Moody’s cuts rating by a notch as fears over economy grow

MOODY’S Investors Service cut its rating on Egypt’s sovereign debt yesterday, saying the government might damage its already weak finances by increasing social spending to calm mass protests.

It announced a one-notch downgrade, to Ba2 with a negative outlook from Ba1.

The news follows a similar move by Fitch Ratings, which cut the outlook on Egypt’s BB+ country ceiling to negative, saying the political turmoil would likely undermine the country’s economic reform programme.

A Moody’s spokesman said: “There is a strong possibility that fiscal policy will be loosened as part of the government’s efforts to contain discontent.

“A background of rising inflationary pressures further complicates fiscal policy by threatening to increase the high level of budgetary expenditure on wages and subsidies.”

Egypt’s budget deficit in the fiscal year to June 2010 was 8.1 per cent of gross domestic product (GDP). It aims to keep the deficit at 7.9 per cent of GDP this fiscal year, falling to between three and 3.5 per cent in 2014/15.

There is rising unease among rating agencies at the impact of political tensions across swathes of North Africa.

Standard and Poor’s says political and fiscal uncertainty is weighing on the sovereign ratings of several Middle Eastern and North African countries, with Algeria and Jordan most vulnerable to unrest similar to the protests in Tunisia and Egypt.

Fitch says it will decide in three to six months whether to cut its rating on Tunisia, following weeks of unrest that forced a change of government and hit economic growth.