The most-populous Arab country’s rating was lowered by one level to B-, six steps below investment grade, with a negative outlook, S&P said today. The rating, which is also on par with Pakistan, may face more downgrades should political instability result “in a sharp deterioration of economic indicators such as foreign exchange reserves or the government’s deficit,” S&P said. Egypt’s benchmark bonds were little changed.
S&P has reduced Egypt’s rating five times since the start of a popular revolt almost two years ago. The country’s credit risk jumped this month before a constitutional vote that has intensified divisions between the ruling Islamists and their opponents. The unrest led President Mohamed Mursi’s government to ask the IMF to delay a decision on a $4.8 billion loan, after getting the initial go-ahead last month.
“The increased polarization between the Muslim Brotherhood’s Freedom and Justice Party and sections of the population is likely to weaken the sovereign’s ability to deliver sustainable public finances, promote balanced growth and respond to further economic or political shocks,” S&P said.
Riskiest Credits
The cost of protecting Egypt’s debt against default for five years using credit default swaps surged 99 basis points this month to 490, according to CMA, which is owned by McGraw- Hill Cos. (MHP) and compiles prices quoted by dealers in the privately negotiated market. That ranks it among the world’s 10 riskiest borrowers, ahead of Iraq and Lebanon.
The rating cut “should serve as an alarm for politicians from both sides that we need stability and clarity for the economy in order for Egypt to move on,” Khalil El Bawab, director of Egypt fixed income at EFG-Hermes Holding SAE, said by phone.
Stable Outcome
Still, investors often ignore such rating actions. Bond spreads have moved in the opposite direction from what the companies suggested in 53 percent of rating or outlook changes for countries including France and South Korea since February, according to data compiled by Bloomberg. Over the past 38 years, yields have gone the opposite way about half the time for more than 300 issues.
Egypt’s 5.75 percent dollar-denominated bonds due in April 2020 were little changed at 5.99 percent as of 4:45 p.m. in Cairo, according to prices compiled by Bloomberg. The yield is up 81 basis points, or 0.81 percentage point, this month.
The S&P rating cut “is pretty hard to justify; it doesn’t seem at all sensible that Greece should have the same rating as Egypt,” Gabriel Sterne, a fixed income economist at Exotix Holdings Ltd. in London, said by phone today. “Egypt got the government and constitution it voted for. So like it or not, the most-stable outcome is reflected in the will of the people. But going forward, it remains a worry whether they will get an IMF program and if they be able to implement conventional IMF fiscal adjustments.”
IMF Delay
As part of a plan backed by the IMF, Egypt will strive to cut its budget deficit to 10.4 percent of economic output in the year that ends next June and bring it to 8.5 percent the following year. The deficit was 11 percent of gross domestic product last year.
The government asked the Washington-based IMF to delay its decision on the loan by one month to give it time to hold public dialogue on policies including a plan to raise taxes. Moody’s Investors Service last week said the delay was “credit negative” and threatened the nation’s financial stability.
If political rifts continue, the broad consensus Egypt needs to implement an IMF program “could remain out of reach and the program inactive,” S&P said. Egyptian opposition leaders prepared the ground for renewed unrest with vows to revoke an Islamist-backed constitution that appears to have won a majority of votes.
The premium investors demand to hold Egyptian debt over similar-maturity U.S. securities has climbed 44 basis points, or 0.44 of a percentage point, to 452 since Mursi sparked the constitutional dispute on Nov. 22, when he issued a decree granting himself more powers.
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Bloomberg