Moody's Investors Service has downgraded Egypt's government bond ratings by one notch to B1 from Ba3 with a negative outlook. The rating action was prompted by the country's ongoing economic weakness and inancial deterioration, as reflected in the sharp loss in official foreign exchange reserves since the beginning of this year, said Moody's in a statement.
Also the likelihood of continued macroeconomic weakness and instability, and the rising pressures on budgetary spending and financing led to the downgrade, it added. The continued unsettled political conditions and the uncertainty over the transition to a stable, civilian government also prompted the action, the rating agency said in the statement. These developments have caused a further erosion of Egypt's credit fundamentals relative to rating peers, it added.
The primary driver of today's downgrade of Egypt's sovereign bond rating is the ongoing economic weakness and financial deterioration, which has deepened further since the onset of the country's popular revolution in January 2011, said Moodys. The rating agency is concerned that the external and fiscal positions may remain particularly fragile.
Unsettled political conditions have further undermined economic performance and investor confidence in Egypt. The economy is struggling to find its footing, said Moodys. The GDP contracted by 4.2 percent in Q1 2011, although it stabilized somewhat in the April-June period. The IMF expects real GDP growth to remain at an anaemic 1 to 2 percent annual rate this year and next. Although inflation has dipped below the double-digit level in September, unemployment remains high, it stated. Moodys expects the budget deficit to rise above 10 percent of GDP in the current fiscal year. In sum, the rating agency believes that the risks are on the downside.
The second main driver of the downgrade is the political uncertainty, which has been reflected not only in the vague process for transition to representative and civilian rule, but also in the interim government's tendering of its resignation (and subsequent withdrawal of the resignation) on October 11. Moodys said the rating could be downgraded further in the event that foreign exchange reserves continue to decline to a level that threatens the authorities' debt repayment capacity or its ability to support the Egyptian pound.