Decline and Fall of Egypt's Credit Ratings

Standard and Poor's (S&P) credit downgrade, reducing Egypt's foreign and domestic long-term rating to 'CCC+' and foreign and local short-term rating to 'C' is the latest in a series of such actions taken by the most prominent international rating agencies since Egypt's January 2011 revolution. The three agencies combined have cut Egypt's sovereign debt rating a total of sixteen times since the uprising, due to successive waves of political instability, dwindling foreign currency reserves, weakening public finances and failure to reach agreement on an International Monetary Fund (IMF) rescue loan. In cutting Egypt's grade on Thursday from 'B' to 'C', S&P became the third rating agency to do so this year. On 21 March, Moody's Investors Service downgraded Egypt's government bond ratings from 'B3' to 'Caa1', after it had already downgraded it from 'B2' on 12 February. On 30 January, credit-rating agency Fitch cut Egypt's sovereign rating from 'B+' to 'B'. A court verdict on 26 January sentencing 21 fans of Port Said's Masry football club to death ignited violent unrest in the Suez Canal cities, resulting in many deaths and prompting President Morsi to announce a state of emergency in Port Said, Ismailia and Suez, which was itself widely challenged. In March, Moody's cited "the economic impact of the intensification of civil unrest, as reflected by the recent decree announcing a state of emergency" for its action. It also cited the "weakening in Egypt's external payments position" in light of the dramatic $1.4 billion drop in Egypt's foreign currency reserves in January, the largest decline in a year, according to the agency. Egypt's central bank started auctioning US dollars in late December, after foreign currency reserves reached a critical level as the bank had spent more than $20 billion in foreign reserves to prop up the Egyptian pound in the wake of the revolution. Concern over Egypt's economic future as cited by the agencies, has also been exacerbated by Egypt's failure to secure a $4.8 billion IMF loan after political unrest caused a preliminary agreement with the Fund to fall through in December. "Political conditions are complicating economic policymaking, as evidenced by the backtracking on IMF fiscal prior actions in December," said Fitch in January. On 9 December, President Morsi, caught in a constitutional battle with the opposition, had announced a raft of tax hikes as part of an economic reform programme proposed to the Fund in exchange for the loan, only to retract it later the same day in fear of a popular backlash. “The increased polarisation between the Muslim Brotherhood’s Freedom and Justice Party and sections of the population is likely to weaken the sovereign’s ability to deliver sustainable public finances, promote balanced growth and respond to further economic or political shocks,” S&P said when it cut Egypt's long-term rating from 'B' to 'B-' in late December. Uncertainty surrounding the timing, outcome, and effect of Egypt's parliamentary elections on the IMF negotiations has also been a major factor. When the vote was scheduled to begin in April, Fitch identified it as "a potential flashpoint" and predicted that "an IMF programme could be delayed until after the election."

Though negotiations with the IMF have shown tentative signs of progress, with officials on both sides of the negotiations expecting to conclude an agreement by the end of May, a court order has forced the delay of the elections until the autumn of this year.

A previous ruling, issued by the country's Supreme Constitutional court days before Mohamed Morsi beat Mubarak-stalwart Ahmed Shafiq in a presidential run-off vote last June, had forced the dissolution of Egypt's Islamist-led post-revolutionary parliament, causing Fitch to downgrade Egypt's sovereign credit rating to 'B+' from 'BB-'.

A few months before on 10 February, S&P lowered Egypt to 'B', five steps below investment grade, citing wariness of a turbulent transition to democracy, and the ongoing decline in the country's foreign currency reserves, which had fallen to $16.35 billion in January.

The transitional period had taken a sharp turn for the worse in late 2011. On October 9, the armed forces had brutally dispersed a protest by Coptic Christians in front of the state television building in downtown Cairo, killing 28 protesters in what became known as the "Maspero massacre."

In late November, a wave of protests unseen since the January 2011 revolution over the ruling Supreme Council of the Armed Forces' perceived botching of the transitional period ended in a week of deadly clashes on Mohamed Mahmoud Street near Tahrir Square, ahead of the country's first post-revolution legislative elections.

The events sparked a spate of downgrades, with S&P cutting Egypt's rating on 18 October then on 24 November to 'BB-' then 'B+', Moody's also lowering Egypt twice, in October then December, and Fitch catching up on 30 December, dropping Egypt's sovereign credit rating by one notch, citing "ongoing political turbulence," weakened public finances, and unfavourable "security conditions."

Moody's had previously acted on its scepticism in the earliest stage of the transition, downgrading Egypt's foreign and local currency government bond ratings by one notch in March. At the time, the agency cited "concerns about whether a transition to an effective and stable government will be achieved," in light of the "the prolonged political uncertainty in Egypt since our last rating action on 31 January."

Moody's had been the first to cut Egypt's credit rating in January 2011, to 'Ba2' from 'Ba1', less than a week after the January 25 protests sparked a wider revolution. It had been followed by S&P on 1 February, and Fitch on 3 February, which downgraded Egypt's sovereign debt by one notch each.

"The downgrade reflects the significant intensification of unrest, at the start of what is likely to be a volatile transition to a new government, and the increasingly negative consequences for the economy, public and external finances of the continuing disruption," Fitch had said, days before then president Hosni Mubarak stepped down on 11 February 2011.