CAIRO: Standard & Poor’s (S&P) on Tuesday described the outlook for the Egyptian economy as “negative,” though the assessment came as no surprise to experts.
“Credit rating agencies come and assess the current economic situation, and our economy has been taking several hits since the revolution,” Magda Kandil, executive director of the Egyptian Center for Economic Studies, said.
Still, the assessment is not to be ignored and “demands policy adjustment,” she added.
“The government, the Cabinet, [Supreme Council of the Armed Forces] SCAF or whoever is in charge, should take it as a wake-up call,” Kandil told Daily News Egypt.
S&P downgraded long-term foreign and local currency ratings due to negative projections arising from an extended transition period.
S&P lowered Egypt’s long-term foreign currency sovereign credit rating to ‘BB-‘ from ‘BB’ and long-term local currency rating to ‘BB-‘ from ‘BB+.’ It also affirmed ‘B’ short-term ratings on Egypt.
The ratings agency warned of further downgrades in the future pending political developments, making it the second ratings agency to downgrade Egypt this month.
Earlier in October, Fitch Ratings downgraded Egypt’s long-term default and currency outlook ratings to “negative” as wavering political decisions continue to delay economic growth.
S&P’s latest assessment seems to be in line with the current economic climate, and was even forecasted by Finance Minister Hazem El-Beblawi, Kandil said.
She attributed the downgrade to declining foreign reserves, a mere trickle of tourist income and lack of growth, citing a dearth of FDI inflow and recent GDP contractions.
At the moment, higher rates and increased costs of borrowing are an added pressure on the government as it strives to keep apace with commitments, Kandil noted.
In a statement, S&P analyst Trevor Cullinan said, "The downgrade reflects our opinion that risks to macroeconomic stability have risen during the transition period for Egyptian political reform, which we expect to evolve over the next two years."
When asked about the severity of the downgrade, Kandil said, “The decision is not too harsh. Obviously [agencies] are now sailing on the conservative side globally, having learned their lessons since the financial crisis in order not to be blamed as before for overlooking economic risks and waiting for crises to occur.”
Karim Helal, board member of Egypt’s CI Capital, was also unsurprised. “It’s been coming, given the dwindling reserves, economic stagnation and the reductions in tourism. It was already discounted by investors on the market, and probably poses no significant impact — it’s only a reflection of the current situation,” he said.
Investor confidence is already on shaky ground, said Helal, adding that “we’re not waiting for downgrades from S&P, all the data is here and in the news daily.”
While the damage is already done and quite visible, Helal said it can be reversed if there is a quick turnaround in tourism, an increase in revenues and political clarity following the elections.
“A strong government with a clear roadmap can improve future prospects and [deter] any further downgrades,” he said.
S&P attributed the anticipated risks mainly to the continuation of street protests over the coming period until presidential elections, which it expects to take place in early 2013.
According to the agency’s projections, ratings could stabilize at current levels “if Egypt’s political transition strengthens the social contract and if government debt dynamics remain close to or better than our expectations.”
However, the agency warned that ratings could lowered again between now and 2012, “if the political transition falters in a manner that leads to renewed political turmoil.”
Parliamentary hopefuls began submitting their applications last week, but the first elections since the ouster of Hosni Mubarak come at a critical time for Egypt on the security, economic and political fronts.
On Oct. 9 a violent crackdown by army forces on protesters marching for Coptic rights left 25 people dead and more than 300 injured. El-Beblawi, also deputy prime minister, submitted his resignation in protest, but remained in his post after it was rejected by the ruling military council.
People’s Assembly elections are set to begin on Nov. 28 while voting for the Shoura Council is scheduled for Jan. 29 next year. The People’s Assembly is scheduled to hold its first session on March 17 and the Shoura Council on March 24.
A committee will then set out to draft a new constitution within six months, after which presidential elections are to take place.
In the meantime, measures to improve the economic conditions “require an immediate effort by government to consolidate fiscal deficit by mobilizing additional revenues and more comprehensive strategies to ration spending and raise funds,” Kandil said.
The issue at hand now is “whether such predictions are ignored [or] actions are taken to protect investors and alert them to risks,” she added.
“The only way to break a possible vicious cycle… demands a firmer approach by the current transitional government to take proper measures.”
