Placing the rating on review for further possible downgrade in the event that foreign exchange reserves continue to decline at their current pace, bringing Egypt closer to a currency or balance-of-payments crisis. Also, continued social unrest and political uncertainty and an unrelenting upward trend in the government funding costs would further increase refinancing risks and prompt a further downgrade.
Moody's has also downgraded Egypt's country ceiling for foreign-currency bonds by one notch from Ba2 to Ba3 and the country ceiling for foreign-currency bank deposits from B2 to B3. The short-term country ceiling for foreign-currency bonds remains at Not-Prime. The local-currency bond and deposit ceilings remain unchanged at Ba1.
The main reason for the downgrade has been the continued political unsettlement following the November 28 elections and the installation of the fourth transitional government since January which has resulted in ineffective and unpredictable economic policies.
Investor confidence will remain shaken as Egypt remains in transition to a constitutional and civilian rule.
The continued deterioration of Egypt's external payments position also contributed to the downgrade, where foreign exchange reserves have fallen by almost $4 billion (LE 24.1 billion) to $20.2 billion (LE 121.6 billion) at the end of November 2011. This represents a cumulative decline of 44% since December 2010.