Recent credit rating downgrades are a reflection of the economy's ongoing suffering, Nesma Nowar reports This time it's more than government statements, which some believe are exaggerated, that are drawing an alarming picture of Egypt's economy. Major international institutions are expressing concern too, while Egypt has been downgraded by two major credit agencies over the past 10 days. Last week international ratings agency Moody's downgraded Egypt's government bond ratings by one notch to B1 from Ba3 while maintaining a negative outlook on the ratings, a sign that further downgrades might take place in the next couple of years. The downgrade was prompted primarily by the country's ongoing economic weaknesses and financial deterioration, as reflected in the sharp losses in official foreign exchange reserves since the start of this year. In addition, the likelihood of continued macroeconomic weakness and instability, and rising pressures on budgetary spending and financing were also factors leading to the current downgrades. Unstable political conditions and uncertainty over the transition to a stable, civilian government were another major reason behind the change. A week before, Standard and Poor's (S&P), also a major rating agency, had cut the country's rating by one notch to BB- from BB+. The S&P downgrade came on the back of concerns similar to those expressed by Moody's. Chief among them was the worry that a new government may fail to contain a growing budget deficit and put a break on declines in international reserves. Nevertheless, former governor of the Central Bank of Egypt (CBE) Ismail Hassan believes that Egypt's credit downgrading is nothing to worry about. He explained to Al-Ahram Weekly that Egypt's current economic woes are an inevitable and normal consequence of revolution. Hassan added that the recent political events have resulted in a wider budget deficit -- the difference between state revenues and expenses -- and have therefore led to increased government borrowing. "The increase in government borrowing, coupled with a decrease in production, has affected the state's credit ratings," he told the Weekly. Still Hassan said that for 20 years, Egypt never delayed the payment of its foreign and domestic debts. He therefore believes that there is no need to link credit downgrades to Egypt's capacity to pay its debts on time. He added that Egypt's external payments position is good, given that the quantity of the country's foreign debts are reasonable and can be repaid over a long period of time. Indeed, Hassan believes that it will take some time to overcome the repercussions of the revolution, and once order and stability are restored in the country, things will get better. Since Egypt's uprising late in January, the country has been witnessing continuous downgradings by international investment bodies. According to a recent report by Beltone Financial, a local investment bank, continued social unrest, an unclear government plan and high borrowing costs, coupled with deteriorating economic performance, have placed Egypt in a critical situation. Egypt's GDP growth in fiscal year 2010/11 stood at 1.8 per cent. "We do expect a continued depressed economic performance this fiscal year of below two per cent," the report said. The negative outlook on Egypt's sovereign ratings, according to the report, reflects the uncertainty of the political outlook and the resulting downside risks to the country's credit fundamentals. The rating could be downgraded further, in case foreign exchange reserves continue to decline to levels that threaten the authorities' debt repayment capacity or its ability to support the Egyptian pound. A further rise in the government's funding costs and an increase in refinancing risks would also exert negative pressure on the ratings, said Beltone. Moody's says it would consider moving the outlook back to stable if Egypt's external payments position stabilises, and if fiscal funding pressures are alleviated. This would likely require a successful and peaceful transition to civilian rule.
