TEXT-Fitch cuts Egypt's ratings

June 15 - Fitch Ratings has downgraded the Arab Republic of Egypt's Long-term foreign currency Issuer Default Rating (IDR) to 'B+' from 'BB-' and Long-term local currency IDR to 'B+' from 'BB'. Both ratings have a Negative Outlook. The agency has also downgraded the Country Ceiling to 'B+' from 'BB-'. The Short-term foreign currency IDR is affirmed at 'B'. The downgrade and Negative Outlook reflect increased uncertainties surrounding the political transition following yesterday's ruling by the Supreme Constitutional Court to annul parliamentary elections and dissolve parliament. "Whatever the ultimate outcome of these events, the political and policy making process has been complicated, delaying the likely implementation of the comprehensive macroeconomic and structural reforms needed to kick start recovery and ease financing strains" says Richard Fox, Head of Middle East and Africa Sovereigns at Fitch. Before these latest events, the economic situation had shown some signs of easing with, in particular, international reserves rising slightly in April and May after several months of sharp decline. However, the need to re-run parliamentary elections will, at the very least, delay the emergence of a workable and inclusive governance structure. Popular reaction to the dissolving of parliament remains unclear at this stage. Although the incumbent, military appointed, government will remain in position for the time being, it will need to come to a working arrangement with whatever president emerges from this weekend's elections. This will add a further element to Egypt's already complex political equation. Meanwhile, the re-writing of the constitution will be further delayed with the result that the new president's powers will be unclear and the longevity of any new parliament uncertain. Such political uncertainty could weaken confidence and heighten near-term economic and financial pressures facing Egypt. Nor is it conducive to the taking of critical macroeconomic and structural policy decisions required to catalyse Egypt's economic recovery, alleviate budget and external financing strains and return the public finances to a sustainable path. The two-notch downgrade of the local currency IDR reflects Fitch's judgement that increased domestic financing challenges, as reflected in sharply increased treasury bill yields over the past year, and the increased resort to foreign currency linked domestic debt, has equalised the risks to foreign currency and local currency debt service. In comparison to the high domestic debt burden, Egypt's foreign currency debt burden remains relatively light. The ratings will remain under downward pressure until political uncertainties begin to resolve, a functioning governance structure begins to take hold and an economic adjustment programme is put into place. A sustained outbreak of political violence or other political setbacks that make the transition to political stability longer, more uncertain or ultimately less likely to succeed would lead to a downgrade. Evidence that prolonged political uncertainty was exerting a greater cost on the economy could also lead to a downgrade. By contrast, the emergence of a stable governing structure which could focus on key economic and structural policy decisions, including progress toward an IMF agreement, would help to stabilise the rating.