Egyptian government bonds rated at 'B2" level by Moody's, but negative outlook remains
Moody's Investors Service has confirmed Egypt’s B2 government bond ratings and maintained the rating outlook at negative.
Today’s announcement concludes the review for possible downgrade which Moody’s had initiated on 21 December 2011 and subsequently extended on 26 April 2012 in order to incorporate the credit implications of Egypt's presidential elections and the government’s ongoing discussions with the International Monetary Fund (IMF).
The key drivers of today’s confirmation of Egypt’s B2 sovereign rating and negative outlook are:
1) Reduced political uncertainty,
2) Stabilisation of Egypt’s external payments position,
3) Progress towards stabilizing government financing and macroeconomic conditions, and
4) The formal request by the new Egyptian government for IMF support.
As part of today’s announcement, Moody’s has also confirmed the following ceilings: the B3 country ceiling for foreign-currency bank deposits, the Ba3 country ceiling for bonds and the Ba1 local-currency bond and deposit ceilings. The short-term country ceiling for foreign-currency bonds remains at Not-Prime (NP). The local-currency bond and deposit ceilings remain unchanged at Ba1.
The main factor behind Moody's decision to confirm Egypt’s government bond rating at its current B2 level is the country’s progress towards a political transition to civilian rule and the reduced political uncertainty and stability further to the election of Mr. Mohamed Morsi as president in June.
These developments have to an appreciable extent calmed the unsettled political conditions and have shored up weak investor confidence that followed the January 2011 revolution, the subsequent overthrow of President Hosni Mubarak’s government and the series of transitional governments, all of which had in turn prompted Moody’s to downgrade Egypt's sovereign rating and to keep it on review for further possible downgrade.
The second factor underlying the rating confirmation is the stabilisation in Egypt's external payments position, with the Central Bank’s net international reserves remaining at around $15 billion since March 2012. Even though this level represents a halving of the country’s reserves from a peak of $36 billion in December 2010, Moody’ notes that Egypt’s foreign-currency reserves remain more than adequate to cover all external debt payments falling due within the upcoming 12 months.
Without external donor support, reserves would have fallen lower: most recently, Qatar disbursed another $500 million as part of a new $2 billion financial support program, with the remaining tranche to be released in September, according to Egypt’s Ministry of Finance. Saudi Arabia has also provided financial support.
The ability of Egypt’s central bank to stem the loss in official foreign-exchange reserves has reduced the risk of a balance-of-payments crisis. However, a turnaround in the deterioration in the current account balance, which was still evident in the most recent data provided by the central bank, would be necessary to reduce further balance-of-payments risks.
The third driver informing Moody’s decision is the recent leveling-off in the previously sharp upward rise in government financing costs observed since the January 2011 revolution. Average yields on treasury bills have leveled off in recent months, but have widened about 500 basis points since late 2010, when 364-day treasury bill yields were around 10.6 per cent.
While the recent auction results indicate that the erosion in confidence may have abated, the occasional domestic issuance of US dollar-denominated, which amounted to $4.8 billion in the past July 2011-June 2012 fiscal year may have helped to ease the upward pressure on government bond yields.
Moreover, the downward trend in inflation has also contributed to an easing in upward pressure on government bond yields, with headline consumer price index (CPI) inflation at 6.4 per cent in August and core inflation at 5.3 per cent, down from double-digit levels in 2011 and earlier this year.
The fourth driver is Egypt"s resumption of negotiations with the IMF on a support programme, as announced by the Minister of Finance, Momtaz El-Saied, in August.
The size of a possible program is to be increased to $4.3 billion (300 per cent of Egypt’s borrowing quota) from a $3.2 billion programme that had previously been under discussion. In Moody's view, such funding would relieve pressures on both the fiscal and external payments positions and help restore investor confidence.
However, the delicate political situation and elevated pressures on the balance of payments and government finance warrants the negative outlook.
Egypt's rating could be downgraded further in the event of:
1) Heightened political uncertainty, such as from a disruption in progress towards civilian rule.
2) An assessment of a likely further weakening of the external payments position and depletion of official reserves.
3) A steady rise, or spike, in the government's funding costs which would raise refinancing risks.
Although an upgrade is unlikely over the near term, Moody's would change the rating outlook to stable from negative in the event of continued political stability as a result of:
1) A sustained strengthening in the balance of payments and external payments position – in particular, a replenishing trend in official international reserves.
2) A reduction in government debt-financing costs.
3) A sustained recovery in economic growth towards the pre-revolution trend.
4) Demonstrated success in implementing an IMF support program.
Moody's previous rating action affecting the Government of Egypt's rating was taken on 26 April 2012, when the review for possible downgrade on the Government's B2 bond ratings was extended. The rating action prior to that was Moody’s downgrade of Egypt’s government bond ratings to B2 from B1 and the initiation of a review for further possible downgrade.