For the first time since the 25 January Revolution, Moody's, the American credit-rating agency, has raised the credit-rating of Egyptian government bonds. In the four-year period since the revolution, the agency had previously downgraded them five times. This means that bonds issued by Egypt are now seen as less risky than before, thus bearing lower interest and putting less pressure on public finances. The move was fed by improvements in the country's economic indicators as well as a commitment to more reforms, noted a Moody's statement. Moody's also rated the outlook of the economy as stable, meaning it views downward pressures on the rating as limited due to strong support from the Gulf countries as well as foreign donors. The upgrading came with the end of the recent Egypt Economic Development Conference (EEDC), indicating its success in attracting foreign funds and investment and reflecting the fact that the Egyptian economy is on the right track and is taking off after four years of political instability, commented Eman Negm, an economist at Prime Group, a regional investment bank. The Moody's action follows upgrades from credit-rating agencies Standard & Poor's and Fitch Ratings and comes as Egypt prepares to return to the international bond market for the first time since 2010. The government said on 26 March it had hired seven banks to help sell $1.5 billion worth of bonds. Moody's attributed the move to several main factors, including improvements in macroeconomic performance. It expects real GDP growth in Egypt to recover to 4.5 per cent for the current fiscal year, which ends in June. Moreover, it projects growth of 5-6 per cent in the following four years. “This expected level is based on an assumption that domestic political stability will continue, as will improvements in the business environment, which in Moody's view will be conducive to higher investment levels,” noted a statement. The political turmoil since the toppling of the former Mubarak regime has scared investors and driven away tourists, depriving government coffers of important foreign currency sources and adding to the woes of the ailing economy. “The upgrade will help attract more foreign investment, especially after the recent structural and legislative reforms that took place before the Conference,” said Negm in a research note. The government has amended the investment law to improve the business climate. The changes include a new system of land allocation and a new mechanism for the out-of-court settlement of disputes between investors and the state. It has also lowered income taxes from 30 per cent to 22.5 per cent. Furthermore, the Central Bank of Egypt (CBE) has eased its grip on the dollar-pound exchange rate, leaving the pound to lose six per cent of its value versus the dollar since February. The second reason Moody's has improved its perception of the economy is a reduction in external vulnerabilities, as the country's reserves now stand at around $15 billion, providing ample coverage for the external debt payments due in 2015 and supported by the continuous flow of funds and grants from the Gulf Cooperation Council (GCC) countries. While Egypt's net foreign reserves for March have decreased 1.03 per cent compared to February to reach $15.29 billion, analysts believe they will start heading up again soon. In addition to the $12.5 billion Gulf aid pledged during the EEDC last month, the Kuwait Fund for Arab Economic Development will lend Egypt $1.5 billion this month. The country's commitment to fiscal reform is the third reason for the upgrade. Moody's expects the government to carry on with its programme of reform, including by lowering subsidies and putting a lid on public-sector salary growth, coupled with revenue-enhancing measures such as the introduction of a value added tax. The agency expects the fiscal deficit to decline to around 10 per cent of GDP by June, and edge down further to around 9.3 per cent in the next fiscal year. With Egypt planning to issue dollar-denominated foreign bonds of a total value of around $1.5 billion this month, the “upgrade will help lower the rates, lessening the burden of external debt servicing on the government's budget,” Negm said. “It will also help create sources of foreign finance, in case these are needed to defend the foreign reserves, and repay pending investor backlogs,” she added. After repaying almost $5 billion of oil and gas company dues in November and December, the ministry of petroleum still has to pay a further $3.1 billion. The rating agency's statement was not all positive, however. “Sizeable deficits and elevated debt levels continue to constrain the Egyptian government's bond rating of B3,” it noted. “In addition, while government effectiveness has improved and risks to policy-making are diminishing, Moody's still sees elevated security risks, as reflected in ongoing terrorist attacks,” the statement read. On Sunday, two separate bomb attacks by unidentified militants targeting security forces in Sinai took the lives of 13 people and wounded dozens of others.
