amount of 969 billion yen ($6.13 billion) during September, for the second month in a row, compared to net sales of 1.16 trillion yen in August.
The operations included the sale of long-term foreign bonds worth 1.43 trillion yen, the largest in six months, in exchange for the purchase of short-term bonds worth about 457 billion yen.
Thus, net sales of foreign bonds since the beginning of the year amounted to about 5.08 trillion yen, which is the highest level for this period since 2022.
These flows indicate a gradual shift in the strategies of Japanese institutions, after rising local interest rates reduced the difference between investment returns inside and outside the country.
Banks lead exits
Japanese banks led the selling of long-term foreign bonds during September, with net sales of 2.49 trillion yen, the largest in seven months. Life insurance companies also sold bonds worth 288.6 billion yen, investment fund management companies worth 200.1 billion yen, while trust accounts bought long-term foreign bonds worth a net 1.2 trillion yen.
Separate data from the Bank of Japan showed that investors sold US bonds for a net amount of 4.74 trillion yen during the first eight months of the year, compared to net purchases of European bonds amounting to 355.85 billion yen.
In Europe, the Japanese bought Italian bonds worth 329.82 billion yen, while they sold French bonds worth 208.59 billion yen and German bonds worth 94.25 billion yen.
The continued return of funds may support the yen, but it may also put pressure on global bond markets, given the large role of Japanese institutions in financing foreign governments.
Bond auction cools yields
In the local market, government bond yields fell after a strong 30-year auction, with the benchmark 10-year bond yield falling by three basis points to 3.075 percent, while the 30-year yield fell by 3.5 basis points to 4.175 percent.
The auction coverage ratio reached 3.88 times, compared to 3.79 times in September, while the difference between the weighted average price and the lowest acceptable price narrowed to 0.16 from 0.28.
Mickey Dean, chief interest strategist at SMBC Nikko Securities, said the result appeared relatively strong despite the decline in returns before the auction.
The 30-year bond yield hit a record level of 4.25 percent on Monday, amid concerns about Japanese public finances and the transmission of pressures from European debt markets.
The two-year bond yield fell to 1.93 percent, the five-year bond yield fell to 2.385 percent, while the twenty-year bond yield fell to 3.945 percent.
Investors are awaiting central bank decisions, with increasing expectations that the Bank of Japan will keep interest rates unchanged in October, before possibly raising them in December.
Nikkei loses 70,000 points
In the stock market, the Nikkei index fell by 1.42 percent to 69,042.11 points, while the broader Topix index fell by 1.51 percent to 4,091.46 points.
Hiroki Taki, a strategist at Resona Holdings, said that the rapid rise in stocks over the past period encouraged investors to take profits, with selling pressure continuing for the second session.
Technology stocks suffered notable losses, as “Rom” semiconductor manufacturing shares fell 5.19 percent, “Soft Bank Group” fell 4.28 percent, and “Tokyo Electron” fell 2.48 percent.
“Sumco” stock recorded the largest relative loss, down 5.73 percent, followed by “Komatsu” by 5.52 percent, and “Kubota” by 5.42 percent.
In contrast, “Trend Micro” shares rose by 3.89 percent, “Nomura Research Institute” by about 3 percent, and “Ricoh” by 2.33 percent.
165 companies declined in the Nikkei index, compared to an increase of 56 companies and four stability.
Fears of rising oil prices increased after the escalation of attacks on shipping traffic in the Gulf and the Strait of Hormuz, while the minutes of the US Federal Reserve showed that most officials expected another increase in interest rates before the end of the year.
These developments put Japanese markets at a delicate stage, as rising domestic yields enhance the attractiveness of government bonds and encourage the repatriation of funds from abroad, but at the same time increase the cost of borrowing and put pressure on stock valuations.
The direction of interest rates, energy prices, and Japanese investment flows will remain decisive factors in determining the course of local and global markets in the coming months.
Primoz Dolink, a policymaker at the European Central Bank, said the bank may have to continue raising interest rates given the many risks that could push inflation higher, but the timing and size of any such step are still too unclear to predict.
Dolink, the governor of the Slovenian Central Bank, added in a press interview that the European Central Bank can also derive some reassurance from the composition of inflation data, as the data shows a limited transmission of the impact of rising energy costs to other goods and services, and also indicates that there is no impact of the “second round” of inflation on wages.
The European Central Bank raised the deposit interest rate twice this year to 2.5 percent, after inflation jumped last month to nearly double its target level of 2 percent. Policymakers are currently examining the data to determine the extent of the need for further monetary tightening to prevent the effects of rising energy costs resulting from the war in Iran from taking hold.
Dolink said, “The continued rise in inflation - as our forecasts for September show - and the failure to resolve conflicts in the Middle East, Ukraine and other regions, strengthen the justification for moving interest rates towards a more restrictive (tighter) range.” But we will determine the timing and size of the increase in each meeting separately, based on the data received.”
Although last month's inflation reading, which amounted to 3.8 percent, was higher than expectations, it was mainly driven by energy prices, a volatile indicator, while the core figures indicated a more comforting trend.
“Core inflation has remained relatively stable, indicating a limited transmission to core inflation components, particularly services,” Dolink explained. “The more stable behavior of core inflation also provides some reassurance that broader inflationary pressures remain under control.”
Risks tend toward higher inflation
However, Dolink noted that risks are skewed towards higher price levels.
He added that energy prices may rise further, and the decline in natural gas storage levels ahead of the winter is a cause for concern, given that any jump in wholesale gas prices is transmitted more quickly to retail prices. Food prices may also rise as a result of a combination of factors, including higher input costs, droughts and the El Niño phenomenon, and the stronger-than-expected economic performance of the Eurozone in turn represents a potential inflationary risk.
It was expected that the sharp rise in energy prices would wipe out most of the bloc's growth gains this year, but the economy showed resilience similar to that recorded during previous crises, as it grew at its fastest pace in four years during the second quarter, exceeding potential growth levels, that is, potential production capacity.
Dolink indicated that this strong performance, which was based mostly on personal consumption and spending on services, is likely to continue, as confirmed by economic survey indicators.
A major risk to growth may be the recent rise in long-term borrowing costs, with Philipp Lane and Isabel Schnabel, members of the European Central Bank's governing council, warning that the jump in yields could dampen the economy more than expected.
Financial analysts are particularly concerned about the high “risk premium” that investors demand to hold French debt, and there is also discussion about the possibility of the European Central Bank intervening in the markets.
In the context of downplaying these expectations, Dolink stressed that monetary policy continues to transmit its effects to the economy efficiently.
“The effects of monetary policy are transmitted fairly uniformly to broader financial conditions across the euro area,” he said. We did not observe any devastating impact of the rise in returns on other sectors of the economy.”
