CAIRO – Moody's Investors Service has Wednesday affirmed Egypt's Caa1 government bond rating and is maintaining the negative rating outlook. Therating affirmation is supported by the following considerations: (1) The substantial boost in Egypt's international liquidity provided by the $12 billion external financial support package from the governments of Saudi Arabia (Aa3 stable), Kuwait (Aa2 stable) and the United Arab Emirates (Aa2 stable); (2) The road map laid out by the interim, military-installed government for a return to democracy by early 2014; and (3) The recent containment of the government's debt-financing costs, below post-Revolution peaks. The maintenance of the negative outlook on Egypt's Caa1 rating is driven by Moody's view of the country's considerable economic and political challenges. Egypt's B3 foreign-currency ceiling, Caa2 foreign-currency deposit ceiling and Ba3 local-currency bond ceiling are unaffected by today's rating affirmation. The short-term country ceiling for foreign-currency bonds remains unaffected at Not-Prime (NP). Egypt's Caa1 bond rating indicates a material probability of default, although this 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 five-years is slightly under 40 percent. Other sovereigns rated in the same Caa category include Cyprus (Caa3 negative), Ecuador (Caa1 stable), Jamaica (Caa3 stable) and Pakistan (Caa1 negative). The primary driver behind Moody's decision to affirm Egypt's government bond ratings is the substantial boost in Egypt's international liquidity provided by the $12 billion (almost 5 percent of GDP) financial support package from the governments of Saudi Arabia, the United Arab Emirates and Kuwait to, as the Saudi government noted, “support the challenges” the country faces. This package will have the immediate effect of offsetting pressures on Egypt's balance of payments by substantially bolstering official foreign-exchange reserves. Moody's notes, however, that reserves are presently more than adequate to meet short and long-term debt payments falling due in the next 12 months. Saudi Arabia will provide $5 billion, Kuwait $4 billion and the UAE $3 billion. Most of the $12 billion total package will have the effect of augmenting the Central Bank of Egypt's (CBE) balance sheet. Saudi Arabia and the UAE each have already made a five-year, interest-free $2 billion deposit. – SG
