Negative outlook on Egypt: S&P

s-and-pS&P lowered its sovereign credit ratings on Egypt to 'B+' from 'BB-' and gave a negative outlook for the country.

The downgrade reflects S&P’s opinion that Egypt's weak political and economic profile has deteriorated further. This follows the clashes between protesters and security personnel that began on Nov. 20, 2011. Our appraisal of Egypt's flexibility and performance profile remains unchanged.

S&P believes that the faltering political transition will in turn placed further pressure on Egypt's net international reserves. “In our view, this political scenario has now been realised and we expect reserves to continue their downward trend. Net international reserves have fallen steadily to US$22 billion as of Oct. 31, 2011 (the latest published figure) from US$36 billion at the start of the year,” said the report.

According to S&P: “We assess the policy choices of Egypt's ruling Supreme Council of the Armed Forces (SCAF)--such as allowing violence to escalate in Tahrir Square from Nov. 20 in an effort to disburse protestors--as having weakened the prospects of a smooth political transition to democracy and having reduced the ability of the government to place the public finances on a more sustainable path.”

Following Egypt's popular uprising of January 2011, public expectations regarding the government's ability to promptly deliver improved living standards remain high. Egypt has pressing economic development needs, in S&Ps view; per capita GDP in 2011 is about US$2,700 (our estimate) and its Human Development Index ranking was 101 out of 169 countries in 2010.

S&P believes that: “any incoming government will continue to run high general government deficits, as previous governments have done. General government deficits have averaged 8 per cent of GDP during the last five years. We anticipate large government deficits will result from increased spending, particularly on food and fuel subsidies (these already account for over one-fifth of government spending), and weak government tax revenues.”

S&P said on its decision to downgrade was that it: “reflects our view that government or SCAF policymaking during the political transition process could further weaken Egypt's ability to fund its government borrowing requirement or the country's external needs.”

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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