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Rating Action:

Moody's downgrades Egypt's debt rating to B1, negative outlook

27 Oct 2011

Singapore, October 27, 2011 -- Moody's Investors Service has today downgraded Egypt's government bond ratings by one notch to B1 from Ba3. The outlook remains negative.

Today's rating action was prompted by:

1) The country's ongoing economic weakness and financial deterioration, as reflected in the sharp loss in official foreign exchange reserves since the beginning of this year, the likelihood of continued macroeconomic weakness and instability, and the rising pressures on budgetary spending and financing.

2) The continued unsettled political conditions and the uncertainty over the transition to a stable, civilian government.

These developments have caused a further erosion of Egypt's credit fundamentals relative to rating peers.

RATINGS RATIONALE

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. Moody's 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. GDP contracted by 4.2% in Q1 2011, although it stabilized somewhat in the April-June period. Foreign direct investment into Egypt shrank dramatically in the first half of 2011, recording a small net outflow, and tourist arrivals fell by 42% in the March-June period compared with the same period in 2010. The IMF expects real GDP growth to remain at an anemic 1%-2% annual rate this year and next.

Although inflation has dipped below the double-digit level in September, unemployment remains high. Fiscal pressures are aggravated by policy accommodation to the demand for increased subsidies and hikes in public-sector wages unleashed by the revolution. Meanwhile, stress has appeared in budgetary financing. At the end of September, the yield on 91-day treasury bills peaked at 13.02%. Although it has retreated somewhat since then, the government has become increasingly dependent on short-term financing to fund its deficit. Moody's expects the budget deficit to rise above 10% 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 11 October. The resignation was prompted by the military's handling of the demonstrations by Coptic Christians in southern Egypt on 9 October, which resulted in many fatalities.

Nonetheless, Moody's notes that Egypt's ratings continue to be supported by a number of important factors, which explain why today's downgrade is limited to one notch. The most important of these is Egypt's relatively less vulnerable external payments and debt position. Indeed, Egypt's current account deficits, government foreign-currency debt and total external debt ratios have been more favorably positioned than countries rated at B1 or even one notch higher or lower, such as Georgia (Ba3), Lebanon (B1), and Ukraine (B2). In particular, the stock of official foreign exchange reserves is still substantial at current levels, and appears to be more than adequate to cover external debt redemption in the upcoming 12-months, including all short-term debt. Also, the relatively large scale of the Egyptian economy and its diversification provides an ability to absorb economic shocks. Egypt also benefits from being a marginal net hydrocarbons exporter, thereby limiting the sensitivity of its balance of payments to fluctuations in global oil prices.

There is the possibility that the interim government could receive external financial support, although none has been forthcoming so far. The IMF has offered a US$3 billion stand-by arrangement, and the government of Saudi Arabia is reported to have offered a package worth around US$4 billion. Securing such support has become increasingly critical for Egypt in view of the sharp fall in the country's official international reserves to US$24 billion, down from US$36 billion at the end of 2010. Continued decline in foreign currency reserves at the current pace would significantly weaken the country's external payments position.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The 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 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. A further rise in the government's funding costs and an increase in refinancing risks would also exert negative pressure on the ratings.

Given that an upgrade is currently unlikely, Moody's says that it would consider moving the outlook back to stable if Egypt's external payments position were to stabilize and if fiscal funding pressures were alleviated. This would likely require a successful and peaceful transition to civilian rule.

CHANGES IN COUNTRY CEILINGS

Egypt's country ceiling for foreign currency bonds is lowered to Ba2 from Ba1, while the country ceiling for foreign currency bank deposits has been downgraded by one notch to B2 from B1. The local currency bond and deposit ceilings have been downgraded by one notch to Ba1 from Baa3. The short-term country ceiling for foreign currency bonds remains unchanged at Not-Prime.

PREVIOUS RATING ACTION & METHODOLOGY USED

Moody's previous rating action affecting the Government of Egypt's rating was made on 16 March 2011, when the government's bond ratings were downgraded to Ba3 from Ba2.

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

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are considered EU Qualified by Extension and therefore available for regulatory use in the EU. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Thomas J. Byrne
Senior Vice President - Regional Credit Officer
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 debt rating to B1, negative outlook
No Related Data.
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