Egypt’s bond rating was cut for the fifth time in two years by Moody’s Investors Service, pushing government debt six levels below investment grade on concern over International Monetary Fund loans and political unrest.
The country’s credit rating was lowered by one level to B3, New York-based Moody’s said today, putting it on par with Ukraine, Argentina and Nicaragua. The rating will remain on review for a further possible downgrade, Moody’s said. Benchmark dollar-denominated bonds tumbled.
The cut is the fifth by Moody’s since the January 2011 uprising that ousted former President Hosni Mubarak from power. Changes in government and concern over policy, including the constitution, have stoked sporadic violence in the North African nation and stalled talks over $4.8 billion in IMF assistance. More than 50 people have been killed in recent clashes between protesters and police.
Egypt’s rating was cut because of “the country’s ongoing unsettled political conditions and recent escalation of civil unrest in the form of violent clashes between protesters and security forces, resulting in many deaths,” Moody’s analysts including Thomas J Byrne wrote in a statement. “The political challenges facing the government complicate both the reaching of an agreement with the IMF, as well as the ability of the government to adhere to a program of fiscal austerity.”
The government’s 5.75 percent dollar bonds due in April 2020 fell, pushing the yield up 15 basis points, or 0.15 percentage point, to 6.81 percent by 1:30 p.m. in New York. That’s the highest level on a closing basis since June. While borrowing costs have surged 123 basis points since the start of the most recent bout of violence Jan. 25, yields are still 198 basis points below a high of 8.79 percent reached last January.
The Egyptian pound has retreated 7.9 percent since the central bank started auctioning dollars to local lenders in December, limiting access to the U.S. currency. The biggest drop in the currency’s value since its devaluation in 2003 has given rise to a black market where the dollar is sold at a premium of 3 percent to 5 percent, Cairo-based investment bank EFG-Hermes Holding SAE said in a report last week.
Moody’s is the third ratings company to reduce Egypt’s credit ranking since December, when Standard & Poor’s cut the nation to B-, also six levels below investment grade. Fitch Ratings followed with a downgrade to B, the fifth-highest junk level, last month. Moody’s also cited Egypt’s foreign reserves, which declined the most in a year last month to $13.6 billion, as one of the reasons for the downgrade.
“I think Moody’s has it right, no one is owning the economic problem,” Jean-Michel Saliba, a London-based economist at BofA Merrill Lynch, said by phone today. “There’s probably further downside to the bonds. Political violence in January has put down all hopes of a resolution to the political crisis in the near future.”
Egypt may be able to avoid another rating reduction should it start rebuilding international reserves, cut government borrowing costs, secure IMF assistance and restore economic growth to a path closer to “pre-revolution trends,” Moody’s said in the statement.
The economy has grown about 2 percent a year in the last two years, according to data compiled by Bloomberg, the slowest rate of expansion since the early 1990s.
The U.S. is urging all Egyptians to reject violence and work toward a democratic future, Assistant Secretary of State Michael Posner told reporters today in Cairo, referring to pending U.S. economic assistance. “Egyptian people need the economic support at this moment to help build a strong, prosperous and democratic country,” he said.
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