The rating action has been triggered by the deteriorating political situation in the country and the associated risks to economic growth, the public finances and international liquidity.

In CI's opinion, there is considerable uncertainty surrounding the political outlook, notwithstanding President Mubarak's decision to step down at the next presidential election, which is currently scheduled for September. The transition to a more open political system could be potentially turbulent as competing constituencies vie for power and influence, and the direction that government policy will take in the future is unclear at present.

CI notes that Egypt's credit ratings were already under pressure before the outbreak of mass demonstrations because of slower than expected progress in tackling the government's large budget deficit and bringing down public debt. Even assuming a smooth transition to a new political system, fiscal reform is unlikely to emerge as a priority in the short term and there is a genuine risk that macroeconomic management will become constrained by political imperatives, particularly in light of relatively high rates of unemployment and poverty.

The ‘Negative' outlook reflects the risk that sovereign vulnerabilities may increase further given that political stability and policy consensus, which are prerequisites for economic and fiscal reform, may not be secured in the near future. In the event of greater political instability the ratings could be lowered by more than one notch. Conversely, the outlook could be revised to ‘Stable' if the political crisis is resolved peacefully and the next administration adopts a credible medium-term programme to improve governance, strengthen the public finances and address the economy's structural weaknesses.

Global Arab Network