Standard & Poor's Downgrades Egypt Debt Rating

CAIRO - Standard & Poor's on Tuesday downgraded its rating on Egypt and warned that another cut was possible, as a week of violent protests demanding the ouster of the president has almost crippled the nation and ground the economy to a virtual standstill.

S&P became the third international ratings agency in under a week to downgrade Egypt because of the unrest that has gripped the Arab world's most populous nation. Demonstrators have focused their anger on a leader they say is sorely out of touch with their daily economic plight.

The New York Times reports that the nation's economy has all but ground to a halt. Tourism, foreign commerce and banking have stopped, international companies are closing plants and sending workers out of the country. Food staples for stores are going undelivered.

Analysts are worried that continued unrest may jeopardize the flow of oil through the Suez Canal, affecting prices in Europe and beyond.

NYT: Egyptian Economy Nearing Crisis
Egypt Crisis Drives Up Oil Prices
Egypt Crisis Stirs Concern for World Economy

Egypt's long-term foreign currency sovereign rating was lowered to BB from BB+, S&P said. The cuts still left the rating within the investment grade category, but reflected the increasing alarm with which investors are viewing the developments in Egypt. S&P warned that it could issue another downgrade - possibly by more than one notch - within the next three months.

"The rating actions reflect our expectation that the violent demonstrations of the past week will persist, despite the appointment of a vice president and the dismissal of the government by President Hosni Mubarak," said S&P credit analyst Kai Stukenbrock.

On Monday, , placing it solidly in junk status. Moody's, in a step taken by ratings agency Fitch days earlier, also lowered its outlook on the country from stable to negative.

S&P, echoing its ratings peers, warned that the political instability and unrest will hamper Egypt's economic growth this year, in no small part because of the blow to the vital tourism sector. Foreigners, and Egyptians, are fleeing the country in droves, with several nations sending in evacuation flights while travelers who had booked trips are quickly canceling.

The agency also lowered its long and short-term local currency ratings to BB+/B from BBB/A-3, while the short-term foreign currency rating of B was unchanged.

Complete Coverage: Anger in the Arab World
Live Blog Day 8: Egypt in Crisis

With tourism likely to take a major hit, the 6 percent GDP growth figure which officials as recently as three weeks ago were projecting for this year seem now to be wishful thinking. A growing number of companies have halted production and others are withdrawing their foreign staff, at least temporarily.

S&P said it believes the government will strive to reduce poverty by increasing fuel and food subsidies. But such a step will have "negative implications" for the public sector deficit.

"In the absence of emergency spending cuts in other areas, the budget deficit in 2011 could reach double digits ... which will be difficult to finance while political uncertainty prevails," S&P said, adding it estimates that general government debt stood at almost 74 percent of GDP in 2010, well above the BB median of 42 percent of GDP.