Moody's Investor's Service pushed Egypt's sovereign bond rating deeper into junk status on Wednesday, the latest symptom of uncertainty about the country's political shifts as it struggles to enact sweeping reforms following Hosni Mubarak's ouster.
Moody's cited the continued volatility in Egypt's politics and the potential impact of the unrest in Libya as drivers behind its decision to lower Egypt's foreign and local currency government bond rating to Ba3 from Ba2. It said it was maintaining its negative outlook on the ratings.
Moody's said that while the country's new military rulers had outlined a timetable for transition to a civilian government, "the process is fraught with uncertainty." Raising additional concerns is the tenuous security situation in the country, with the continued absence of any substantial police presence in the country, repeated Cabinet reshuffles and persistent protests.
"In Moody's opinion, this extended period of political disturbance undermines Egypt's institutional strength and raises event risk, at least over the short term," the agency said in a statement, adding that uncertainty about the country's economic recovery prospects is a cause for concern.
Egyptian officials have cut their expectations for the country's growth in the current fiscal year to around 4 percent. Meanwhile, analysts have said that calendar year 2011 GDP growth could push into negative territory as key sources of foreign revenue for the government, such as tourism and foreign direct investment, will likely fall short of projections.
Moody's said it believed Egypt's "growth prospects, fiscal position and balance of payments have all deteriorated," and cited Central Bank data from the end of February that indicates that there has been a "substantial" fall in official foreign assets. It said the drop was likely a result of foreign capital outflows and the Central Bank's earlier bid to prop up the Egyptian pound.
Fellow ratings agency Standard & Poor's on March 10 affirmed its BB/B long- and short-term foreign currency ratings and BB+/B long and short-term local currency ratings for Egypt. S&P said the ratings could stabilize if "Egypt's political transition strengthens the social contract and if government debt dynamics remain within our forecast of net general government debt reaching a plateau of 62 percent of GDP."
Even after Mubarak's ouster in February, the protests continued as a broad range of labor sectors took to the streets demanding better pay and more rights. The strikes have hit hard at production, while a growing number of Egyptians complain that their daily lives are being severely disrupted because of the unrest and the reports of growing lawlessness across the country.
Egyptians have sounded off about the persistently high level of youth unemployment, the disparity in income distribution and the widening gap between rich and poor in a nation where about 40 percent of the people live on or below the World Bank poverty line of $2 per day.
Compounding the problems is the continued closure of the Egyptian stock exchange, which has been shuttered since the end of trade on Jan. 27. The market's benchmark index fell by over 16 percent in two consecutive days of trade before the exchange closed, and officials have been drawing up new regulations aimed at preventing what many fear could be an outright collapse when it reopens.
The demonstrations that ousted Mubarak were part of the mass anti-regime unrest that has ravaged the Arab world. Stock markets in the Gulf region have been hit hard by the protests in Bahrain while the violence in Libya, Egypt's western neighbor, sent oil market surging.
Moody's said it could move its outlook on the country's ratings to stable if the political situation stabilized and the transition phase was followed by the "formation of an effective government that seemed committed to addressing Egypt's significant social and economic challenges."
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