“The transfer and convertibility (T&C) assessment was also revised to ‘B+’ in line with the sovereign ratings. The recovery rating on the unsecured foreign-currency debt is ‘3’, indicating our expectation of a 50%-70% recovery in the event of a default,” S&P in a statement said.
“The downgrade reflects our opinion that Egypt’s weak political and economic profile, as defined by our criteria, has deteriorated further. This follows the clashes between protesters and security personnel that began on Nov. 20, 2011, and resulted in significant loss of life. Our appraisal of Egypt’s flexibility and performance profile remains unchanged,” S&P explained.
“Last month, we indicated we could lower Egypt’s ratings again in 2011 if the political transition faltered in a manner that led to renewed political turmoil, which, in turn, placed further pressure on Egypt’s net international reserves. In our view, this political scenario has now been realized and we expect reserves to continue their downward trend. Net international reserves have fallen steadily to $22 billion as of Oct. 31, 2011 (the latest published figure) from $36 billion at the start of the year. Accordingly, we have taken today’s rating action,” it added.
“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,” it said.
“In our view, policy responses in Egypt are difficult to predict both for now and, likely, following the untested election process. This is due to a highly polarized political landscape and highly centralized decision making. However, we still view as a possibility the parliamentary and presidential elections taking place according to the official schedule–the first round of parliamentary elections being set for Nov. 28, 2011, the presidential elections by July 2012.”
“In our opinion, there is an ongoing high, and recently increased, risk of challenges to political institutions that will possibly involve further domestic conflict. These challenges could arise if populist demands for greater political participation are thwarted, or from demands for improved living standards from different sectors of the population no matter who is governing Egypt. 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 our view; per capita GDP in 2011 is about $2,700 (our estimate) and its Human Development Index ranking was 101 out of 169 countries in 2010,” it said.
“We expect any incoming government will continue to run high general government deficits, as previous governments have done. General government deficits have averaged 8% 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.”
“Our T&C assessment is equalized with the sovereign foreign-currency rating to reflect our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Egypt-based non-sovereign issuers for debt service is similar to the likelihood of the sovereign defaulting on its foreign currency obligations.”
“Our ‘3’ recovery rating on Egypt’s senior unsecured foreign-currency sovereign debt reflects a scenario in which fiscal slippages and additional reserve losses trigger a debt restructuring or default. Nonetheless, under our stress scenario, Egypt’s history of cooperation with external creditors and its assumed relatively modest share of bond debt suggest an estimated recovery range of between 50% and 70% of face value.”
“The negative outlook 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.”
“Under our criteria, if continued political turmoil weakens Egypt’s external metrics or other key indicators, we could lower Egypt’s ratings. Conversely, we may revise the outlook to stable if Egypt’s political transition strengthens the social contract and if government debt dynamics remain close to or better than our expectations.”