VZCZCXYZ0004
RR RUEHWEB

DE RUEHEG #1335 1781314
ZNR UUUUU ZZH
R 261314Z JUN 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9676
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0416

UNCLAS CAIRO 001335 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
TREASURY FOR SCHINDLER, BAUKOL, MATHIASON AND DENNIS 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EFIN EG
SUBJECT:  MOODY'S DOWNGRADES EGYPT 
 
¶1.  (U) Moody's Investors Service downgraded its ratings of several 
categories of Egypt's debt on June 23.  In particular, Moody's 
changed the outlook on Egypt's Ba1 foreign currency government bond 
from stable to negative and it changed the local currency bond 
rating from Baa3 to Ba1 while preserving its negative outlook. 
 
¶2.  (U) Moody's largely cites rising inflation behind the move. 
While inflation is rising across the region, it has hit Egypt 
particularly hard, and analysts are increasingly expecting inflation 
to remain high through much of 2008.  The y-o-y data of 20% in May 
is one of the highest levels Egypt has seen and it is markedly 
higher than the peers in Egypt's comparator class.  Egypt also has 
the highest public debt burden and widest fiscal deficit of 
countries in its investor peer class.  In response to social 
pressures, the government has increased the subsidy bill and wages, 
both of which contribute to an already strained fiscal position. 
 
¶3.  (U) Moody's notes that the high inflation has contributed to 
some social vulnerabilities, and notes that for the outlook to 
stabilize, there would need to be a reduction in inflation and 
reassurance that the fiscal and social risks were being contained. 
 
 
¶4. (U) Egypt's stock exchange has been suffering since May 5 when 
new revenue measures were announced, several of which will increase 
tax burdens on major industries listed on the exchange.  This week, 
the downward movement has continued with the Moody's downgrade and 
the announcement that the GOE had not accepted any of the offers for 
the Banque du Caire privatization (septel).  The market is down 2.25 
percent this week, and 15.5 percent since May 5. 
 
¶5.  (SBU) The vast majority of Egypt's debt is held domestically and 
the majority of that is held by the state-owned banks.  Most banks 
in Egypt hold debt until maturity as the secondary market is 
undeveloped and state-owned banks consider this debt to be risk 
free.  Hence, the impact of the downgrade may not be huge, but it 
should have some impact on the government's borrowing costs.  A 
senior EFG-Hermes investment bank analyst says, "The downgrade may 
have an impact on yields on local and foreign government debt, and 
this may affect pricing on the Eurobond planned for this year." 
Mohamed Assad in the Finance Ministry indicated surprise by the 
decision, but also was fairly dismissive of its impact.  He said, 
"The inflation is all imported -- why should we be punished for 
that?"  However, he agreed that it could affect any possible 
international offerings later in the year. 
 
SCOBEY