Moody’s: Egypt’s ailing economy increases credit risk, 1-year EDF ups

Moody’s Investors Service said in its latest report that the recent deterioration in Egypt’s economic outlook has led to a sharp increase in its sovereign risk profile.

The one-year Expected Default Frequency (EDF) for Egyptian government debt increased from 0.09% year Sovereign EDF, meanwhile, rose from a low of 0.68% to the latest figure of 1.18%.

“These numbers are when the volatile political situation resulted in the Egyptian army taking control of the government in a coup d’état, pushing the fiveyear but still constitute a material deterioration in credit risk.” Moody’s stated.

“The five-year EDF measure corresponds to an implied rating of B1, which is comfortably noninvestment grade. The Moody’s agency rating sits two notches lower, at B3.”

The increase in Egypt’s Sovereign EDF measures has been driven by rising CDS spreads. The five-year CDS spread was 325 basis points in late-September, rising to 456bp on November 20. Investor risk aversion, as measured by the Market Sharpe Ratio – the other key driver of CDS-implied-EDFs is the loss given default, assumed constant at 75% for sovereigns – remains elevated, but has been decreasing since early-October. That said, if not for the recent fall in investor risk aversion, Egypt’s Sovereign EDF metrics would be higher.

Egypt’s economic outlook has deteriorated since the October 21 bombing of a Russian Metrojet plane in northern Sinai.

The Egyptian central bank operates a managed float exchange rate, and it has already come under some pressure as foreign exchange receipts decline.

An October 18 devaluation was reversed several days later, but the currency is likely to remain under pressure. Egypt’s foreign reserves fell to US$16.4 billion in September, enough to cover just three months worth of imports. The current account deficit is expected to hit 3.7% of GDP in 2015.

Further currency depreciation would be an additional headache for the Egyptian government. Its 2015 budget deficit is expected to hit 11.7% of GDP, while gross government debt sits at 90% of GDP.

Since the Arab Spring and overthrow of the Egyptian government in 2011, its government has been largely frozen out of international capital markets.

The modest bond issuances since then have been denominated in U.S. dollars; any currency depreciation makes it more difficult for the government to service its debts. Meanwhile, the price of traded Egyptian government bonds has been declining in 2015, implying that the interest demanded on any freshly issued debt would also be higher.