Moody’s Investors Service has today affirmed Egypt’s Caa1 government bond rating and is maintaining the negative rating outlook.
Today’s rating affirmation is supported by the following considerations:
(1) The substantial boost in Egypt’s international liquidity provided by the $12 billion external financial support package from the governments of Saudi Arabia (Aa3 stable), Kuwait (Aa2 stable) and the United Arab Emirates (Aa2 stable) ;
(2) The road map laid out by the interim, military-installed government for a return to democracy by early 2014; and
(3) The recent containment of the government’s debt-financing costs, below post-Revolution peaks.
The maintenance of the negative outlook on Egypt’s Caa1 rating is driven by Moody’s view of the country’s considerable economic and political challenges.
Egypt’s B3 foreign-currency ceiling, Caa2 foreign-currency deposit ceiling and Ba3 local-currency bond ceiling are unaffected by today’s rating affirmation. The short-term country ceiling for foreign-currency bonds remains unaffected at Not-Prime (NP).
Egypt’s Caa1 bond rating indicates a material probability of default, although this 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 five-years is slightly under 40%. Other sovereigns rated in the same Caa category include Cyprus (Caa3 negative), Ecuador (Caa1 stable), Jamaica (Caa3 stable) and Pakistan (Caa1 negative).
RATINGS RATIONALE
RATIONALE FOR AFFIRMATION
The primary driver behind Moody’s decision to affirm Egypt’s government bond ratings is the substantial boost in Egypt’s international liquidity provided by the $12 billion (almost 5% of GDP) financial support package from the governments of Saudi Arabia, the United Arab Emirates and Kuwait to, as the Saudi government noted, “support the challenges” the country faces. This package will have the immediate effect of offsetting pressures on Egypt’s balance of payments by substantially bolstering official foreign-exchange reserves. Moody’s notes, however, that reserves are presently more than adequate to meet short and long-term debt payments falling due in the next 12 months.
Saudi Arabia will provide $5 billion, Kuwait $4 billion and the UAE $3 billion. Most of the $12 billion total package will have the effect of augmenting the Central Bank of Egypt’s (CBE) balance sheet. Saudi Arabia and the UAE each have already made a five-year, interest-free $2 billion deposit, and Kuwait will also provide a $2 billion deposit. Grants to Egypt’s Treasury will be credited to CBE dollar reserve accounts. The package also includes $3 billion in financing for petroleum imports. Over the next 6-12 months, this funding will likely more than offset the drain of reserves brought on by the current account deficit, external debt repayment and capital flight (negative errors and omissions reported in Egypt’s balance of payments statistics). Nonetheless, Moody’s notes that this funding will provide only temporary relief from the political and economic challenges that Egypt faces.
The second driver of the affirmation is the roadmap for constitutional reform and elections laid out by the interim government. The first step will be to amend the suspended constitution, the process for which begins with the formation of a Constitutional Review Committee and concludes with a constitutional referendum by late-November. Thereafter, parliamentary elections are expected to be held between December 2013 and February 2014. The presidential election will follow shortly after the first parliamentary session opens. Although the roadmap is clear and timely, the attainment of a functional post-Revolution government is vulnerable to the deepening political polarization in Egypt, as witnessed in the ongoing boycott of the Islamist parties in the post-Morsi political process.
The third driver of the affirmation is the containment of the government’s debt-financing costs in recent months. Central bank financing through the Ministry of Finance’s use of overdrafts has also helped support the price of government securities. Yields on 90-day T-bill yields have edged downwards to 12.9% as of 21 July, compared with a monthly average rate of 14.1% in May, and a post-Revolution monthly peak of 14.6% in June 2012. Nonetheless, financing costs at these levels are likely to be unsustainable over the longer term, given the sharp rise in government debt since 2010 and unless yields on government securities are brought down further to pre-Revolution levels.
RATIONALE FOR THE NEGATIVE OUTLOOK
The maintenance of the negative outlook on Egypt’s Caa1 rating is driven by Moody’s view of the country’s considerable economic and political challenges, particularly given the deepening in Egypt’s political divide since the military deposed the government of President Mohamed Morsi on 4 July.
WHAT COULD MOVE THE RATING DOWN/UP
Egypt’s rating could be downgraded further if there is: (1) an intensification of political unrest, especially if it was to derail the interim government’s constitutional reform and electoral road map; (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; and/or (4) a significant deterioration in the external payments position, which could occur from a collapse of confidence and capital flight, despite the sizable financial support package by the three Gulf countries.
Any upward movement in the rating is unlikely over the near term as captured by the negative outlook. The implementation of an IMF-supported program of fiscal and economic reform would be considered as credit positive, although Moody’s notes that the resumption of talks between the new government and the IMF staff is unlikely at present. Moreover, economic stabilization and a post-Revolution recovery in Egypt would hinge on a constructive resolution of the political standoff between the forces backing the interim government and the Islamist parties.
GDP per capita (PPP basis, US$): 6,455 (2011 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.2% (2012 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.6% (2012 Actual)
Gen. Gov. Financial Balance/GDP: -10.7% (2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2012 Actual) (also known as External Balance)
External debt/GDP: 13.4% (2012 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 22 July 2013, a rating committee was called to discuss the rating of the Egypt, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed. In addition the discussion focused on external financial support from Saudi Arabia, Kuwait, and the United Arab Emirates, as well as on the interim government’s road map for a return to democracy.
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.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
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.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
