Moody's Investors Services, a leading credit-rating agency, has downgraded Egypt's government bond rating to B3 from B2 today. Moody's mentioned that the main factors behind the downgrade are the ongoing political turmoil and the recent escalation of civil unrest in the form of violent clashes between protesters and security forces. The situation culminated in President Mohamed Morsi's declaration of a state of emergency in three Egyptian provinces on 27 January. The deep polarisation and the divide between the democratically-elected government and those in opposition, casts further doubt over the government's ability to govern effectively, to restore social stability, and to avert more severe economic disruptions The second factor underlying Moody's downgrade is the further weakening in Egypt's strained external payments position. Foreign cash reserves dropped $1.4bn to reach $13.6bn in January, a sharp departure from the stability seen throughout most of 2012. This occurred despite the deposits made to the central bank by the governments of Saudi Arabia and Qatar and despite the bank's imposition on selected capital controls on 30 December 2012 with the aim of limiting foreign currency cash withdrawals, Moody's added. The third factor underpinning the rating decision is the Egyptian government's inability to secure financial support from the International Monetary Fund (IMF), which would help to improve investor confidence through a monitored programme of economic reform. Although the IMF and the Egyptian government both expressed their commitment in pursuing a new agreement on 7 January, Moody's notes that the political challenges facing the government complicate reaching an agreement with the IMF and cast doubt on the Egyptian government's ability to adhere to a programme of fiscal austerity. Moody's said Egypt's rating is likely to be downgraded even further, depending on the severity of adverse developments. Such developments include the absence of substantial and predictable external financing support, further weakening of external payments, further run-down of foreign cash reserves, instability in the banking system, or sharp rises in the government's funding costs. Moody's will consider leaving Egypt's rating unchanged in case of a sustained strengthening in the balance of payments and external payments position, or reduction in government debt-financing costs, sustained recovery in Egypt's economic growth towards pre-revolution trends, or success in securing an IMF support package.
