October 18, 2011 / 7:00 PM / 8 years ago

UPDATE 1-S&P downgrades Egypt on economic stability risks

By Walter Brandimarte

NEW YORK, Oct 18 (Reuters) - Standard & Poor’s on Tuesday cut Egypt’s credit ratings deeper into junk territory, saying the transition to a new government has increased risks to macroeconomic stability.

It warned another downgrade is possible if the political transition is less smooth than expected, making it more difficult to finance the government’s borrowing requirements or the country’s external needs.

S&P cut Egypt’s foreign-currency rating to BB-minus from BB. The local-currency rating was cut by two notches, to BB-minus from BB-plus. All the ratings have a negative outlook.

Clashes between protesters and the army left 25 people dead earlier this month in Cairo, in the worst outbreak of violence since the ousting of President Hosni Mubarak in February.

S&P sees a risk that street protests may continue until parliamentary elections take place in the next few months, a constitution is agreed by August 2012, and a president is elected, probably in early 2013.

In the meantime the government will likely run high general deficits to appease the population, mainly through food and fuel subsidies. Government revenues are also expected to be low.

“Risks to macroeconomic stability have risen during the transition period for Egyptian political reform, which we expect to evolve over the next two years,” S&P’s analyst Trevor Cullinan wrote in a report.

“These risks center on the government’s fiscal stance but also encompass price stability and balance of payments pressure,” he said.

The ratings agency noted that Egypt’s net international reserves have fallen by $12 billion to $24 billion since the uprising to September — a result of current account deficits and capital outflows.

“The pace of reserve loss has slowed of late, although the recent violence could create new pressures,” S&P warned.

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