Moody's junks Egypt on back of unrest, delayed IMF talks

Egypt's bond rating has been cut to B3 - six levels below investment grade - by Moody's Investors Service as a result of political uncertainty and may be downgraded further, the ratings agency said.

The downgrade comes amid stalled discussion with the International Monetary Fund (IMF) for a US$4.8bn loan which would restore confidence in the North African country's economy. Moody's said the rating cut was a result of “ongoing unsettled political conditions and recent escalation of civil unrest in the form of violent clashes between protesters and security forces", and the ensuing state of emergency declared by President Mohamed Mursi in three Egyptian cities along the Suez Canal on 27 January.

“The polarisation and divide between the democratically elected government and those in opposition appears to be deepening, thereby casting doubt over the government's ability to govern effectively, restore social stability and avert a worsening of the already severe economic disruptions," Moody's added.

The ratings agency also said another reason underpinning the latest measure was a further weakening in Egypt's external payments position as a result of the large drop in January in the Central Bank of Egypt's foreign currency reserves.

The bank's reserves have plunged about 60 percent from their high before the 2011 revolution that toppled Hosni Mubarak's regime to US$13.6bn. Saudi, Arabia, Turkey and Qatar have tried to shore up the bank's reserves to help it slow the pace of decline. The fall in reserves has continued even as the central bank imposed capital control at the end of last year.

The Egyptian pound has lost about 8 percent of its value against the dollar since the end of last year and eroding confidence in the economy has led to the re-emergence of a black market. Stalled discussions with the IMF over a US$4.8bn loan will delay economic reforms like the removal of fuel subsidies by the government, which have contributed to double digit budget deficits and weakening fiscal balance.  

Moody's said it will monitor the evolution of underlying factors that led to the rate cut “to assess whether to implement a further downgrade of Egypt's government bond rating or to confirm it at its newly adjusted B3 level". It said Egypt's rating could be downgraded further, “depending on the severity of possible adverse developments."

Moody's rate cut follows that of Standard & Poor's, which reduced Egypt to junk status in December, on a par with Greece.