The Caa1 ratings and negative outlooks of Egypt and Pakistan are driven by a mix of external payment pressures and political weaknesses, with the latter exacerbating the balance-of-payments fragility in both economies, says Moody’s Investors Service in a new Credit Focus – Peer Comparison report published today.
In the face of similarly unsettled and factious political environments, neither the government in Cairo nor that in Islamabad has been able to put in place a policy framework that can arrest economic deterioration, let alone restore investor confidence.
The report, entitled “Egypt and Pakistan: Peer Comparison” is now available on the Rating agency; www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release. This report is an update to the market and does not represent a change to either of the two countries’ ratings.
Moody’s notes that both Egypt and Pakistan share a number of credit risks that drive the two countries’ Caa1 ratings. Firstly, both face external liquidity pressures and a steep decline of foreign reserves. A by-product of the political turbulence in both countries is the ongoing downward trend in foreign direct investment (FDI), punctuated by periods of outflows over the past two years. The accompanying run-down of foreign reserves, together with looming debt repayments, have further exacerbated the deterioration in Egypt and Pakistan’s balance of payments, despite moderate current account deficits and external debt levels compared with rating peers.
Secondly, both countries’ unsettled political backdrop have worsened economic risks and undermined investor confidence, prompting Moody’s to downgrade the ratings of both sovereigns to Caa1 over the past 12 months (although Pakistan’s rating has historically been lower and has not undergone the multi-notch ratings transition experienced by Egypt since its January 2011 revolution). The two countries’ politics will also determine their ability to secure external funding — a key driver of sovereign creditworthiness — from Middle Eastern governments, which Egypt has already obtained, and/or the IMF.
Lastly, Moody’s notes that both countries have deeply entrenched fiscal imbalances and strained government finances. Egypt and Pakistan’s large and persistent fiscal imbalances have widened in recent years, weighed down by troubled domestic energy sectors. Given the scarce external financing available, both countries have become more dependent on banks to finance their deficits, thus buffering external risks somewhat.