DUBAI, Oct 20 (Reuters) - Moody's raised Egypt's credit ratings outlook to stable from negative on Monday, citing a more stable political and security situation and signs of economic recovery.

It refrained from upgrading the credit rating, keeping it at Caa1, still one notch below Standard & Poor's, saying government finances are still too weak.

Moody's said government initiatives and reforms launched over the past year, including plans to phase out fuel and electricity subsidies, and measures to lift public revenues by a shifting to value-added tax system from a goods and services tax, had improved the outlook.

The upgrade to the credit outlook may help restore confidence in an economy hammered by political turmoil that has weighed on investment and tourism for nearly four years.

A constitutional referendum in January and presidential elections in May this year, with parliamentary elections likely to be held by early 2015, had provided a political reform roadmap and led to greater institutional stability, Moody's said in a statement.

Egypt's economic outlook has brightened in recent months. The economy grew 3.7 percent year-on-year in the fourth quarter, up from 2.5 percent in the previous quarter, and more recent economic indicators have pointed to a sequential pick-up in growth.

"Domestic investors are showing confidence in the economic recovery of Egypt," Moody's said, adding that strong demand from the recent $8.5 billion issue of Suez Canal investment certificates to retail investors was testament to investor confidence.

Economic growth and employment will be supported at least for the next five years by the expansion of the Suez canal and development of the surrounding area, it said.

This, coupled with external support from Gulf Cooperation Council member states, supports Egypt's budget and cuts the government's financing costs, it noted.

Gulf Arab States have pledged almost $17 billion in financial support to the Egyptian government during 2014, and the U.S. government has resumed military cooperation and aid.

Standard & Poor's rates the country B-minus with a stable outlook. S&P upgraded Egypt's credit rating in November 2013, citing support from other countries which continued to prop up government finances.

In June, Fitch affirmed its credit rating for Egypt at B-minus.

Moody's said the affirmation of the Caa1 rating reflected the very weak and challenging state of Egypt's government finances.

Egypt's budget deficits remaining at over 10 percent of GDP and the country's policy of increasing expenditure to meet social welfare demands indicates that fiscal consolidation will be very gradual, with the fiscal deficit still expected to be elevated by fiscal 2019 at 8.5 percent of GDP. (Reporting by Archana Narayanan; Editing by Susan Fenton)