Moody's downgrades Egypt a notch to Ba2

Moody's Investors Service has on Monday downgraded Egypt's government bond ratings to Ba2 from Ba1 and has changed the outlook to negative from stable.

Today's rating action was prompted by the recent significant rise in political event risk and concern that the policy response could undermine Egypt's already weak public finances.

Moody's also downgraded the country ceiling for foreign currency bonds to Baa3 from Baa2 and the country ceiling for foreign currency bank deposits to Ba3 from Ba2. The outlook on these ratings was changed to negative from stable.

The short-term country ceiling for foreign currency bonds was downgraded to P-3 from P-2. The local currency ceilings were downgraded to Baa1 from A3.

Moody's decision to downgrade Egypt's government bond ratings is driven by increased event risk. This has resulted from escalating political tensions in the country following the recent uprising in Tunisia, with large-scale anti-government protests taking place.

Moody's noted that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations.

In Moody's opinion, there is a strong possibility that fiscal policy will be loosened as part of the government's efforts to contain discontent. A background of rising inflationary pressures further complicates fiscal policy by threatening to increase the high level of budgetary expenditure on wages and subsidies. The public finances in Egypt are already stretched and are significantly weaker than Ba rating peers.

For example, Egypt's fiscal deficit approximates 8 per cent of GDP, compared with a median for the Ba rating category of around 4 per cent of GDP. Egypt's public debt also exceeds the Ba median by a considerable margin. Moody's points out, however, that Egypt's ratings continue to be supported by a number of important factors.

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