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May 9, 2013 3:30 pm
The agency lowered Egypt’s long-term credit rating from B- to CCC+, and its short-term rating from B to C on worries about the country’s ability to meet its financial targets and maintain social peace more than two years after President Hosni Mubarak was overthrown in an uprising, ushering in a new era.
The news delivers a further blow to the government of President Mohamed Morsi and his cabinet of mostly Muslim Brotherhood allies who have thus far failed to agree a $4.8bn financing deal with the International Monetary Fund that could potentially draw in foreign and domestic investment.
“The downgrade reflects our view that the Egyptian authorities have yet to put forward – either to the Egyptian population or the international donor community – a sustainable medium-term strategy to manage the country’s fiscal and external financing needs,” S&P wrote in a note. “As a result, we expect financing pressures to remain elevated and comprehensive donor support, including from the International Monetary Fund, to remain elusive.”
It is the sixth S&P downgrade since the uprising and will be seen by analysts as a rebuke to the government’s recent attempts to right an economy that has been beset with inflation, slow growth and a weakening currency.
Mr Morsi this week signed into law a bill allowing the issuance of Islamic debt instruments called sukuk that its proponents claim may raise billions of dollars. And his prime minister, Hisham Kandil, on Tuesday announced a cabinet reshuffle that brought in a new finance minister.
But these moves failed to impress Mr Morsi’s political opponents, the international community or even some of his own Islamist allies.
“The downgrade is a realistic reflection of the fact that Egypt is without a pro-growth economic plan that would change sentiment,” said Angus Blair, founder of the Signet Institute, a Cairo think-tank. “Domestic sentiment remains poor. The downgrade means that they’re in danger of not being able to pay back their debts. You still have long-term trade deficits and a current account deficit. You need the government to pull a rabbit out of the hat.”
The S&P report described Egypt’s outlook as “stable” because of the willingness of the international community to prop it up. Qatar recently committed to giving Egypt $3bn in financial aid. A $2bn Libyan deposit in the country’s central bank last month papered over the unhealthy state of its foreign currency reserves, which have dropped from $36bn at the start of Egyptian revolution to $14.4bn at the end of April.
Still, S&P said the hastily arranged loans and deposits only buy Egypt “a limited amount of time to deliver more sustainable public finances and avoid a balance of payments crisis”.
The rating agency also voiced fears that Egypt’s foreign currency reserves could fall further because of the deterioration of the Egyptian currency, which has dropped nearly a quarter in value against the dollar since January 2011.
Egypt’s benchmark EGX30 was flat on the day’s news, reflecting already diminished investor expectations. “It’s like a city hit by a tsunami,” said Wael Ziada, head of research at EFG-Hermes, a Cairo investment bank. “You know the damage has happened. But all of a sudden a news agency says 10 people died. You know it’s going to happen; you’re just waiting to see the number.”
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