A police officer fires rubber bullets at anti-government protesters and members of the Muslim Brotherhood at Ramsis street, which leads to Tahrir Square in downtown Cairo
Police fire rubber bullets during a protest in Cairo last month: Fitch believes Egypt's situation is stabilising

Funds from Gulf countries have helped stabilise Egypt’s outlook but the country still faces “ substantial risks and challenges”, according to Fitch Ratings.

Fitch has downgraded Egypt five notches since the uprising against Hosni Mubarak, the former president, in 2011, but on Wednesday it said “tentative political and economic improvements” were behind its stabilisation of the outlook.

Last month the agency affirmed Egypt’s long-term foreign currency rating at B- but revised the outlook from “negative” to “stable” for the first time since the revolution in January 2011.

The agency noted that large inflows of bilateral funds from Gulf neighbours following the popularly backed coup which ousted Mohamed Morsi, the elected Islamist president, have eased pressure on reserves, the exchange rate and the budget.

Delighted with the ousting of Mr Morsi, the United Arab Emirates, Saudi Arabia and Kuwait pledged $16bn to Egypt in loans, grants, funding for projects and free petroleum products. Cairo returned $3bn of funds previously granted by Qatar, with whom relations have soured because of Doha’s support for Mr Morsi and his Muslim Brotherhood group.

Mr Morsi is standing trial on charges that include conspiracy, treason and incitement to murder. Thousands of Brotherhood supporters, as well as other critics of the military-backed government, remain in detention.

The agency warned that the crackdown is unlikely to end the turmoil: “Although political turbulence has been contained, serious tensions remain and Fitch believes that the clampdown on the Muslim Brotherhood brings a greater risk of radicalisation than before 2011. Donor inflows will not be sufficient to end foreign-exchange rationing and making inroads into the large fiscal deficit will be tough.”

Propped up by aid from its Gulf friends, Egypt’s foreign reserves stood at $17.1bn at the end of January – just under half of their level of $36bn on the eve of the revolution. Despite the support from abroad, foreign currency is still rationed by the Central Bank and a black market persists – a sign that banks remain unable to meet all their clients’ demands.

Tourism and foreign investment – both substantial economic drivers and sources of foreign currency – have yet to recover to the levels that preceded the turmoil that has gripped the country since 2011.

The government aims to cut the deficit to around 10 per cent of gross domestic product in the fiscal year to the end of June, down from 14 per cent the year before.

Mohamed Abu Basha, Egypt economist at EFG-Hermes, a regional investment bank, said he expected the economy to grow at 2.6 per cent in the current fiscal year compared to 2.1 per cent last year.

“So far there have been no shocks, but there are also no factors which would support stronger growth,” he said. He described business sentiment as positive but “awaiting more stability, possibly after the presidential election”.

Elections are expected in the spring, and many in the business class are pinning their hopes for stability on Abdel Fattah al-Sisi, the defence minister who ousted Mr Morsi. He has yet to announce formally that he will run but last week the army publicly authorised him to enter the race.

Hisham Fahmy, chief executive of the American Chamber of Commerce in Egypt, told the Financial Times that business remained optimistic. “Existing companies are doing well,” he said. “But in terms of fresh foreign investment, the attitude is still wait and see.”

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