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Global Credit Research - 16 Mar 2011
DIFC - Dubai, March 16, 2011 -- Moody's Investors Service has today downgraded Egypt's foreign and local
currency government bond ratings by one notch to Ba3 from Ba2.
The outlook on these ratings remains negative.
Today's rating action was prompted by:
1) The prolonged political uncertainty in Egypt since our last rating
action on 31 January, and our concerns about whether a transition
to an effective and stable government will be achieved.
2) The adverse impact this political uncertainty is having on the country's
fiscal position and broader economic performance.
3) The deterioration of the political situation in Libya, which
has negative implications for Egypt's economy and security.
In Moody's opinion, these developments have caused a further
erosion of Egypt's credit fundamentals relative to rating peers.
Moody's has today also downgraded the country ceiling for foreign currency
bonds to Ba1 from Baa3 and the country ceiling for foreign currency bank
deposits to B1 from Ba3. The outlook on these ratings remains negative.
The short-term country ceiling for foreign currency bonds was downgraded
to NP from P-3. The local currency bond and deposit ceilings
were downgraded to Baa3 from Baa1.
The primary driver of today's downgrade of Egypt's sovereign
bond ratings is the continued volatility in the country's domestic
politics in the wake of the ousting of former president, Hosni Mubarak,
in February. Although the country's Higher Military Council
has outlined a timetable for transition to a civilian government,
the process is fraught with uncertainty. Moreover, the make-up
of the cabinet has been fluid, and sporadic protests and violence
have continued amid fragile domestic security. In Moody's
opinion, this extended period of political disturbance undermines
Egypt's institutional strength and raises event risk, at least
over the short term. Over the longer term, it remains to
be seen whether an effective and stable government will be formed at the
end of the announced transition phase.
Moody's decision to downgrade was also informed by the uncertain
prospects for economic recovery, which in turn very much depend
on the country's unpredictable politics. Additionally,
a number of strikes and the departure of Egyptian workers from Libya are
likely to have a negative impact on Egypt's economy. Moody's
believes that the country's growth prospects, fiscal position
and balance of payments have all deteriorated. Data from the central
bank until the end of February indicate that there has been a substantial
fall in official foreign assets, likely related to capital outflows
and the defence of the currency. Egypt's stock market has
been closed since January 27th and has yet to reopen, generating
fears that there could be a renewed drain of capital when it does.
Inflation remains stubbornly high.
A further driver of today's rating action is the deterioration in
Egypt's regional security environment in light of the ongoing civil
war in Libya.
Moody's believes that the above risks are now better reflected by
a Ba3 government bond rating for Egypt. (Other countries rated
Ba3 include Bangladesh, Georgia, Montenegro and the Philippines.)
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's decision to maintain a negative outlook on Egypt's
sovereign ratings reflects the uncertainty of the political outlook and
the resulting downside risks to the country's credit fundamentals.
The rating agency would move the outlook back to stable if the political
situation were to stabilise and if the transition phase were followed
by the formation of an effective government that seemed committed to addressing
Egypt's significant social and economic challenges. These
include a high level of unemployment and inflation, together with
impaired growth and a wide fiscal deficit.
Moody's would consider downgrading Egypt's bond ratings further
in the event of a substantial fall in foreign exchange reserves,
signs that the government were facing difficulty in funding its wide fiscal
deficit, or a political deterioration that threatened the transition
to an effective government.
Moody's stresses that Egypt's ratings continue to be supported by a number
of important factors, which is why today's downgrade is limited
to one notch. These include a still substantial stock of official
foreign exchange reserves, a well-diversified economy and
a favourable public debt structure with little marketable foreign currency
sovereign debt. Moreover, the country as a whole has limited
external debt. There is a possibility that donor countries could
step up financial assistance to Egypt in case of serious difficulty,
although that would depend on the external relations of the government
in place. Egypt also benefits from being a marginal net hydrocarbons
exporter, thereby limiting the sensitivity of the balance of payments
to fluctuations in global oil prices. The government has previously
shown a high degree of willingness to repay and has never defaulted on
PREVIOUS RATING ACTION & METHODOLOGY USED
Moody's last rating action affecting Egypt was implemented on 31 January
2011, when the government's bond ratings were downgraded by
one notch to Ba2 from Ba1.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Please see the ratings disclosure page on our website www.moodys.com
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DIFC - Dubai
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Middle East Limited
Telephone: 00971 4237 9536
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
Moody's Middle East Limited
Moody's downgrades Egypt to Ba3, negative outlook
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
Telephone: 00971 4237 9536
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