Moody’s credit rating agency ranks Egypt as stable

Egypt was given a stable B3 rating for its “long-term issuer and senior unsecured bond” by the credit rating agency Moody’s, a press release by Moody’s Investors Service said on Friday.

Moody’s rating measures debt security in the bond market, and ranges from A to C, where A is the highest security quality and C the lowest.

Moody’s rating follows an initial staff-level agreement between the Egyptian government and the International Monetary Fund, sealed on August 11, through which Egypt will guarantee a loan of US$12 billion. The agreement was seen by Moody’s as “credit supportive, because it will alleviate some of Egypt's external liquidity pressures and also promote the reform agenda.”

It was also perceived as a pathway to external funding from other multilateral and bilateral sources.

Moody’s says the rating reflects “upward and downward pressures” on Egypt bonds, despite efforts to implement fiscal and economic reforms over the last year. Moody’s cites Egypt’s civil service law and recent electricity price hikes as measures that could keep government spending in check, just as the value-added tax is expected to when applied.

The statement also rationalized the rating based on Egypt’s banking system, which was able to provide financial support during a stressful time and lowered the immediate risk of a fiscal crisis.

“Moody's notes that government effectiveness has improved, risks to policy making have diminished, and the overall political situation appears to be broadly stable,” the statement read, despite ongoing concerns about terrorist attacks in Sinai and on security targets, as well as high unemployment rates.

Yet, the rating still reflects what Moody’s considers “deep structural challenges reflected in very weak government finances, a fragile external payments position, and continued security risks,” the statement read, adding that these conditions have led to a poor business environment and constrained growth potential.

The fiscal deficit percentage, which is at 12 percent of Egypt’s GDP, and debt, which has reached 100 percent of GDP, are both given as evidence for these challenges. Fragile external payments are mainly due to a high trade deficit, lower tourism income and weaker Suez Canal revenues, besides the slowdown of public transfers from Gulf countries and lower influx from remittances, which is largely due to the gap between official and parallel exchange rates.

The exchange rates issue and hard access to foreign currencies are also seen to have affected direct investments.

The relevance of credit ratings for Egypt was limited in the past because the government didn't typically issue many external bonds and the private sector resorted to suppliers credit rather than bonds, economist Mohamed Abu Basha told Mada Masr. However, with the IMF agreement and Egypt intending to carry out bond issuance by the end of September, the rating becomes more relevant, he added.

Moody’s credit rating for Egypt last year was also stable at B3, while this year’s credit rating for Egypt by Standard and Poor’s was at B- and marked as negative.

Credit rating agencies have typically been criticized for being constrained to two or three companies at most (Moody’s, Standard and Poor’s and Fetch), all operating from the US as gatekeepers to financial markets. They have also been accused of a lack of accountability in their assessments, although they clarify that their work is mostly opinion based.

The problem is that credit rating agencies represent the only mechanism for bond pricing, with no other alternatives, Abu Basha adds. After the global crisis, he says people "started taking rating agencies more seriously."