S&P lowers long-term ratings on Egypt to ‘B’

Standard & Poor’s Ratings Services today lowered its long-term foreign- and local-currency sovereign credit ratings on the Arab Republic of Egypt to ‘B’ from ‘B+’.

The recovery rating on the unsecured foreign-currency debt remains unchanged at ‘3’, indicating the expectation of 50%-70% recovery in the event of a default.

“The downgrade reflects our opinion that Egypt’s external position has deteriorated and is likely to weaken further, absent stabilization in the domestic political situation alongside external financial support”, Rating Agency said.

“We lowered our ratings on Egypt to ‘B+’ on Nov. 24, 2011. At that time, we said that we could lower the ratings again if we believed that policy developments during the political transition were further weakening Egypt’s ability to fund its country’s external needs.”

External financing is becoming more problematic in the face of the related problems of sharply falling reserves, exchange rate pressures, and capital flight. In addition, foreign direct investment is declining sharply and net portfolio flows also turned negative. Egyptian Central Bank interventions–to support the Egyptian pound in the face of significant capital outflows and double-digit annual inflation–have resulted in a sharp decline in net international reserves. These were $16 billion at end-January 2012, down from $36 billion at the start of 2011.

The Agency said that the program being discussed with the IMF, alongside potential funding from other multi- and bi-lateral lenders, could provide important near-term external financing, noting that lending conditionality supports structural improvements and encourages private sector capital inflows.

“If Egypt’s political transition strengthens the social contract and if external pressures ease-an indication of which would be the stabilization of net international reserves–we could affirm the ratings at the current level.”, the Agency concluded.

Source: Reuters