Global Arab Network | Fitch: Intensification of Unrest Downgrades Egypt to Negative Rating

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Fitch: Intensification of Unrest Downgrades Egypt to Negative Rating

Global Arab Network - - Gamal Ragay

Thursday, 03 February 2011 15:03

Intensification_of_Unrest_Downgrades_Egypt

Fitch Ratings has downgraded the Arab Republic of Egypt's Long-term foreign currency Issuer Default Rating (IDR) to 'BB' from 'BB+' and Long-term local currency IDR to 'BB+' from 'BBB-' and placed both ratings on Rating Watch Negative (RWN). The agency has also downgraded the Country Ceiling to 'BB'. The Short-term foreign currency IDR is affirmed at 'B', Global Arab Network reports according to a press statement.

"The downgrade reflects the significant intensification of unrest, at the start of what is likely to be a volatile transition to a new government, and the increasingly negative consequences for the economy, public and external finances of the continuing disruption," says Richard Fox, Head of Middle East and Africa Sovereign Ratings at Fitch. "The Rating Watch Negative reflects the continuing large gap between protestors' demands and the government's position regarding political reform, which risks the political and economic situation deteriorating further before a resolution is agreed."

Continued violent confrontation between pro and anti-government protestors would worsen the damage already inflicted on the economy and lead to a further downgrade. By contrast, if order is restored and progress towards a peaceful transition begins, with the economy returning to some semblance of normality, negative rating pressure would lessen.

This week's decision by President Mubarak not to stand in September's scheduled presidential election marks the beginning of a transition to a change of government. However, the process is at a very early stage; tensions between pro and anti-government protestors have taken a more violent turn in recent days; some of the competing political actors have yet to emerge; and the format of the transition talks remains in dispute. The transition is proving to be volatile and the range of possible outcomes has increased and become more difficult to predict, worsening the sovereign credit risk profile.

Economic activity has already suffered from the extended closure of businesses and banks, and many decisions and investments will be put on hold until the political outlook is clearer. GDP growth will fall sharply and unemployment, currently just below 9%, will rise. Tax revenues will suffer, spending pressures will rise and debt dynamics will take a turn for the worse. The budget deficit is likely to rise above 8% of GDP and the debt to GDP ratio will likely rise again from already high levels. External revenues, such as tourism and foreign direct investment (over 5% and 3% of GDP, respectively) will decline, and portfolio outflows from equity and government debt markets could be heavy, putting pressure on reserves and the exchange rate. Inflation is likely to rise. The economic impact could be more severe in the event of material capital flight or deposit withdrawal from banks.

Fitch will monitor political developments and their economic impact and aims to resolve the RWN in the usual three to six-month time horizon. However, it could be several months before the outlines of a political resolution begin to emerge and even longer before stability is fully restored

On 28 January, Fitch revised the rating Outlook on Egypt's Long-term IDRs to Negative, noting that a continuation or intensification of significant unrest that seriously threatened economic and financial performance and the economic reform process would lead to a rating downgrade

Global Arab Network

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