Moody’s Pushes Egypt Lower Into Junk on Political Divide

Egypt’s sovereign rating was cut to seven levels below investment grade by Moody’s Investors Service, which said political stalemate was hindering an economic recovery. Egyptian dollar bonds plunged.

The Arab country’s government bonds were reduced by one level to Caa1 with a negative outlook, the New York-based ratings company said in a statement. That’s the sixth cut in Egypt’s rating since the 2011 uprising that ousted Hosni Mubarak, taking it to the same level as Pakistan and one level below Argentina.

The cut reflects “deep polarization” of the country’s politics with “repeated episodes of violent civil unrest,” Thomas Byrne, a Moody’s analyst, said in the report. “This polarization is in turn impeding the government’s ability to govern effectively, restore social stability and avert a worsening of the already severe disruption to the economy.”

The yield on the government’s benchmark $1 billion of 5.75 percent dollar-denominated bonds maturing in April 2020 surged 44 basis points, or 0.44 percentage point, to 7.87 percent at 5:46 p.m. in Cairo, heading for a record high.

Egypt has been in loan talks with the International Monetary Fund for more than two years and its foreign reserves have plunged more than 60 percent since the 2011 uprising. The government is “exerting the utmost effort” to complete a $4.8 billion IMF agreement by the start of next fiscal year in July, Planning and International Cooperation Minister Ashraf el-Arabi said yesterday.

Budget Target

The government has been forced to scale back its economic program amid political unrest that has rocked the country for more than four months, sparking nation-wide demonstrations where dozens have been killed. A revised plan announced last month sets the budget deficit target at 9.5 percent of economic output in the year that ends in June 2014, compared with an 8.5 percent goal announced in November.

The Moody’s rating decision reflects the pricing of existing debt, according to Said Hirsh, an independent London-based Middle East economist.

“It would be a problem if it was to reissue,” he said by phone. “There isn’t much foreign money coming to the country in any case. So, the downgrades are just a reflection of the poor condition that Egypt is in and how the rest of the world views it at the moment.”

‘Bad Start’

Lawmakers yesterday approved the country’s first sukuk law, paving the way for the government to take part in a market that hit a record $46 billion of debt sales last year.

The rating cut “will definitely get them off on a bad start,” Hirsh said, referring to a possible Islamic bond sale. “There is definitely demand for sukuk, but it doesn’t mean that investors are taking it at any price.”

Egypt’s rating “indicates that the probability of default has risen materially but that the risk of default is not necessarily imminent,” Moody’s Byrne wrote in the report. At Caa1, the average cumulative default rate over one-year is close to 10 percent and slightly under 40 percent over five-years, he added.

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