International rating agency Fitch Ratings has downgraded the Arab Republic of Egypt's long-term foreign currency rating to 'BB+' from 'BBB-' (BBB minus). At the same time, the long-term local currency has been downgraded to 'BBB' from 'BBB+' and the short-term rating lowered to 'B' from 'F3'. The outlook is stable.
Fitch stated that a slow but steady erosion of sovereign creditworthiness has been underway for several years. The fixed exchange rate was an important element in the success of the structural reform program introduced in the early 1990s, but prolonged real effective appreciation and protectionist trade policies subsequently resulted in Egypt having one of the least open economies of any sovereign rated by Fitch.
Although the exchange rate has been liberalized such that it now trades in a band that has been devalued several times, the agency still views exchange rate policy as a negative rating consideration. "Shortages of foreign exchange, the existence of a sophisticated parallel market and uncertainty about further policy changes preclude full realization of the benefits that should have accrued from a 20 percent real effective depreciation", said James McCormack, senior director of Sovereigns.
The agency pointed out that the economy has been beset by a series of external shocks since 1997, the most recent being the terrorist attacks in the United States in September 2001, from which tourism has yet to recover fully.
Fitch firmly believes that Egypt's medium-term growth prospects would benefit from a more flexible exchange rate. It would allow for a quicker response to external shocks and, with further depreciation, would facilitate the development of a more diversified export base to reduce vulnerability to such shocks.
A 25 percent drawdown in foreign exchange reserves since 1998, in part to support the exchange rate, is behind a marked deterioration of the net external position. Net external debt (NXD) has nearly doubled in absolute terms and when measured against foreign exchange earnings (CXR). Egypt's NXD/CXR ratio is now higher than the average for 'BBB-' (BBB minus) and 'BB+' sovereigns.
According to Fitch, while economic reform has been stepped up, implementation is likely to remain unhurried. Above all else, the Egyptian authorities value the continuation of social and political stability. Changes in economic policy, particularly those involving transitory costs such as higher unemployment or consumer prices, are not undertaken without full consideration of the social consequences.
Fitch said, however, that the need for more and quicker reform is evident from the private sector's inability to absorb the rapidly increasing labor force, which could, in turn, jeopardize the medium-term social stability the authorities seek to preserve.
Fitch has identified several positive factors in the current policy mix. Trade policy reforms are at various stages of development, focusing on export promotion, tariff reduction, customs reform and easing the administrative burden on exporters. In addition, fiscal policy has become more transparent, with consolidated general government data now available, revealing deficits that are comparable to 'BBB-' (BBB minus) and 'BB+' sovereigns.
Consolidated debt is lower than previously reported, but still high at about 85 percent of Gross Domestic Product (GDP). Egypt's strong external liquidity position, notwithstanding the fall in reserves, and a comfortable external debt service burden are also supportive of the ratings.
In light of the change in sovereign rating, Fitch has also downgraded its foreign currency short- and long-term ratings for some banks and added a 'T' suffix to its support ratings in Egypt. A support rating qualified by the suffix 'T' indicates significant existing or potential transfer risk of economic and/or political origin that might prevent support for foreign currency creditors.
The banks affected and their respective ratings are:
National Bank of Egypt: Foreign currency short- and long-term ratings have been downgraded from 'F3/BBB-' (BBB minus) to 'B/BB+' outlook stable, and the support rating changed from '2' to '2T'. The individual rating of 'D/E' and national ratings of 'F1+/AA+ (egy)' are affirmed.
National Bank of Egypt International: Foreign currency short- and long-term ratings have been downgraded from 'F3/BBB-' (BBB minus) to 'B/BB+' outlook stable. The individual and support rating of 'C' and 4 respectively are affirmed.
Commercial International Bank: Foreign currency short and long-term ratings have been downgraded from 'F3/BBB-' (BBB minus) to 'B/BB+' outlook stable, and the support rating changed from '2' to '2T'. The individual rating of 'C' and national ratings of 'F1+/AA+ (egy)' are affirmed.
Egyptian American Bank: Foreign currency long-term rating has been downgraded from 'BBB-' (BBB minus) to 'BB+' outlook stable, and the support rating changed from '4' to '4T'.
Export Development Bank of Egpyt: Foreign currency long-term ratings has been downgraded from 'BB' to 'BB-' (BB minus) outlook stable, and the support rating changed from '2' to '2T'. The foreign currency short-term rating of 'B' and individual of 'C/D' along with the national ratings of 'F1/A (egy)' are affirmed.
Al-Watany Bank of Egypt: The support rating changed from '5' to '5T', while its national ratings of 'F2/BBB+ (egy)' are affirmed. Credit Agricole Indosuez Egypt: The support rating changed from '3' to '3T', while its national ratings of 'F1/AA (egy)' are affirmed.
Misr Iran Development Bank: The support rating changed from '4' to '4T', while its national ratings of 'F3/BBB-' (BBB minus) (egy)' are affirmed. Suez Canal Bank: The support rating changed from '4' to '4T', while its national ratings of 'F2/A-' (A minus) (egy)' are affirmed. — (menareport.com)
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