By the Blouin News Business staff

Egypt ratings downgrade brings devaluation nearer

by in Middle East.

Continuing political strife in Egypt threatens a further credit downgrading.

Protest rally in Alexandria. AFP/Getty Images/MAHMUD HAMS

Standard & Poor’s cut of Egypt’s long-term credit rating to ‘B-‘ from ‘B’ bodes ill for the country’s ability to finalize a $4.8 billion IMF loan–one purpose of which was to forestall a ratings downgrade–and increases the likelihood of a devaluation in the new year.

The aid is needed to prop up an economy that has seen tourists and foreign investors desert the country since popular uprisings started two years ago. Egypt has been left with a budget deficit that has raced into double digits as a percentage of GDP and a deteriorating balance of payments. Strong capital outflows have put pressure on the currency, causing a sharp fall in foreign exchange reserves.

The loan was put on hold at Cairo’s request earlier this month after the Morsi government cancelled some of the austerity measures introduced to pave the way for it. These included cuts in energy subsidies and higher sales taxes on a range of goods and services that were withdrawn within hours of being announced in the face of popular criticism ahead of the constitutional referendum.

If the current polarization between the [Muslim Brotherhood’s Freedom and Justice Party] and other sections of society persists, the “broad-based domestic and international support,” which the IMF views as “crucial for the successful implementation of the planned policies” under the program, could remain out of reach and the program inactive. –Standard & Poor’s

S&P’s decision not only to cut Egypt’s credit rating to the same level of junk as Greece but also to maintain its negative outlook and warn against the impact of continued political strife suggests another cut is likely. That in turn would imply that the government won’t be able to get public support for austerity before discussions with the IMF to approve the loan are due to resume in January. If it can’t, and if Egypt’s foreign exchange reserves and the public finances continue to deteriorate, the government will be left with little option but to devalue.