Fitch cuts Egypt’s long term currency rating

In its most recent report the sovereign ratings group of the international rating agency, Fitch IBCA downgraded the Arab Republic’s currency to a BBB+ from an A-.The downgrade comes on the back of the recent devaluation of the Egyptian pound early August, and an increasing budget deficit rising from a customary 1% of GDP to 4%. The devaluation had adjusted the pound by six percent to 4.15 pounds US per dollar, in the hope of widening the range of currency trading, and reviving a declining foreign exchange market brought about when the country abandoned a nine-year peg to the US dollar at about 3.40 pounds. Commenting on the downgrade, the author of the report, Richard Fox, told ITP.net “While the recent currency devaluation does have an impact, by raising the fiscal cost of external debt, the down grade is more linked to the budget deficit and the domestic debt burden.” “We consider the devaluation positive, the system is better than it used to be, and we hope the structural reform process will speed up the growth rate and the deficit will decline again,” he added.The BBB+ rating, indicates a low expectation of credit risk with an adequate capacity for timely payment of financial commitments. However, it also implies that adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category. While the rating agency lowered the long term rating of the local currency it confirmed a long-term foreign currency rating of a BBB- with a short-term rating of an F3. The foreign currency ratings are illustrative of fair credit quality with an adequate capacity for timely payment of financial commitments. However, near term adverse changes could result in a reduction to non-investment grade. “The affirmation of the foreign currency ratings reflects Egypt’s continuing comfortable external debt position. Public external debt is falling and although total net external debt has risen since 1997, as official reserves have fallen and banks have run down external assets, it remains close to the average for sovereigns in the BBB range,” Fitch said.