S&P downgrades Egypt's debt rating and says it could go lower

Standard & Poor's yesterday downgraded its rating on Egypt and warned that another cut was possible as a week of protests demanding the ouster of the President crippled the nation, stalled its economy and battered its currency.

S&P became the third international ratings agency in under a week to downgrade Egypt because of the unrest that has gripped the Arab world's most populous nation.

Demonstrators have focused their anger on a leader they say is sorely out of touch with their daily economic plight.

Egypt's long-term foreign currency sovereign rating was lowered to BB from BB+, S&P said. The cuts still left the rating within the investment grade category, but reflected the increasing alarm with which investors are viewing the developments in Egypt. S&P warned that it could issue another downgrade - possibly by more than one notch - within three months.

The rating reflected an expectation that violent demonstrations were likely to persist in Egypt, S&P credit analyst Kai Stukenbrock said.

The agency also believed the rating downgrade could have a negative impact on the creditworthiness of two of Egypt's biggest banks, the National Bank of Egypt and Commercial International bank.

Forward spreads widened sharply over the early days of the crisis before easing up yesterday and the impact was palpable on other regional currencies, at least temporarily, before the forward spreads narrowed.

"This is due to the fact that there is more differentiation between the levels of contagion in the Middle East," said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi-Credit Agricole Group. "Markets are seeing that the contagion ... won't spill to oil-producing countries, particularly Saudi Arabia."

The Saudi riyal is the most actively traded in the region and is used by foreign investors as a hedge against their Egyptian pound exposure.

For Egypt, the S&P downgrade was the latest blow in a week where there was little to cheer about.

On Tuesday, Moody's cut its rating for Egypt's government bonds, while lowering its outlook on the country from stable to negative.

S&P, echoing its ratings peers, warned that the political instability and unrest will hamper Egypt's economic growth this year, in no small part because of the blow to the tourism sector.

The agency also lowered its long-term and short-term local currency ratings to BB+/B from BBB/A-3, while the short-term foreign currency rating of B was unchanged.

With tourism likely to take a serious hit, the 6 per cent GDP growth figure being projecting for this year seemed now to be wishful thinking. Companies have halted production and others are withdrawing their foreign staff.

- BLOOMBERG