Standard & Poor's on Tuesday downgraded its rating on Egypt and warned that another cut was possible as a week of protests demanding the ouster of the president crippled the nation, ground its economy to a virtual standstill and battered its currency.
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.
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.
The agency also said it believed the rating downgrade could have a negative impact on the creditworthiness of two of Egypt's biggest banks, the National Bank of Egypt and Commercial International bank.
The Egyptian pound was trading at about 5.85 pounds to the U.S. dollar by early Tuesday afternoon, rebounding slightly from a roughly four-and-a-half year low.
Forward spreads widened sharply over the early days of the crisis before easing up by Tuesday and the impact was palpable on other regional currencies, at least temporarily, before the forward spreads narrowed.
"This is due to the fact that there is more differentiation between the levels of contagion in the Middle East," said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi-Credit Agricole Group. "Markets are seeing that the contagion ... won't spill to oil producing countries, particularly Saudi Arabia."
The Saudi riyal is the most actively traded in the region and is used by foreign investors as a hedge against their Egyptian pound exposure.
For Egypt, the S&P downgrade was the latest blow in a week where there was little to cheer about in the economy.
On Monday, Moody's cut its rating for Egypt's government bonds, 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.
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 seemed now to be wishful thinking. A growing number of companies have halted production and others are withdrawing their foreign staff, at least temporarily.
Joining a growing list of companies that have suspended operations, Dubai-based port operator DP World said it temporarily halted its operations "as a precautionary measure" at the Red Sea port of Sokhna, near the Suez Canal's southern entrance.
Sokhna, about 120 kilometers (75 miles) from Cairo, handles most of the sea cargo destined for Egypt arriving from the east, according to DP World.
A key concern about Egypt has been whether operations at the canal itself would be affected. The canal is the key artery to the Mediterranean and shippers rely on it to avoid the longer, and increasingly pirate-prone path around Africa to the Atlantic Ocean. So far, traffic through the canal appears unaffected.
But Egypt still faces plenty of challenges.
Poverty is rife, unemployment is unofficially pegged in the mid-20 percent although government figures put it at about 10 percent. In addition, the government's efforts to push reform have been weighed down by a massive subsidy bill, with more than 60 million of the country's 80 million people receiving some sort of subsidized foodstuff or fuel.
The weakening in the currency, if sustained, would be another problem for either Mubarak, if he remains in power, or a subsequent government.
"Egypt's foreign reserves should be sufficient to prevent a complete collapse in the currency, but it will become increasingly difficult and expensive to manage rising inflation," said Capital Economics' Mideast economist Said Hirsch in a research note.
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.
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