Moody's Cuts Egypt Bond Rating, Outlook

CAIRO (AP) - Moody's Investors Service cut Egypt's sovereign rating, revised its outlook to negative and warned further reductions were possible after a week of protests that have catapulted the Arab world's most populous nation into a state of chaos.

The downward revision in the country's outlook was at least the second by an international ratings agency since the mass demonstrations demanding President Hosni Mubarak's ouster began a week ago. The move highlighted growing concerns about Egypt's stability, and by extension, the economy.

The cut was driven by the growing unrest, noting that "Egypt suffers from deep-seated political and socio-economic challenges," said Tristan Cooper, Moody's head analyst for Middle East Sovereigns.

The ratings agency's cut of the government bond from Ba1 to Ba2 appears more symbolic than substantive. They were already in the speculative range - far from investment grade. But the downgrades will do little to ease borrowing costs for Egypt, which have already climbed since the unrest began.

Moody's also cut the country ceiling for foreign currency bonds to Baa3 from Baa2, the lowest investment grade level.

While the agency would be ready to revise up its outlook rating to stable again if political and fiscal concerns ease, further downgrades would happen "if there were a substantial escalation of political volatility, a large fiscal slippage, or evidence of lasting economic damage that threatened to impair credit fundamentals relative to Ba2 rating peers," said Cooper.

Late last week, rating agency Fitch had lowered its outlook for Egypt to negative from stable, also citing worries about the unrest and questions about what it means for the country.

Unemployment is unofficially estimated at over 25 percent - and even higher among the youth - food price inflation has been at about 17 percent per year and the rampant poverty and inequity in income distribution have all served as a catalyst for the popular uprising.

"The end-game in the political crisis in Egypt remains uncertain," investment giant Citigroup said in a research note. "The position of (Mubarak) is looking increasingly tenuous, although it is far from clear how any transfer to a new political order will proceed, and over what timeline."

The unrest has had a palpable, if yet not-quantified, effect on the economy. It also has analysts jittery about a spillover effect in much the same way they had voiced worries when Tunisia's protests weeks earlier led to the ousting of that country's president.

Citigroup said concerns that are stoked by the unrest in Egypt are tied to whether it will spread to other autocracies, disruptions in oil supplies and any change in the regional power balance that threatens Israel.

Within Egypt, the stock market's benchmark index fell about 17 percent in the span of two days before the weekend, and has been closed since. Its decline triggered a ripple effect in regional exchanges. That slide, however, appeared short-lived as most regained at least some of the losses accrued Sunday, the first day of the work week in much of the Arab world.

Tourism is expected to take a big hit. Foreigners are struggling to flee the country, tour and cruise companies are seeing cancellations and a growing list of Western and Arab nations are sending in flights to evacuate their nationals. The tourism sector is vital for Egypt - and is among one of the four top sources of foreign revenue for the country.

Few to no companies have been working since Thursday, the end of the work week. Unilever said its offices in Cairo have been closed since Jan. 28. General Motors' plant in the 6th of October City near Cairo has not been producing vehicles also since that date, and production was not expected to restart at least until after Friday, according to an employee at the plant who declined to be identified because he was not authorized to speak to the media.

Foreign companies were also beginning to pull their foreign staff from the country, though oil companies such as BP PLC said their production remained unaffected.

French cement company Lafarge said Monday that it is repatriating about 100 employees and their families from Egypt. "This decision was taken as a measure of prudence and in the interest of the families," Lafarge said in a statement.

The government has cut Internet access since Jan. 28 - a move aimed at disrupting protesters' ability to mobilize. But one potential long-term effect of the move is to undercut investor confidence in a country that has taken pride in its growing outsourcing and call center business. With no Web access, such services are at a standstill.

Egypt, which had enjoyed relatively robust economic growth rates even during the global financial meltdown, was projecting GDP growth of 6 percent for 2011. But the country faced numerous challenges, even before the protests unfolded.

Egypt's fiscal deficit is roughly 8 percent of GDP, compared with a median 4 percent for other countries with Ba ratings, according to Moody's. Its public debt also was significantly higher than other countries in the same category.

Part of the problem stemmed from sizable subsidy costs. The government spends roughly 100 billion Egyptian pounds - or $16.9 billion - per year on subsidizing key commodities such as fuel and foodstuff, with roughly 63 million of its 80 million people receiving such help. Efforts to cut the subsidies - a key step to boosting spending in other sectors - were delayed by the world's recession two years earlier.

Under the best of circumstances, it would have been an unpopular move in a country where about 40 percent of the population lives on or below the World Bank-set poverty line of $2 per day.

"There is a strong possibility that fiscal policy will be loosened as part of the government's efforts to contain discontent," Moody's said.

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AP Business writers Greg Keller in Paris and Adam Schreck in Dubai contributed to this report.