NEW YORK: Moody’s Investors Service has downgraded Egypt’s sovereign foreign currency credit rating from B3, citing unsettled political conditions, and said risks of a default have increased.
Egypt’s economy has been in crisis since the 2011 overthrow of Hosni Mubarak, with Islamist President Muhammad Mursi’s government grappling with sliding currency reserves, dwindling tourism, a soaring budget deficit and a wave of often violent street protests.
“More than two years into the Egyptian revolution, the continued unsettled political conditions have significantly weakened Egypt’s economy,” Moody’s said in a statement.
The government’s inability to secure financing from the International Monetary Fund has exacerbated a lack of predictability in the Middle East nation’s economy and fiscal policies.
The outlook on the credit is negative, Moody’s said.
Egypt is rated one notch higher at B-minus with a negative outlook by Standard & Poor’s while Fitch Ratings has Egypt two notches higher at B with a negative outlook.
“The sustained deterioration in Egypt’s external payments position and government finances have reached a level at which the country’s vulnerability to economic or political shocks has widened and the risk of default has consequently increased,” Moody’s said.
While the risk of a default has increased, Moody’s cautions that a default is not necessarily imminent.
“At the Caa1 rating level, the historical record shows that the average, cumulative default rate over a one-year horizon is close to 10 percent and over a five-year horizon slightly under 40 percent,” Moody’s said.
Egypt’s central bank, meanwhile, raised its main interest rates by 50 basis points, taking the overnight deposit rate to 9.75 percent and the overnight lending rate to 10.75 percent, the bank said after its monetary policy committee (MPC) met.
The bank said on its website that it had also raised its main repo and deposit auction rates by 50 basis points to 10.25 percent and the discount rate by 75 basis points, also to 10.25 percent.
Before the meeting, economists had been split on whether the bank would hold rates to avoid damaging a very weak economy, or raise them in the hope of curbing a sharp rise in inflation and supporting the Egyptian pound.
The pound has lost 9 percent of its value against the dollar since late last year, pushing up the cost of imported goods. Inflation in towns and cities jumped to 8.2 percent in the year to February from 6.3 percent in January.
Inflation is eating into Egyptians’ living standards as the country has slid into crisis since the overthrow of president Honsi Mubarak two years ago.
