CAIRO, Apr 7 (Aswat Masriya) - Credit ratings provider Moody's upgraded the Egyptian government's bond rating to B3, with a stable outlook, rising from Caa1, it announced on Tuesday. 

The key drivers behind the upgrade, are "improving macroeconomic performance," reduction in "external vulnerabilities" and "ongoing commitment to fiscal and economic reform", Moody's Investor Service said in a statement on its website.

"Egypt still faces marked challenges, and upward pressure on the government bond rating is likely to be limited over the next 12-18 months," Moody's said. 

The upgrade was welcomed by Egypt’s finance minister, in a statement released shortly after Moody’s announcement.  

Moody's did address weakness in the government's finances, saying that "still sizeable deficits and elevated debt levels" continue to constrain the Egyptian government's bond rating of B3. 

"In addition, while government effectiveness has improved and risks to policy making are diminishing, Moody's still sees elevated security risks, as reflected in ongoing terrorist attacks," the statement read. 

Militancy in Egypt has surged since July 2013, particularly in the Sinai peninsula where security forces are often the target of bombings and shootings. 

Moody's cited improvements in Egypt's economic performance and stability among the reasons for improving the rating. Economic growth reached 5.6 percent in the first half of the ongoing fiscal year 2014/15 and Moody's "expects real GDP growth in Egypt to recover to 4.5% year-on-year for the current fiscal year."  

Contributing to reducing external vulnerabilities, Moody's said Egypt's net foreign reserves have stabilised. Net foreign reserves at the end of March reached $15.291 billion, the central bank said on Tuesday, dropping from $15.456 at the end of February.

Egypt signed direct investment agreements worth $36.2 billion during the Egypt Economic Development Conference, held from March 13 -15. Another $12.5 in assistance and investments were pledged by Gulf states of Saudi Arabia, Kuwait, the United Arab Emirates and Oman. 

Moody's expects Egypt to continue to carry out fiscal and economic reforms, introduced since last year. Egyptian President Abdel Fattah al-Sisi approved last June the state budget for the current fiscal year, after revising it to decrease the budget deficit to amount to or 10 percent of GDP.  

Egypt's government reduced petroleum subsidies and introduced new taxes in July, hiking fuel prices by up to 78 percent. The decrease in subsidies came among a string of austerity measures introduced by Sisi's administration since his accession to power last June.

Credit ratings firm Standard and Poor’s had upgraded Egypt’s credit ratings in November 2013, whereas ratings firm Fitch took a similar step last December, following a series of decreasing credit ratings since the January 2011 uprising which toppled the regime of former President Hosni Mubarak.