Fitch downgrades Egypt sovereign rating, could cut further

NEW YORK — Fitch Ratings cut Egypt's sovereign credit rating Wednesday one notch, to B from B-plus, citing a wider budget deficit and instability caused by the country's political transition.

The downgrade reflects several factors, including a worsened fiscal position, Fitch said in a statement.

"Egypt's 'B' rating reflects a balance between short-term reserve pressure, political upheaval, a weak and deteriorating fiscal position and capital flight against our assumption that an [International Monetary Fund] program will be in place after the election," Fitch said.

Fitch cited shortages of foreign exchange reserves and the subsequent decision by the government to tighten capital controls and introduce currency auctions as a concern.

Violence has swept through Egypt's cities, killing more than 50 people, while the economy has lurched deeper into crisis. The instability occurs two years after a revolution toppled Hosni Mubarak.

In Mubarak's place is an Islamist-led government of President Mohamed Morsy, who is struggling deliver security, stability, jobs and food in a society that is polarized between those seeking a firmer religious hand in day-to-day life and a large secular society fostered by the 30-year rule of Mubarak.

The lack of trust between the two sides has left Egypt adrift and boiling. The army's chief warned Tuesday that the state was on the brink of collapse if Morsy's opponents and supporters did not end street battles on the second anniversary of the revolution.

Morsy, speaking Wednesday during a brief visit to Berlin that was made in part to reassure Western investors, said he expected economic growth of 5.5 percent next year and 750,000 new jobs created annually.

Fitch expects growth of 3.3 percent, on average, over fiscal year 2013 and 2014. That would be "well below the pace necessary to generate sufficient job opportunities for the 700,000 new entrants to the labor force each year," Fitch said.

The World Bank recently forecast economic growth of 2.6 percent this year and 3.8 percent in 2014, rising to 4.7 percent in 2015.

Egypt has yet to agree with the IMF on a US$4.8 billion loan to help shore up the economy. An agreement had been expected in December but was postponed due to the political instability, which triggered a plunge in the Egyptian pound to record lows.

Fitch warned that failure to put in place a deal with the IMF in the second quarter, "particularly if accompanied by capital flight, falling reserves and major currency depreciation, could trigger a downgrade."

The rating outlook remains negative, indicating the potential for further downgrades in the next 12–18 months.

Standard & Poor's rates Egypt B-minus with a negative outlook. Moody's Investors Service rates the country B2 but has it on watch for a downgrade, possibly before the end of April.

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