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Oct 20, 1:29 PM EDT

Moody's raises Egypt's outlook to stable from negative but keeps government bond rating low

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CAIRO (AP) -- Moody's Investor Services said Egypt's political and security situation has stabilized, raising the country's outlook from negative to stable.

The influential international ratings agency credits, "the launch of government initiatives toward fiscal consolidation, signs of a growth recovery and an improvement in macroeconomic stability" for its revised assessment, which was announced on Monday.

However, Moody's kept Egypt's government bond rating at "Caa1"-essentially junk bond level. Moody's said the continued low rating "reflects the very weak and challenging state of Egypt's government finances."

Wael Ziada, head of research at EFG Hermes, one of the Middle East's largest investment banks, called Moody's improved outlook "a prerequisite for attracting investors." He said it is particularly important ahead of a major donor's conference next February, where the government is looking to raise as much as $100 billion.

However, Ziada said the government has yet to clarify its broader economic vision despite some positive steps.

Egypt's economy has been battered from three years of near-constant political upheaval since the ouster of longtime autocrat Hosni Mubarak. The vital tourism industry collapsed and Egypt has struggled to attract foreign investors. Gulf countries have kept Egypt's economy afloat with massive influxes of aid.

In the last year, a sweeping crackdown on dissent - including a law banning demonstrations without prior government approval and the arrest of thousands of government opponents - has all but crushed street protests.

Now, President Abdel Fattah el-Sissi has launched a number of mega-projects including the expansion of the Suez Canal. The government says that project could boost revenues from $5 billion to $13 billion annually.

The government slashed fuel subsidies and is pursing revenue-enhancing measures aimed at deficit reduction. "It's an economy that has benefited from some important decisions that have been made by the Egyptian government recently to try and contain their budget deficit ... raising energy prices and reallocating these resources to other more productive uses," said International Monetary Fund Middle East Director Masood Ahmed at a recent press conference.

The country's finance ministry predicts growth rates of up to 6 percent within three years, which would mark a major turnaround. Government officials have said recent tourism figures are showing signs of recovery as a number of key countries lift travel warnings to the Sinai Peninsula.

The IMF said it plans to conduct a long-delayed assessment of Egypt's economy in November. Finance Minister Hany Kadry Dimian has said he hopes the resumption of consultations with the IMF will help restore confidence in the economy for investment.

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