The agency has accordingly lowered its outlook on the Baa1 local currency bond rating from stable to negative. However, Moody's has maintained its stable outlook on Egypt's Ba1 (sub-investment-grade) foreign currency country ceiling.

The agency says the change in the local currency outlook stems from a deterioration in the government's budgetary position. The budget deficit has been running at more than 4 per cent of GDP for the past two years. Moody's also says the outlook incorporates 'the context of increasingly complicated domestic politics because of Egyptian popular discontent with the US military operations in Afghanistan, which may deter the government from undertaking difficult economic adjustments'.

According to figures issued by the Economy Ministry, domestic debt has been rising by about 8 per cent a year over the past five years. Debt was equivalent to 64 per cent of GDP at the end of July 2001.

Moody's, in its 7 November statement on the revised outlook, was more upbeat on the government's efforts to make the exchange rate system more flexible and broaden the tax base.