Moody's Investors Service has downgraded Egypt's government bond ratings by one notch to B2 from B1 and also placed the rating on review for further possible downgrade.

It said that the move was in response to Egypt's ongoing unsettled political situation, which continues to undermine investor confidence.

It also noted the deterioration in the country's external balance of payments position, which it said was exacerbated by the continued loss of official foreign exchange reserves and which raises the risk of a balance of payments crisis.

The rating agency added that it was concerned about the absence of a meaningful level of exceptional, external financial support to help restore confidence in the transitional period ahead of a return to civilian rule.

It said in a report that "In Moody's view, the repeated changes in government leadership have resulted in ineffective and unpredictable economic policies. Moreover, the protracted timetable for a transition to constitutional and civilian rule, as demanded by the major political parties, will likely continue to undermine investor confidence in the Egyptian economy."

It said in the past two months, foreign exchange reserves have fallen by almost USD 4 billion to USD 20.2 billion at the end of November 2011, a cumulative decline of 44% since December 2010.

It added that "Moreover, the pressure on Egypt's balance of payments from the domestic political turmoil is further compounded by the economic downturn in Europe."

Moody's said that as a result, receipts from tourism have dropped sharply while growth in exports and in Suez Canal revenues will likely falters. Foreign direct investment in Egypt has suffered a dramatic contraction to a USD 65 million outflow in H1 2011 from a USD 4.2 billion inflow in H1 2010.

Moody's added that "In the absence of further financial support, Moody's believes that the Central Bank of Egypt will find it increasingly difficult to maintain adequate international liquidity in the months or year ahead, raising the risk of a balance of payments crisis."

The IMF had offered a USD 3 billion stand by arrangement in June 2011, and the governments of Saudi Arabia and the UAE are reported to have offered USD 7 billion in economic pledges, which may become more readily available with an IMF program.

Moody's said such funding would relieve pressures on both the fiscal and external payments positions and help restore investor confidence.

(Sourced from www.arabianbusiness.com)