S&P downgrades Egypt rating

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S&P downgrades Egypt rating

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Standard & Poor's lowered Egypt's long-term foreign and local currency ratings from B to B.

10 February,2012 07:59 pm

Ratings house Standard & Poors said it lowered Egypts long-term foreign and local currency ratings from B to B on Friday because of a sharp decline in foreign currency reserves and ongoing concerns about political stability.S&P, which cut the rating in November for similar reasons, said the outlook was negative.In our view, Egypts external financing risks have risen significantly, with foreign direct investment having declined sharply and net portfolio flows also having turned negative, S&P said.It said central bank intervention to support the Egyptian pound has resulted in a sharp decline in net international reserves to $16 billion at end-January 2012 from from $36 billion at the start of 2011.As a result, S&P estimated that net international reserves, excluding gold, now cover less than three months of goods and services imports compared with more than six months at the start of 2011.The negative outlook reflects our view of the likelihood of a downgrade either if the government fails to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition.The political transition process could be undermined over the coming year as the constitution is redrafted and a new president is elected -- currently expected by June 2012 -- after which a new government would be formed.In our view, the transition to more-participatory political institutions in Egypt could falter, leading to weaker political institutions and rising domestic conflict.Conversely, if Egypts political transition strengthens the social contract and if external pressures ease -- an indication of which would be the stabilisation of net international reserves -- we could affirm the ratings at the current level.