Moody’s third downgrade of Egypt’s sovereign risk rating spooks investors

The revolution has ushered in many changes for Egypt. Along with increased political awareness and participation, came economic slowdown and declines across tourism and other industries. At the end of October Moody’s Investor Services downgraded Egypt’s sovereign risk rating for the third time this year, followed by the downgrade of five of the country’s largest local banks. Moody’s Singapore-based office cited “economic weakness, financial deterioration and an uncertain political landscape.”


Before the revolution, Egypt’s rating stood at Ba1, just one level below investment grade. The country’s rating has slumped three notches to B1 with its outlook changed from stable to negative.


Then, on January 31, the increase in political risk prompted the agency’s first downgrade from Ba1 to Ba2. Moody’s then warned of a further downgrade of Egypt’s sovereign ratings in case of substantial increase in “political instability, fiscal slippage and evidence of lasting economic damage”.


Less than two months later, on March 16, the country’s sovereign risk rating was further downgraded to Ba3 with the negative outlook maintained. Most recently, the downgrade put the rating at B1 on October 27, amid mounting concerns about Egypt’s long-term credit stability.


Exposed balance sheets
With every sovereign risk downgrade, the country’s five largest banks — National Bank of Egypt (NBE), Banque Misr, Banque du Caire, the Bank of Alexandria and Commercial International Bank — have seen their foreign and local currency deposits downgraded due to the large exposure of their balance sheets to Egyptian government bonds. According to Moody’s, these bonds make up about four to seven times their equity base.


Tom Byrne, Moody’s Sovereign Risk Group Senior Vice President, says the country’s ongoing economic weakness and financial deterioration, as well as the continued political instability and uncertainty of the transition process are behind the last downgrade.


“These developments have caused a further erosion of Egypt’s credit fundamentals relative to rating peers,” Byrne explains.


The Egyptian government is caught in the middle as the public pressure mounts to spend more to alleviate their hardships while the government’s resources are shrinking due to lower tourism revenues and foreign direct investment.