CAIRO: In another sign that Egypt may yet weather the latest round of economic troubles, one of the premier international ratings agencies this week reaffirmed its assessment of a stable Egyptian economy. Standard & Poor's Ratings Services made the announcement while offering several cautionary footnotes. For foreign currency, the agency reaffirmed its 'BB+ long-term rating and 'B' short-term rating. With local currency, it renewed its ratings of 'BBB-' for long-term and 'A-3' for short-term. Egypt's outlook, S&P announced, is stable. Echoing S&P's outlook for Egypt was Beltone financial, one of Egypt's leading brokerage firms. "While appearing to be somewhat less favorable compared to a year ago, wrote Reham ElDesoki, a senior economist at Beltone, "we believe Egypt's story is still relatively intact with opportunities for growth going forward. S&P was willing to overlook certain negative indicators because of what it called a reform-minded cabinet and the government's renewed commitment to fiscal responsibility. The ratings agency warned, however, that continued inflation remains a chief concern. It added that failure to staunch the wound could encourage lower ratings. The recent spike in year-on-year consumer price inflation to above 22 percent in July, said S&P credit analyst Ben Faulks, "driven mostly by soaring international commodity prices, presents considerable challenges and could yet bring downward pressure on the rating. S&P placed blame for high inflation on two specific areas. First, it said, weak monetary transmission hindered the ability of the Central Bank to reign in currency. Furthermore, it said, the government exacerbated the problem by raising wages and subsidies as a - perhaps necessary - reaction to domestic problems. "The higher growth has fuelled inflation, however, wrote Beltone's ElDesoki, "with inflation spiraling to unprecedented levels, stoked by other factors, leading to an upward revision of our forecasts. We expect inflation to end the year in the vicinity of 22 percent, with an annual average of around 20 percent. This forecast implies that inflation will not significantly back off from its current rate of 22 percent. The latest S&P ratings, which seem to fly in the face of some of the latest indicators, imply that while troubled, the Egyptian economy seems to have stabilized. Beltone's inflation forecast indicates similar thinking. As inflationary pressures continue, experts believe that modest interest rate hikes remain a possibility. "With inflation in the 20 percent until the end of the year, argued ElDesoki, "We believe the CBE could be inclined to raise its corridor interest rates by another 50-100 basis points until the first quarter of 2009. With competing forces having opposite pulls on the future of Egypt's economy, S&P's assessment of Egypt's outlook is still very much reflective of a country whose economy is largely government controlled. The competing forces, in other words, are both incumbent upon the government, not the private sector, to manage. The stable outlook reflects the balance between the continued improvements in Egypt s economic prospects as a result of structural reform on the one hand, said Faulks, "And the ongoing challenges of relatively weak public finances and a high inflationary environment.
