“We revised the transfer and convertibility (T&C) assessment to ‘B’ in line with the sovereign ratings. The recovery rating on the unsecured foreign-currency debt remains unchanged at ‘3’, indicating our expectation of 50 percent-70 percent recovery in the event of a default,” S&P said.
The downgrade reflects our opinion that 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 lowered its ratings on Egypt to “B+” on Nov. 24, 2011. At that time, S&P said that we could lower the ratings again if we believed that policy developments during the political transition were further weakening Egypt's ability to fund its country's external needs.
Egypt’s external financing is becoming more problematic in the face of the related problems of sharply falling reserves, exchange rate pressures, and capital flight, S&P said.
Egypt's external financing risks have risen significantly, with foreign direct investment having declined sharply and net portfolio flows also having turned negative. Egyptian Central Bank interventions — to support the Egyptian pound in the face of significant capital outflows and double-digit annual inflation — have resulted in a sharp decline in net international reserves. These were $16 billion at end-January 2012, down from $36 billion at the start of 2011.
Historically, our assessment of Egypt's external score has been a relative strength to the rating; this is now being eroded. Egypt’s net international reserves, excluding gold, now cover less than three months of goods and services imports compared with more than six months at the start of 2011.
The program Egypt being discussed with the IMF, alongside potential funding from other multi- and bi-lateral lenders, could provide important near-term external financing.
S&P’s T&C assessment is equalized with the sovereign foreign-currency rating to reflect our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Egypt-based nonsovereign issuers for debt service is similar to the likelihood of the sovereign defaulting on its foreign currency obligations.
