The news delivers a further blow to the government of President Mohamed Morsi and his cabinet of mostly Muslim Brotherhood allies who have thus far failed to agree a $4.8bn financing deal with the International Monetary Fundthat could potentially draw in foreign and domestic investment.
“The downgrade reflects our view that the Egyptian authorities have yet to put forward – either to the Egyptian population or the international donor community – a sustainable medium-term strategy to manage the country’s fiscal and external financing needs,” S&P wrote in a note. “As a result, we expect financing pressures to remain elevated and comprehensive donor support, including from the International Monetary Fund, to remain elusive.”
It is the sixth S&P downgrade since the uprising and will be seen by analysts as a rebuke to the government’s recent attempts to right an economy that has been beset with inflation, slow growth and a weakening currency.
Mr Morsi this week signed into law a bill allowing the issuance of Islamic debt instruments called sukuk that its proponents claim may raise billions of dollars. And his prime minister, Hisham Kandil, on Tuesday announced a cabinet reshuffle that brought in a new finance minister.
But these moves failed to impress Mr Morsi’s political opponents, the international community or even some of his own Islamist allies.
“The downgrade is a realistic reflection of the fact that Egypt is without a pro-growth economic plan that would change sentiment,” said Angus Blair, founder of the Signet Institute, a Cairo think-tank. “Domestic sentiment remains poor. The downgrade means that they’re in danger of not being able to pay back their debts. You still have long-term trade deficits and a current account deficit. You need the government to pull a rabbit out of the hat.”
S&P decribed Egypt’s outlook as “stable” because of the willingness of the international community to prop it up. Qatar recently committed to giving Egypt $3bn in financial aid. A $2bn Libyan deposit in the country’s central bank last month papered over the unhealthy state of its foreign currency reserves, which have dropped from $36bn at the start of Egyptian revolution to $14.4bn at the end of April.
Still, S&P said the hastily arranged loans and deposits only buy Egypt “a limited amount of time to deliver more sustainable public finances and avoid a balance of payments crisis”.
The rating agency also voiced fears that Egypt’s foreign currency reserves could fall further because of the deterioration of the Egyptian currency, which has dropped nearly a quarter in value against the dollar since January 2011.
Egypt’s benchmark EGX30 was flat on the day’s news, reflecting already diminished investor expectations. “It’s like a city hit by a tsunami,” said Wael Ziada, head of research at EFG-Hermes, a Cairo investment bank. “You know the damage has happened. But all of a sudden a news agency says 10 people died. You know it’s going to happen; you’re just waiting to see the number.”
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By Borzou Daragahi in Cairo. Copyright The Financial Times Limited.