Singapore, March 21, 2013 -- Moody's Investors Service has today downgraded Egypt's government
bond ratings to Caa1 from B3, thereby concluding the rating review
which had been initiated on 12 February 2013. The rating outlook
is negative.
Today's one-notch downgrade was prompted by the following
factors:
1) More than two years into the Egyptian revolution, the continued
unsettled political conditions have significantly weakened Egypt's
economy.
2) The sustained deterioration in Egypt's external payments position
and government finances have reached a level at which the country's
vulnerability to economic or political shocks has widened and the risk
of default has consequently increased.
3) The lack of predictability in economic and fiscal policies and outcomes,
which is underscored by continued uncertainty surrounding the Egyptian
government's ability to secure financial support from the International
Monetary Fund (IMF).
Overall, even if the Egyptian government's third attempt in
two years to gain IMF support (as announced on 17 March) were to succeed,
Moody's believes that the risks facing a successful completion of
a stand-by arrangement have risen in light of the economic and
political challenges that have intensified as Egypt's revolution
has unfolded. As a result, there is more uncertainty over
Egypt's ability to regain macroeconomic stability and shore up its
external and fiscal positions.
As part of today's rating action, Moody's has also lowered
the country ceiling for foreign-currency bank deposits by one notch
to Caa2, the B1 country ceiling for foreign-currency bonds
by two notches to B3, and the Ba2 local-currency bond and
deposit ceilings by one notch to Ba3. The short-term country
ceiling for foreign-currency bonds remains unaffected at Not-Prime
(NP).
Egypt's Caa1 bond rating indicates that the probability of default
has risen materially but that the risk of default is not necessarily imminent.
At the Caa1 rating level, the historical record shows that the average,
cumulative default rate over a one-year horizon is close to 10%
and over a five-year horizon slightly under 40%.
Other sovereigns rated in the same broad-letter category include
Cyprus (Caa3 negative), Ecuador (Caa1 stable), Jamaica (Caa3
stable) and Pakistan (Caa1 negative).
RATINGS RATIONALE
The primary driver behind Moody's decision to downgrade Egypt's
government bond ratings is the deep polarization of the country's
democratically elected government and those in opposition as a result
of the ongoing unsettled political conditions and repeated episodes of
violent civil unrest. This polarization is in turn impeding the
government's ability to govern effectively, restore social
stability and avert a worsening of the already severe disruption to the
economy. Real GDP growth has slowed to the low, single-digit
range from the mid- to high-single digit range, and
the government's budget deficit has risen into the double-digit
range in the aftermath of the revolution.
Egypt's continued political difficulties are further highlighted
by the Administrative Court's recent decision to suspend,
pending review by the Supreme Constitutional Court, the lower house
legislative elections which were supposed to be held from April to June.
The second and interrelated factor underlying Moody's one-notch
downgrade is the further weakening in Egypt's strained external
payments position. Although the country's gross international
reserves edged down by only $0.1 billion in February,
this small decline followed a large drop of $1.4 billion
in January, the largest decline in 12 months and a sharp departure
from the semblance of stability seen throughout most of 2012, during
which Moody's had maintained a B2 rating on Egyptian government
bonds.
While gross reserves of $13.5 billion, including $4.5
billion of gold and IMF Special Drawing Rights, presently provide
ample coverage for debt falling due in the 12 months ahead on a one-year
residual maturity basis, the cushion could wear thin if external
financial support is not forthcoming or from capital flight, and
if a longer time horizon than one year is taken into consideration.
Moody's notes that strains on the external balance of payments prompted
the Central Bank of Egypt on 30 December 2012 to relax its grip on the
exchange rate and to impose selected capital controls, with the
aim of limiting foreign-currency cash withdrawals and cross-border
transfers for current transactions. The Egyptian pound has consequently
depreciated by around 9% against the dollar so far this year.
Future stability in the external payments position could be undermined
if the Gulf Cooperation Council governments, especially Saudi Arabia
and Qatar, decide not to be as generous in providing financial support
in the future as they have been over the past year or so. To some
extent, such bilateral grants, loans and deposits are likely
to be tied to a future IMF program. Nevertheless, there is
a considerable degree of unpredictability over whether such governments
would provide timely exceptional support if needed.
The third driver underpinning today's rating action is the lack
of predictability in Egypt's economic and fiscal policies,
as reflected in the continued uncertainty surrounding the government's
ability to secure financial support from the IMF. Although a renewed
effort between the government and IMF on a possible $4.8
billion stand-by arrangement was announced on 17 March, Moody's
notes that previous attempts had faltered and led to the postponement
of preliminary, staff-level agreements in June 2011 and again
in December 2012.
In Moody's view, an IMF program would not only catalyze substantial
financial support both directly from the Fund and also by other governments,
but it would also help to bolster confidence in the efficacy and durability
of fiscal and structural reforms. In the absence of a robust reform
program, Egypt's budget deficits and debt servicing costs
will likely remain elevated, with government bond yields stuck well
within the double-digit level. Moody's also expects
that such a scenario would deprive Egypt of fiscal resources that could
otherwise be directed towards infrastructure development and poverty reduction.
WHAT COULD MOVE THE RATING OR OUTLOOK
As reflected by the current negative outlook, any upward movement
in the rating is unlikely over the near term. Moody's will
continue to monitor the evolution of the above factors to assess whether
to implement a further downgrade of Egypt's government bond rating
or to change the rating outlook back to stable.
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) An assessment that the external payments position would likely deteriorate
to the extent that the risk of default is significantly heightened.
This could arise from the absence of substantial and predictable external
financing support.
2) Instability in the banking system, which may prompt the imposition
of tighter capital controls on domestic deposits or foreign-exchange
transactions.
3) 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 changing the rating outlook to stable from
negative in the event of:
1) Successful implementation of an IMF-supported economic and fiscal
reform program which appreciably alleviates pressures on government finances
and shores up the external payments position.
2) Enhanced political stability and an abatement of violent civil unrest.
3) Cohesiveness between the institutions of government, namely between
the executive, legislative, judicial branches and the military,
that improves government policy effectiveness and the functioning of Egypt's
post-revolution democracy.
PREVIOUS RATING ACTION
Moody's previous action affecting Egypt was implemented on 12 February
2013, when the rating agency downgraded Egypt's government
bond rating to B3 and maintained the 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
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 Jan Sebastian 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 Caa1, negative outlook
