UPDATE 2-S&P cuts Egypt rating on political strife

Mon Dec 24, 2012 10:29am EST

CAIRO Dec 24 (Reuters) - Standard & Poors' cut Egypt's long-term credit rating on Monday and said another downgrade was possible if deepening political turbulence undermines efforts to prop up the economy and public finances.

Egypt's popular uprising two years ago drove away tourists and foreign investors alike, helping push its budget deficit into double digits as a percentage of national output and worsening its balance of payments.

A divisive battle over a new constitution this month has also prompted the government to delay urgent austerity measures and put a crucial $4.8 billion IMF loan on hold.

S&P reduced Egypt's long-term sovereign rating to 'B-' from 'B', but left its short-term rating at 'B' for both foreign- and local-currency debt. It kept its negative outlook on the rating - suggesting it sees another cut as the most likely next move.

"A further downgrade is possible if a significant worsening of the domestic political situation results in a sharp deterioration of economic indicators such as foreign exchange reserves or the government's deficit," S&P said.

Some Egyptians have said recently they had withdrawn funds from banks out of concern that they would be frozen by the authorities.

Seeking to quell what it called these "public rumours", the central bank on Monday said it was taking all steps needed to safeguard deposits in Egyptian banks whether denominated in local or foreign currencies.

Egypt's domestic debt was equivalent to 69.7 percent of gross domestic product as of the end of September while its foreign debt was 13.1 percent of GDP, according to the finance ministry.

Egypt reached an initial accord with the International Monetary Fund (IMF) last month for a financial support package, but later put on hold a series of austerity measures deemed necessary to secure IMF approval.

The government then asked the IMF to delay until January a meeting to approve the loan, which looks increasingly vital to prop up government finances but requires it to take unpopular measures on taxation and spending.

The measures included increases in sales tax on goods and services ranging from alcoholic beverages, cigarettes and mobile phone calls to automobile licences and quarrying permits.

President Mohamed Mursi withdrew them within hours of their being announced after criticism from his opponents and the media.

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