Egypt protests prompt new ratings review
Mideast EgyptCAIRO(AP)–Egypt’s economy suffered a fresh blow Tuesday after yet another credit agency lowered its ratings and its currency approached a five-year low with slim chance of a quick rebound amid surging street protests.
Estimates of the losses sustained during the week of unrest roiling the country have yet to emerge, but one thing is certain: Hopes for another year of solid economic growth in the Arab world’s most populous nation are long gone. Companies are suspending operations, workers are staying home, banks remained closed, and tourists are fleeing by the thousands.
“We have a few months of uncertainty, as opposed to a few days,”said Said Hirsch, Mideast economist with the London-based Capital Economics, summing up investor sentiment in a climate in which it remained unclear whether President Hosni Mubarak could further withstand emphatic calls for his ouster.
Standard&Poor’s joined Moody’s in cutting Egypt’s ratings–the second such downgrade in as many days. The third major ratings agency, Fitch, lowered its outlook for the country to negative last week. All three agencies citied the deteriorating situation in the country. More than a quarter-million people massed in the heart of the capital Tuesday in the largest demonstration to date against Mubarak.
S&P lowered Egypt’s long-term foreign currency sovereign rating to BB from BB+, and warned that another downgrade was possible within the next three months. The move put the rating solidly in junk status. It also warned the cuts could affect the creditworthiness of two main Egyptian banks–the Commercial International Bank and the National Bank of Egypt.
Egypt, which had prided itself on decades of stability and, more recently, impressive GDP growth, was increasingly taking on the appearance of an investment pariah–if only for the short term.
The Egyptian pound, viewed as relatively stable because of solid Central Bank support, was trading at 5.8550 pounds to the dollar. It hit 5.8570 earlier in the day, approaching the January 2005 low of six pounds to the dollar. It appeared increasingly likely that the depreciation against the dollar would stoke inflationary fears in a nation where prices, critics complain, go up on a whim and rarely come down.
“Egypt’s foreign reserves should be sufficient to prevent a complete collapse in the currency, but it will become increasingly difficult and expensive to manage rising inflation,”said Hirsch.
Reflecting the prevailing worries in the country, a new round of companies announced they were suspending operations in Egypt.
Dubai-based DP World was among the most prominent, with the port operator saying the step was taken as”a precautionary measure.”The move affected its operation at the Red Sea port of Sokhna, near the Suez Canal’s southern entrance.
In a rare bit of good news for Egypt, however, traffic along the canal–a key artery through which shippers can avoid the perilous trip around Africa–appeared to be running smoothly.
Swiss-Swedish engineering giant ABB said it had closed temporarily shuttered its factories in Egypt”for security reasons,”said company spokesman Thomas Schmidt. The company has 1,600 staff in Egypt, where it produces generators and other power supply machinery.
More daunting were the implications of the ratings cuts.
S&P said the cuts”reflect our expectation that the violent demonstrations of the past week will persist, despite the appointment of a vice president and the dismissal of the government.”It added that”at present, a state of political impasse appears to exist in the country.”
S&P also lowered its long and short-term local currency ratings to BB+/B from BBB/A-3, while the short-term foreign currency rating of B was unchanged.
The downgrades mean that the cost of borrowing would rise, burdening any Egyptian government in the short-term, be it one led by Mubarak or someone else.
The expectation among many analysts was that the government would have to ramp up spending in order to address the financial concerns that have been a significant catalyst in the protests.
Subsidies, which drain upward of 100 billion pounds($17 billion)of the government’s budget, will likely have to be boosted to offset the expected commodity price increases and that undercut efforts to lower the public sector deficit.
“Fiscal deficits will be going up this year,”said Hirsch.”Any money they need to borrow is going to be more expensive.”
But other factors also weighed heavily. Tourism, which accounts for up to 5 percent of GDP, was taking a hit as foreigners fled the country and others canceled planned trips. Cairo airport saw passenger traffic swell to more than 18,000 Tuesday as people sought seats on commercial flights, or flew out on jets chartered by various governments for their nationals.
Foreign direct investment–another key revenue source–was also looking questionable as investors worried about the stability of the country.
“People are going to be extremely careful to get involved again until they get some sort of clarity,”said Geoffrey Dennis, an emerging markets analyst with Citigroup.