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Rating Action:

Moody's changes Egypt's outlook to stable from negative, affirms Caa1 rating

Global Credit Research - 20 Oct 2014

Singapore, October 20, 2014 -- Moody's Investors Service has today changed Egypt's outlook to stable from negative and affirmed its Caa1 government bond rating.

Key drivers for the outlook change to stable from negative are the stabilised political and security situation, the launch of government initiatives toward fiscal consolidation, signs of a growth recovery and an improvement in macroeconomic stability, and strong support from external donors.

However, Egypt's Caa1 government bond rating remains primarily constrained by high fiscal deficits, high government debt, very large fiscal borrowing needs and continued challenges hindering the recovery of economic growth in the post-revolutionary political and economic environment.

Moody's has today also affirmed the Aaa rating of Egypt's backed global bond. Egypt's B3 foreign-currency bond ceiling, Caa2 foreign-currency deposit ceiling and Ba3 local-currency country risk ceilings are unaffected by today's rating affirmation. The short-term country ceilings for foreign-currency bonds and deposits remain unaffected at Not-Prime (NP).

RATINGS RATIONALE

OUTLOOK CHANGED TO STABLE FROM NEGATIVE

The outlook change to stable from negative reflects our expectations of an improving fiscal and economic environment, building on a number of developments over the past year that reduce downside risks to the rating.

The domestic political and security situation has improved, following the constitutional referendum on 14-15 January 2014, which formed the first step in the political reform roadmap and led to greater institutional stability. This was followed by presidential elections in May 2014, with parliamentary elections likely to be held by early 2015. With the exception of an attack on a Korean tourist group in February 2014, there have been no terrorist assaults on foreign visitors. Most of the violence stems from small-scale attacks on Egypt's security forces, outside the traditional tourist areas.

Coinciding with the stabilizing security situation, the government launched several fiscal and economic reforms over the past year. In July, authorities adjusted administered fuel prices, and unveiled plans to phase out fuel and electricity subsidies over the next five years. The government is also working on revenue-enhancing measures, including a shift from the current goods and services tax to a value-added tax system.

These initiatives target a deficit reduction, with the current fiscal year target set at 10% of GDP, compared with an 12.8% estimated by the Ministry of Finance in fiscal 2014 and 8.5% by 2019. At the same time, the Ministry of Finance plans to stabilize the government debt ratio and reduce it to 80-85% of GDP by 2019.

In addition, economic growth has started to pick up. Real GDP grew by 3.7% year-on-year during the fourth quarter of fiscal 2014, up from 2.5% in the previous quarter, while high frequency indicators support the scenario of a sequential pick-up in growth. The HSBC/Markit Purchasing Managers Index rose to a ten-month high of 52.4 in September and tourist arrivals are rising.

Domestic investors are showing confidence in the economic recovery of Egypt. The recent issuance of Suez Canal investment certificates to retail investors was met with high demand and yielded the equivalent of $8.5 billion within one week. Furthermore, the expansion of the canal and development of the surrounding area will be a central supporting factor for economic growth and employment over the next five years at least .

External financial support, predominantly from Gulf Cooperation Council member states, continues to bolster external liquidity, supporting Egypt's budget and lowering the government's financing costs. The commitment from the Gulf governments remains strong and will likely continue in the future. According to Egypt's Ministry of Finance, Saudi Arabia, Kuwait and the United Arab Emirates have provided almost $17 billion in grants and loans to the Egyptian government and Central Bank of Egypt during fiscal 2014. In addition, the US government has recently resumed military cooperation and other aid.

RATING AFFIRMATION

The affirmation of the Caa1 rating reflects the very weak and challenging state of Egypt's government finances. Budget deficits remain wide, at more than 10% of GDP. Government expenditure is marked by a very high share of recurrent spending, which limits room for public investment.

The government's policy of increasing expenditure to meet social welfare demand indicates a gradual pace of fiscal consolidation, with the government envisaging a decline in fiscal deficit, but remaining at an elevated 8.5% of GDP in fiscal 2019.

The government's gross financing requirements are amongst the highest of rated sovereigns, at around 45% of GDP for the current fiscal year 2015, and weakened economic growth, following the first revolution in 2011, has depressed fiscal revenue generation. The unsettled political situation also reversed the declining trend in government debt, causing the debt-to-GDP ratio to rise above 90%, while the ratio of interest payments to government revenue has risen to 34% during the past fiscal year. Despite some easing of market uncertainty, government funding costs remain elevated.

Relative weak economic growth hinders a more rapid fiscal consolidation. While there are signs of a turnaround in economic performance, Moody's expects real GDP growth to rise only modestly in fiscal 2015, to 3.5%. Furthermore, the outlook for Egypt's economic growth remains weaker than pre-revolution, when growth averaged 6% between 2007 and 2010.

FACTORS THAT COULD CAUSE THE RATING TO MOVE UP/DOWN

Although the stable outlook indicates that rating pressures are balanced, Egypt's rating could be downgraded further in the case of: (1) a renewed intensification of political turmoil and instability; (2) instability in the banking system and a diminution in its capacity to fund government deficits; (3) a sharp rise in the government's funding costs (above previously elevated levels), to reach a level that significantly heightens refinancing risks; and/or (4) a significant deterioration in the external payments position, despite the sizable financial support package by the three Gulf governments.

We would consider the following factors as credit positive: (1) further signs of economic stabilization, characterized by a return of foreign direct investment closer to pre-revolution levels, as well as a pick-up in growth and lower inflation rates; (2) the sustained build-up of foreign exchange reserve buffers; and/or (3) the successful implementation of further measures to lower fiscal deficits and stabilize government debt.

GDP per capita (PPP basis, US$): 10,870 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.1% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change annual average): 6.9% (2013 Actual)

Gen. Gov. Financial Balance/GDP: -14.1% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.4% (2013 Actual) (also known as External Balance)

External debt/GDP: 15.9% (2013 Actual)

Level of economic development: Moderate level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 15 October 2014, a rating committee was called to discuss the rating of Egypt, Government of. The main points raised during the discussion were: The issuer has become less susceptible to domestic political event risks, which in turn has helped to improve the issuer's economic fundamentals, including its economic strength. At the same time, despite certain fiscal reforms the issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Steffen Dyck
Vice President - Senior Analyst
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: (852) 3551-3077

Alastair Wilson
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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: (852) 3551-3077

Moody's changes Egypt's outlook to stable from negative, affirms Caa1 rating
No Related Data.
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