Moody’s hits Egypt with downgrade

Moody’s, rating agency, has downgraded Egypt’s sovereign bond ratings by one notch to B2 from B1, pushing it further into junk territory. It has also placed Egypt on review for a further downgrade.

In its statement on Wednesday, Moody’s said the downgrade was prompted by the political uncertainty being violently played out on Cairo’s streets and by Egypt’s precarious fiscal situation – in particular the imminent and increasing risk of a balance of payments crisis.

From Moody’s statement:

The main driver of today’s one-notch downgrade of Egypt’s sovereign bond ratings is the continued unsettled political conditions… In Moody’s view, the repeated changes in government leadership have resulted in ineffective and unpredictable economic policies. Moreover, the protracted timetable for a transition to constitutional and civilian rule, as demanded by the major political parties, will likely continue to undermine investor confidence in the Egyptian economy.

Moody’s also points to Egypt’s falling reserve position and the fact that the this is very unlikely to improve in the near term as tourism and foreign direct investment have slowed to a trickle. The ratings agency believes that the Central Bank of Egypt will find it increasingly difficult to maintain adequate liquidity in the months or year ahead, raising the risk of a balance-of-payments crisis:

In the past two months, foreign-exchange reserves have fallen by almost $4 billion to $20.2 billion at the end of November 2011. This represents a cumulative decline of 44 percent since December 2010.

Furthermore:

The downturn in economic growth and in tax revenues will likely widen the government’s budget to around 10 percent of GDP in this fiscal year. Moreover, the continued rise in interest rates (with one-year treasury bills attracting interest rates of 15.19 percent on 8 December 2011, up from 10.67 percent at year-end 2010) are adding to the government debt-servicing costs from an already high level of around 25 percent of budget revenues. The very short average maturity of government bonds (less than two years) heightens refinancing risks.