Egypt Credit Rating Cut to BB- by S&P on Deficit, Risks

Egypt’s rating was cut one level by Standard & Poor’s on concern that a new government may fail to contain growing budget deficits and stem declines in international reserves.

The most-populous Arab nation’s long-term foreign-currency sovereign credit rating was cut to BB- from BB and its long-term local-currency rating was cut to BB- from BB+, New York-based S&P said in a statement today. Short-term ratings of B for both foreign- and local-currency debt were affirmed. S&P is maintaining a negative outlook on the rating.

Violence has flared several times since military rulers took over power from former President Hosni Mubarak in February. The unrest of the past eight months has hurt the economy, with gross domestic product growing 0.4 percent in the quarter through June after contracting 4.2 percent in the first three months of the year.

“The political instability that arose from the uprising started to manifest itself,” Michael Roche, an emerging-market strategist at MF Global, said in a telephone interview from New York. “The credit metrics of the sovereign have deteriorated when compared with the levels during the Mubarak regime.”

A further cut in the below-investment grade rating is possible if the political transition toward a more pluralistic society doesn’t proceed as smoothly as expected, making it more difficult to finance the government’s borrowing requirements or the country’s external needs, S&P said.

Default Risk

The cost of protecting Egyptian government debt against default for five years rose 8 basis points to 448, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Swaps reached a two-year high on Sept. 26 of 506.

The nation’s government borrowing costs have risen to the highest level in almost three years, with the yield on one-year treasury bills soaring 344 basis points since the start of the revolution to 13.88 percent last month. The rate was at 13.72 percent at an auction Oct. 13.

The yield on Egypt’s 5.75 percent 10-year dollar bond due 2020 has climbed 48 basis points to 5.84 percent from its post- revolution low on Sept. 21.

The Egyptian pound has lost 2.8 percent against the dollar this year to 5.9735 today.

The central bank’s foreign currency reserves have shrunk by a third in 2011 to $24 billion. Twelve-month non-deliverable forwards for the pound are at 6.68 per dollar, reflecting an expectation for the currency to weaken about 11 percent over the life of the contracts.

To contact the editor responsible for this story: Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net