Egypt ratings lowered on continuing unrest


Standard & Poor's Ratings Services lowered its long-term foreign currency sovereign ratings on the Arab Republic of Egypt to 'BB' from 'BB+', and its long- and short-term local currency ratings to 'BB+/B' from 'BBB-/A-3'.

The short-term foreign currency rating of 'B' was affirmed. It has also placed the long-term local and foreign currency ratings on Egypt on CreditWatch with negative implications.

The recovery rating on Egypt's senior unsecured debt is unchanged at '3', indicating our expectations of meaningful (50-70 per cent) recovery of principle, on a net present value basis, in the event of a default or restructuring of Egypt's commercial debt.

At the same time, S&P lowered to 'BB+' from 'BBB-' Egypt's transfer and convertibility assessment, our opinion on the likelihood of the sovereign restricting access to foreign exchange needed for debt service by borrowers other than the government.

"The rating actions reflect our expectation that the violent demonstrations of the past week will persist, despite the appointment of a vice-president and the dismissal of the government by President Hosni Mubarak on Jan. 29, 2011," said Standard & Poor's credit analyst Kai Stukenbrock.

S&P expect the current political instability and violent conflict to affect Egypt's economic growth in 2011 and beyond, not least through the adverse impact on the important tourism sector. This follows real GDP growth of close to 5 per cent over the past two years. We think the conflict and the ensuing uncertainty may also weigh on Egypt's balance of payments if inward foreign direct investment (FDI) or remittances were to decrease.

S&P are of the view that the government will eventually take measures to alleviate poverty by increasing fuel and food subsidies, which we believe will have negative implications for the public sector deficit. We think it will likely be difficult to tackle the deterioration of public finances given Egypt's limited fiscal flexibility. In the absence of emergency spending cuts in other areas, the budget deficit in 2011 could reach double digits, in our view, which will be difficult to finance while political uncertainty prevails. We estimate that Egypt's gross general government debt stood at almost 74 per cent of GDP last year, well above the 'BB' median of 42 per cent of GDP.

In our view, the uncertainties surrounding political stability, if prolonged, may undermine investor confidence in long-term project financing. Egypt is also dependent upon volatile capital flows, such as portfolio investments, which are also vulnerable to reversal. International reserves are currently about US$36 billion, equal to between five and six months' coverage of current account receipts (CARs).

Standard & Poor's aims to resolve the CreditWatch within the next three months. "We may lower the long-term ratings, potentially by more than one notch, if we conclude that political instability would progress to a substantial deterioration in the political environment, such as a potential disorderly struggle for power, accompanied by further violence," said Mr. Stukenbrock. "If political uncertainty were to persist for an extended period, we believe this could also result in a further deterioration in growth prospects, a weakening of the fiscal position, or materially weaker external liquidity."

S&P could extend the CreditWatch beyond three months or assign a negative outlook to the ratings if the political crisis were to remain unresolved and the extent of the downward pressure on the ratings were to remain unclear to us.

S&P could remove the CreditWatch and affirm the ratings if the political instability turns out to be temporary and we believe that it has not significantly further affected Egypt's medium-term economic, fiscal, and external profile.

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