The most predictable, (and certainly worthless: see Mark Zandi) entity in the world has gone ahead and done precisely what Zero Hedge said 24 hours ago it would. Moody's has just downgraded Egypt's bond rating from Ba1 to Ba2, with the outlook changed from stable to negative. The move which was as a surprise to idiots everywhere comes as "Moody's notes that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations." And as we predicted yesterday, Egypt CDS continues to slide ever higher, pushing around 460 on the offer side, in those rare occasions it is actually offered.
Moody's Investors Service has today downgraded Egypt's government bond ratings to Ba2 from Ba1 and has changed the outlook to negative from stable
Today's rating action was prompted by the recent significant rise in political event risk and concern that the policy response could undermine Egypt's already weak public finances. We had previously signaled that such developments may result in a ratings downgrade (see Moody's latest Credit Opinion on Egypt published 24th November 2010).
Moody's has today also downgraded the country ceiling for foreign currency bonds to Baa3 from Baa2 and the country ceiling for foreign currency bank deposits to Ba3 from Ba2. The outlook on these ratings was changed to negative from stable. The short-term country ceiling for foreign currency bonds was downgraded to P-3 from P-2. The local currency ceilings were downgraded to Baa1 from A3.
Moody's decision to downgrade Egypt's government bond ratings is driven by increased event risk. This has resulted from escalating political tensions in the country following the recent uprising in Tunisia, with large-scale anti-government protests taking place.
Moody's notes that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations.
In Moody's opinion, there is a strong possibility that fiscal policy will be loosened as part of the government's efforts to contain discontent. A background of rising inflationary pressures further complicates fiscal policy by threatening to increase the high level of budgetary expenditure on wages and subsidies.
The public finances in Egypt are already stretched and are significantly weaker than Ba rating peers. For example, Egypt's fiscal deficit approximates 8 percent of GDP, compared with a median for the Ba rating category of around 4 percent of GDP. Egypt's public debt also exceeds the Ba median by a considerable margin.
Moody's points out, however, that Egypt's ratings continue to be supported by a number of important factors. These include a relatively robust external position, a well-diversified economy and a favourable public debt structure with limited refinancing risk. The government has shown a high degree of willingness to repay and has never defaulted on its bonds.
Moody's would be ready to move the ratings outlook to stable in the event that political tensions and attendant fiscal and economic risks abate. Conversely, Moody's would downgrade Egypt's sovereign ratings again if there were a substantial escalation of political volatility, a large fiscal slippage, or evidence of lasting economic damage that threatened to impair credit fundamentals relative to Ba2 rating peers.
PREVIOUS RATING ACTION & METHODOLOGY USED
Moody's last rating action affecting Egypt was implemented on 26 April 2010, when a Ba1 rating was assigned to the government's dollar-denominated senior unsecured bonds worth USD1.5 billion. Prior to that, Moody's last rating action on Egypt was taken on 19 August 2009, when the rating agency changed the outlook on Egypt's sovereign ratings to stable from negative.
The principal methodology used in this rating was Moody's Sovereign Bond Methodology published in September 2008.
Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.
Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.