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CAIRO Dec 21 Credit rating agency Moody's
downgraded Egypt by one notch to B2 from B1 on Wednesday and
warned it could cut the rating further, saying the unsettled
political situation was undermining investor confidence.
Egyptian officials were not immediately available for
Moody's also cited a deterioration in the country's balance
of payments position, exacerbated by falling foreign exchange
reserves, which it said raised the risk of a balance of payments
crisis if Cairo cannot secure international financial aid.
Government finances are under increasing pressure,
raising refinancing risks, the rating agency said.
Moody's said the unsettled political situation was the main
driver for the downgrade, citing the installation by the ruling
military council of Egypt's fourth government since the popular
uprising that toppled Hosni Mubarak broke out in
"In Moody's view, the repeated changes in government
leadership have resulted in ineffective and unpredictable
economic policies," it said in a statement.
"Moreover, the protracted timetable for a transition to
constitutional and civilian rule, as demanded by the major
political parties, will likely continue to undermine investor
confidence in the Egyptian economy."
The third round of Egypt's parliamentary election ends on
Jan. 11, but it will be followed by a staggered vote for the
upper house that ends in March and then a presidential vote in
June, after which the army has promised to hand powers to an
elected president. Dozens of protesters have died over the last
few months in a series of violent clashes with the police and
The ratings agency said pressure on Egypt's balance of
payments from domestic political turmoil will be further
compounded by the economic downturn in Europe, a trading partner
and key source of tourism revenues.
In the third quarter of 2011, foreign direct investment fell
to $440 million from $1.60 billion a year earlier, helping to
create a $2.36 billion deficit in the balance of payments versus
a surplus of $14.7 million a year before.
"Moody's believes that the Central Bank of Egypt will find
it increasingly difficult to maintain adequate international
liquidity in the months or year ahead, raising the risk of a
balance-of-payments crisis," the rating agency said.
It said slowing economic growth and lower tax revenues were
widening the budget deficit, which it believed would reach 10
percent of gross domestic product in the year to June 30.
Meanwhile, rising domestic interest rates and the short
average maturity of Egypt's debt - less than two years,
according to Moody's - heightened refinancing risks.
External financial support would relieve pressure on both
the budget and the balance of payments, but a meaningful level
of such international funding remains elusive.
Egypt's ruling military council in June turned down $3
billion in stand-by loans from the International Monetary Fund
because such a deal would infringe on Egypt's sovereignty and
burden the country with debt for years to come. The government
has not ruled out returning to the IMF if it has to.
Moody's said it would consider a further downgrade if
Egypt's foreign reserves continued to decline by the rate of $2
billion in each of the last two months or if its social and
political uncertainty continued.
(Reporting by Chris Reese and Patrick Werr; Editing by