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Moody’s: Market-based risk deteriorating in Egypt

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The global research company says that civil unrest in Egypt has increased the country’s market-based probability of default

Current unrest further endangers Egypt's weakened economy, increasing its chances of defaulting, according to Moody's. AFP Photo

Current unrest further endangers Egypt’s weakened economy, increasing its chances of defaulting, according to Moody’s.
AFP Photo

Market-based risk in Egypt has deteriorated following recent crackdowns on sit-ins by government authorities, credit-rating agency Moody’s said in a reported dated 19 August.

“Investors are understandably concerned about the impact of the civil unrest on Egypt’s already fragile economy,” the report read, noting that the country’s 5-year credit default swap spread had widened to 782 bps, up from less than 700 bps only a month ago.

“Over the same period, the country’s 5-year cumulative CDS-implied Expected Default Frequency credit measure (EDFTM) [a tool that risk managers use to extend coverage of credit risk measure and assess default risk] increased from 7.01% to 9.01%,” the report added.

Moody’s mentioned that although the turmoil in Egypt resulted in an increase in the prices of oil and gold, the impact on the market-based probabilities of default in other countries has only been marginal.

In his meeting with the country’s economic ministers last week, Al-Borsa newspaper reported that interim prime minister Hazem El-Beblawi said that Egypt’s foreign debt is $45bn, which he described as “safe”. Meanwhile, the Central Bank announced that Egypt’s domestic debt surged to EGP 1.460tn in the third quarter of fiscal year (FY) 2012/2013, compared to EGP1.38tn in the previous quarter.

The latest official report by Moody’s in August downgraded Bank of Alexandria’s local currency deposit rating one notch, from B2 to B3. In March, prior to Mohamed Morsi’s ouster, the international rating agency cut Egypt’s credit rating from B3 to Caa1, the sixth downgrade since January 2011. On 24 July, it affirmed Egypt’s Caa1 rating, classifying it as very high credit risk.

In its July report, the agency said its negative outlook for Egypt is based on the considerable economic and political challenges the country faces, noting that an upgrade would be unlikely in the near term.

Moody’s previously stated that it considers the Gulf aid a credit positive since “they will have the immediate effect of offsetting pressures on Egypt’s balance of payments by substantially bolstering official foreign exchange reserves.”

Moody’s also believes that the implementation of an International Monetary Fund-supported program of fiscal and economic reform would be considered a credit positive.

The economy has suffered a recent setback after the violent dispersal of the pro-Morsi sit-ins, which led to the escalation of violence in several governorates, damaging business sectors and forcing foreign investment to temporarily shutdown.


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