Moody's Investors Service has downgraded Egypt's government bond ratings to Ba2 from Ba1 and has changed the outlook to negative from stable.

'Today's rating action was prompted by the recent significant rise in political event risk and concern that the policy response could undermine Egypt's already weak public finances. We had previously signaled that such developments may result in a ratings downgrade,' a statement said.

Moody's has also downgraded the country ceiling for foreign currency bonds to Baa3 from Baa2 and the country ceiling for foreign currency bank deposits to Ba3 from Ba2. The outlook on these ratings was changed to negative from stable. The short-term country ceiling for foreign currency bonds was downgraded to P-3 from P-2. The local currency ceilings were downgraded to Baa1 from A3.

Moody's decision to downgrade Egypt's government bond ratings is driven by increased event risk. This has resulted from escalating political tensions in the country following the recent uprising in Tunisia, with large-scale anti-government protests taking place.

Moody's notes that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations.

In Moody's opinion, 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.

The public finances in Egypt are already stretched and are significantly weaker than Ba rating peers. For example, Egypt's fiscal deficit approximates 8 per cent of GDP, compared with a median for the Ba rating category of around 4 per cent of GDP. Egypt's public debt also exceeds the Ba median by a considerable margin.

Moody's points out, however, that Egypt's ratings continue to be supported by a number of important factors. These include a relatively robust external position, a well-diversified economy and a favourable public debt structure with limited refinancing risk. The government has shown a high degree of willingness to repay and has never defaulted on its bonds.

Moody's would be ready to move the ratings outlook to stable in the event that political tensions and attendant fiscal and economic risks abate. Conversely, Moody's would downgrade Egypt's sovereign ratings again 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.

Moody's last rating action affecting Egypt was implemented on April 26, 2010, when a Ba1 rating was assigned to the government's dollar-denominated senior unsecured bonds worth $1.5 billion.

Prior to that, Moody's last rating action on Egypt was taken on August 19, 2009, when the rating agency changed the outlook on Egypt's sovereign ratings to stable from negative.-TradeArabia News Service