August 26, 2019

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  • S&P’s credit rating cut scrutinized

    Some analysts have downplayed the significance of S&P's latest credit rating downgrade, while emphasizing Egypt's pending economic crisis.

    BY LEYLA DOSS Cairo – Egypt’s worsening economy was hit by another credit rating downgrade earlier this month from Standard and Poor’s (S&P), an American ratings agency, placing it at 124 out of 127 rated economies. Egypt now falls behind Pakistan, Greece and Zambia. But how significant is this ratings cut?

    This is the agency’s sixth downgrade of Egypt’s credit rating over the past two years following the popular uprising which overthrew President Hosni Mubarak.

    S&P lowered Egypt’s long-term credit rating from B- to CCC+ and its short-term rating from B to C, citing the country’s persistent inability to meet its fiscal targets, manage inflation and promote economic growth, as well as its failure to maintain political stability.

    “We knew it would happen eventually and were simply waiting for the agencies to finish their homework,” says Wael Ziada, head of research at EFG-Hermes, a local investment bank.

    Egyptian authorities, headed by President Mohammed Morsi and his Muslim Brotherhood-led government, have also been unable to strike a much-needed $4.8bn loan from the International Monetary Fund.

    As electricity cuts, soaring prices, and entrenched economic crises are set to cause further unrest, Egyptian authorities are increasingly pressured to strike more support from the international community.

    “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 statement.

    As a result of increasing financial pressures, local banks will continue to capitalize on higher treasury yields, while the private sector will very likely remain short of access to cheap debt financing.

    Yet some financial experts believe the rating slash does not carry the significance as it has been widely suggested in the media.

    “Egypt’s economy is definitely in critical condition, but the IMF has a clear strategy,” adds Ziada. “It won’t wait for a rating agency before it makes a decision.”

    Angus Blair, founder of the Signet Institute, a local economic think-tank, agrees.

    “Chances for an IMF loan had already fallen dramatically before the credit rating downgrade. Egypt will not realistically, have a loan before Autumn,” he says.

    Nevertheless, both S&P and some financial experts believe the picture to be stable and not entirely bleak.

    “The stable outlook balances our view of the willingness of bilateral donors to provide ad-hoc funding to avert an external financing crisis,” announced the ratings agency in a statement.

    In a bid to save Egypt’s falling foreign currency reserves, which have reached a record low of $14.4 billion at the end of April, down from $36 billion before the uprising, last month Egypt managed to secure a $3 billion grant from Qatar, and a $2 billion deposit from Libya in the country’s central bank last month.

    In addition, Blair believes that Egypt is still able to buy some time, “deliver more sustainable public finances and avoid a balance of payments crisis.”

    He also thinks that Egypt’s relatively positive prospects in terms of foreign debt, “as it stands relatively low in foreign debt in comparison to global standards.”

    S&P highlighted the possibility of an upgrade if the political transition strengthens the social contract and a sustained increase in net international reserves provides evidence of easing in external pressures.

    “Instead of focusing on responding the credit rating, the Egyptian government should promote economic growth in a sustainable manner, by reducing subsidies and increasing taxes,” says Mr Ziada.

    Last week President Mursi signed a new tax law, which experts say will benefit the country’s poor but target a struggling middle class while leaving the richest untouched. Critics say it fails to include a progressive layer that would levy a higher tax on those who earn more than LE 5 million a year.

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