(Updates with economist comment in fourth paragraph.)
Feb. 10 (Bloomberg) -- Egypt’s credit rating was downgraded by Standard & Poor’s, which cited a plunge in the country’s foreign reserves and persistent political instability.
S&P lowered the ratings on long-term foreign- and local- currency debt to B, five steps below investment grade, from B+, according to an e-mailed statement from London today. The outlook was negative, suggesting the next move may be another cut. It was the country’s third downgrade at S&P in four months.
“Egypt’s external position has deteriorated and is likely to weaken further, absent stabilization in the domestic political situation alongside external financial support,” S&P said.
Egypt’s reserves have plunged by more than half since the start of 2011, dropping to $16.4 billion last month, as the central bank sought to defend the pound after the revolt against Hosni Mubarak a year ago. Its support helped cap the pound’s loss at below 4 percent last year, when most emerging-market currencies declined more, while raising concerns that the bank will run out of cash to stop a run on the currency.
“They will have to devalue soon, we don’t think they can hold on much later than April,” said Said Hirsh, an economist at Capital Economics in London. “Everybody is waiting to see by how much and when it will happen, and that just adds to the uncertainty. If they act on it soon and the shock happens, capital might start to return to Egypt.”
Bond Yields Rise
Yields on Egypt’s benchmark dollar bonds maturing in 2020 rose 3 basis points to 7.31 percent at 4:40 p.m. in Cairo, where local financial markets are closed today.
Egypt’s transition toward democracy has been punctuated by frequent violent clashes between protesters and the military rulers who took power from Mubarak. In recent days it also became embroiled in a row with the U.S., a key ally and financial supporter, over charges brought against several U.S. citizens working at non-governmental organizations in Egypt.
“The transition to more-participatory political institutions in Egypt could falter, leading to weaker political institutions and rising domestic conflict,” S&P said.
The government has applied to the International Monetary Fund for a $3.2 billion loan. The country needs $11 billion in external financing through June 2013, Finance Minister Momtaz el-Saieed said in an e-mailed statement today. One-year borrowing costs in pounds have jumped to a record of almost 16 percent.
The political unrest has deterred investors and tourists, dragging economic growth to its slowest in at least a decade. Gross domestic product expanded 0.2 percent in the third quarter of 2011.
Central bank reserves, excluding gold, now cover less than three months of imports, S&P said.
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