S&P removes Egypt from credit watch rating; outlook negative

Standard & Poor's has removed Egypt from its watch list and affirmed long and short-term foreign and local currency sovereign ratings on it, although with negative outlook.

Updated: Aug 24, 2012, 13:10 PM IST

Dubai: Standard & Poor's has removed Egypt from its watch list and affirmed long and short-term foreign and local currency sovereign ratings on it, although with negative outlook.

S&P said the decision was based on the emergence of working relationship between Egypt's dominant political group and the military.

"We are therefore affirming our 'B/B' long- and short-term sovereign credit ratings on Egypt. At the same time, we are removing the long-term ratings from CreditWatch, where they were placed with negative implications on June 25, 2012," S&P said in a statement.

"B" is a speculative grade rating which indicates that the rated entity is more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.

S&P said, "The ratings affirmation reflects our opinion that a working relationship between the military and the dominant political group, the Muslim Brotherhood, is gradually being reached. In our view, this could pave the way for an improvement in medium-term policymaking.

"We therefore project that Egypt's weak public sector finances and external position could stabilise."

It added, however, the negative outlook reflects S&P view that there is a one-in-three likelihood of a downgrade should political or social tensions escalate once more.

If this happened, the current short-term approach to policymaking would likely continue, and foreign exchange reserves would likely decline further absent foreign donor inflows, the statement said.

S&P said it now expects a relatively stable few months ahead, which could give the authorities room to achieve political and policy consensus sufficient to facilitate the external and domestic financing necessary to fund the government deficit and support the Egyptian pound.

"The government projects net borrowing at EG-135 billion (7.6 percent of GDP) in the state's 2012/13 budget. We estimate that it could be as much as EG-163 billion (9.1 percent)," it added.

Media reports quote the finance minister Momtaz al-Saieed as saying that the government is prepared to cover EG-75 billion of this year's budget deficit, and will use IMF funds to cover the remaining portion. However, the balance of power remains delicate.

PTI