Moody’s Investors Service has today placed Egypt’s B2 government bond ratings on review for possible downgrade.
Today’s rating action was prompted by the following factors:
1) The re-emergence of unsettled political conditions, despite Egypt’s transition to civilian rule in 2012.
2) The heightened uncertainty surrounding the government’s ability to secure financial support from the International Monetary Fund (IMF).
3) The recent imposition of capital controls by the Central Bank of Egypt in order to limit foreign-currency cash withdrawals from the country’s banks.
4) The continued rise in the Egyptian government’s already high fiscal financing costs.
Moody’s country ceilings for Egypt are not affected by this rating action: the B3 country ceiling for foreign-currency bank deposits, the Ba3 country ceiling for foreign-currency bonds and the Ba1 local-currency bond and deposit ceilings remain unchanged. However, if Moody’s were to decide to downgrade Egypt’s government bond rating, then this would likely prompt the lowering of Egypt’s ceilings. The short-term country ceiling for foreign-currency bonds remains unaffected at Not-Prime (NP).
RATINGS RATIONALE
The main factor behind Moody’s decision to initiate a review for possible downgrade for Egypt’s government bond ratings is the country’s return to unsettled political conditions despite the ongoing transition to civilian rule. In particular, President Morsi’s decision to issue a decree in November 2012, which granted him supreme powers that cannot be challenged by the judicial system, triggered violent demonstrations. Moreover, the polarization and disaffection among the country’s population were also evident in the very low turnout in the referendum on Egypt’s new constitution in December 2012.
The second driver underpinning the review for possible downgrade is Egypt’s postponement of a preliminary, staff-level agreement that was reached with the IMF on 20 November 2012. This credit-negative delay jeopardizes the fragile stability that the country has slowly rebuilt in recent months, because an IMF program would have directly provided $4.8 billion in financial support and, more importantly, helped to shore up investor confidence through a monitored program of economic reform. Although the IMF and Egyptian government expressed their commitment on 7 January 2013 to pursue a new agreement, Moody’s notes that the domestic political opposition to fiscal austerity could undermine such intentions.
The third factor underlying Moody’s ratings review is the decision by the Central Bank of Egypt (CBE) to impose selected capital controls on 30 December 2012, with the aim of limiting foreign-currency cash withdrawals and cross-border transfers for current transactions. Although Moody’s views the need for capital controls as credit negative, the rating agency observes that Egypt’s external payments position had not, according to the most recent data, deteriorated — indeed, since August 2012, the country’s international reserves have remained more or less stable at $15 billion, which is more than enough to meet external debt repayments that are due in the 12 months ahead. However, Moody’s notes that the country’s exchange rate remains strained, as reflected by the steady depreciation against the dollar since the introduction of greater flexibility on 30 December 2012.
The fourth driver informing Moody’s decision is the recent rise in Egypt’s government financing costs. The tightening trend in the yield on the 364-day Treasury Bill reversed in November, as reflected by a rise in yields to 14.4% as of 15 January 2013, from a recent low of 12.9% in November 2012. Moody’s believes this development reflects both financial pressures and political uncertainties.
FOCUS OF THE REVIEW
Moody’s will monitor the evolution of the above factors and assess whether to proceed to downgrade Egypt’s government bond rating or to confirm it at its current level.
Egypt’s rating could be downgraded by one or two notches, depending on the severity of possible adverse developments, in the event of one or a combination of the following factors:
1) The absence of substantial and predictable external financing support;
2) an assessment of a likely further weakening of the external payments position and further run-down of official international reserves;
3) the need to impose tighter capital controls on domestic deposits or foreign-exchange transactions; or
4) a rise in the government’s funding costs above previously elevated levels to a degree that significantly heightens refinancing risks.
Moody’s would consider leaving Egypt’s rating unchanged and confirming it at its current level in the event of:
1) A sustained strengthening in the balance of payments and external payments position — in particular, a replenishing trend in the country’s official international reserves.
2) A reduction in government debt-financing costs.
3) A sustained recovery in Egypt’s economic growth towards pre-revolution trends.
4) Demonstrated success in implementing an IMF support program.
PREVIOUS RATING ACTION
Moody’s previous action affecting Egypt’s government bond rating was implemented on 12 September 2012, when the rating agency confirmed the B2 ratings and assigned a negative outlook. That action concluded the review for further possible downgrade, which had been extended on 26 April 2012 after having been initiated on 21 December 2011 at the time of a one-notch downgrade to B2 from B1.
METHODOLOGY USED
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please refer to 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.
