Singapore, February 12, 2013 -- Moody's Investors Service has today downgraded Egypt's government
bond ratings to B3 from B2, while maintaining the rating on review
for further possible downgrade.
Today's one-notch downgrade was prompted by the following
factors:
1) The economic impact of the intensification of civil unrest, as
reflected by the recent decree announcing a state of emergency.
2) The further weakening in Egypt's external payments position given
the large drop in January in the level of international reserves held
by the Central Bank of Egypt (CBE).
3) The continued uncertainty surrounding the Egyptian government's
ability to secure financial support from the International Monetary Fund
(IMF).
As part of today's rating action, Moody's has also lowered
the B3 country ceiling for foreign-currency bank deposits by one
notch to Caa1, the Ba3 country ceiling for foreign-currency
bonds by one notch to B1, and the Ba1 local-currency bond
and deposit ceilings also by one notch to Ba2. The short-term
country ceiling for foreign-currency bonds remains unaffected at
Not-Prime (NP).
RATINGS RATIONALE
The main factor behind Moody's decision to downgrade Egypt's government
bond ratings is the country's ongoing unsettled political conditions
and recent escalation of civil unrest in the form of violent clashes between
protesters and security forces, resulting in many deaths.
This situation culminated in President Morsi's declaration of a
state of emergency in three Egyptian cities along the Suez Canal on 27
January. Moreover, the polarization and divide between the
democratically elected government and those in opposition appears to be
deepening, thereby casting doubt over the government's ability
to govern effectively, restore social stability and avert a worsening
of the already severe economic disruptions.
The second factor underlying Moody's one-notch downgrade
is the further weakening in Egypt's strained external payments position.
In January, the country's international reserves dropped by
$1.4 billion to $13.6 billion, the largest
decline in 12 months and a sharp departure from the semblance of stability
seen throughout most of 2012. This has occurred despite the deposits
made to the CBE by the governments of Saudi Arabia and Qatar, and
despite the CBE's imposition of selected capital controls on 30
December 2012, with the aim of limiting foreign-currency
cash withdrawals and cross-border transfers for current transactions.
Strains in the balance of payments are reflected in the depreciation of
around 8% against the dollar that resulted from the greater exchange-rate
flexibility brought about by the introduction of capital controls.
The third driver underpinning the rating action and the maintenance of
the review for further possible downgrade of Egypt's sovereign bond
rating is the government's postponement of a preliminary,
staff-level agreement that was reached with the IMF in mid-December.
This credit-negative delay jeopardizes the fragile stability that
the country has slowly rebuilt in recent months, because an IMF
program would have directly provided $4.8 billion in financial
support and, more importantly, would have helped to shore
up investor confidence through a monitored program of economic reform.
Although the IMF and Egyptian government expressed their commitment on
7 January 2013 to pursue a new agreement, Moody's notes that
the political challenges facing the government complicate both the reaching
of an agreement with the IMF, as well as the ability of the government
to adhere to a program of fiscal austerity, even if only gradually
and cautiously.
FOCUS OF THE REVIEW FOR FURTHER POSSIBLE DOWNGRADE
Moody's will monitor the evolution of the above factors to assess
whether to implement a further downgrade of Egypt's government bond
rating or to confirm it at its newly adjusted B3 level.
Egypt's rating could be downgraded further, depending on the severity
of possible adverse developments, in the event of one or a combination
of the following factors:
1) The absence of substantial and predictable external financing support;
2) an assessment of a likely further weakening of the external payments
position and further run-down of official international reserves;
3) instability in the banking system, which may prompt the imposition
of tighter capital controls on domestic deposits or foreign-exchange
transactions; or
4) a sharp rise in the government's funding costs above previously elevated
levels to a level that significantly heightens refinancing risks.
Moody's would consider leaving Egypt's rating unchanged and
confirming it at its current level in the event of:
1) A sustained strengthening in the balance of payments and external payments
position -- in particular, a replenishing trend in the country's
official international reserves.
2) A reduction in government debt-financing costs.
3) A sustained recovery in Egypt's economic growth towards pre-revolution
trends.
4) Success in securing an IMF support program, which would likely
be complemented by augmented financial support from western and regional
governments.
PREVIOUS RATING ACTION
Moody's previous action affecting Egypt's government bond rating was implemented
on 18 January 2013, when the rating agency placed Egypt's
B2 ratings on review for possible downgrade.
METHODOLOGY USED
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Thomas J Byrne
Senior Vice President/Manager
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Moody's downgrades Egypt's government bond rating to B3, maintains review for further possible downgrade
