Fitch Ratings' recent downgrade of Egyptian credit has come as no surprise, in fact some experts believe it is rather belated. Niveen Wahish This week, yet another international ratings agency has felt the need to downgrade Egypt's financial rating. Fitch Ratings, has downgraded Egypt's long-term foreign currency rating from BBB- to BB+. The move follows downgrades by Standard and Poor's, Moody's and Capital Intelligence. According to Fitch, a "BB" in long-term ratings indicates that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time. Egypt's long- term local currency rating has also slipped from BBB+ to BBB, and the short-term rating lowered from F3 to B. A "B" in short-term ratings, is a speculative grade. As defined by the agency, it indicates minimal capacity for timely payment of financial commitments, and vulnerability to short-term volatility in financial and economic conditions. Conversely, "F3" indicates fair credit quality and an adequate capacity for timely payment of financial commitments. However, the agency's outlook for the Egyptian economy remained stable. Credit ratings, which reflect a country's economic and financial strength are needed by investors to assess their investment risk. Moreover, governments need credit ratings to be able to borrow internationally. Egypt's new rating places it at the highest speculative grade. "We are no longer in the investment grade," said Enayat El-Naggar, senior manager of Capital Markets at Misr Exterior Bank. She clarified that, with a grade like this, any portfolio management company would have to ask for the client's consent before placing their money in Egyptian investments. According to El-Naggar, this rating has come as no surprise. Earlier this summer, Standard & Poor's lowered Egypt's rating to BB++, leaving its outlook on Egypt 'stable'. Moody's has assigned Egypt a lower domestic currency rating. Capital Intelligence, the international emerging markets rating agency, has assigned a negative outlook to Egypt's sovereign rating. All were dissatisfied with the country's economic fundamentals and the sluggish pace of economic reform. According to Hani Tawfiq, chairman of International Investors, an investment company, Fitch's downgrade was expected due to "Egypt's rigid monetary and fiscal policies and the rather unhealthy investment environment. This must be coupled with the long- standing problems of unemployment, massive internal debt, bureaucracy, corruption, and investment problems we've been trying to deal with since the mid 80s." In his opinion, the government's ultimate concern is control over the exchange rate. "Let the pound float and there will be an automatic reallocation of our economic resources to reflect their true value," he added. In fact, the exchange rate was viewed as a negative rating consideration by Fitch's report, despite the fact that the pound has been devalued several times. "Shortages of foreign exchange, the existence of a sophisticated parallel market and uncertainty about further policy changes preclude full realisation of the benefits that should have accrued from a 20 per cent depreciation," said James McCormack, senior director of 'sovereigns' at Fitch, in a press release made available by the company. The press release also stated that the fixed exchange rate was important for the success of structural reform during the 90's; "but prolonged currency appreciation and protectionist trade policies have resulted in Egypt having one of the least open economies of any sovereign rated by Fitch." The rating agency believes that Egypt's medium-term growth prospects would benefit from a more flexible exchange rate. "It would allow for a quicker response to external shocks, and with further depreciation, would facilitate the development of a more diversified export base to reduce vulnerabilities to such shocks." While acknowledging that economic reform has been stepped up, Fitch expects implementation to remain slow. It pointed out that "changes in economic policy, particularly those involving transitory costs such as higher unemployment or consumer prices, tend not to be undertaken without full consideration of the social consequences." However, Fitch also pointed out that stability could be jeopardised if reform is not quick enough and more jobs are made available. On a more positive note, the report did acknowledge that trade policy is being reformed, with a focus on export promotion, tariff reduction, customs reform and easing the administrative burden on exporters. "Fiscal policy has also become more transparent, with consolidated general government data now available. Consolidated debt is lower than previously reported, but still high, at about 85 per cent of GDP. Egypt also enjoys a strong external liquidity position, notwithstanding the fall in reserves, and a comfortable external debt service burden," the report added. In light of the change in sovereign ratings, Fitch has also downgraded its foreign currency (short and long-term) ratings for some banks. These include the National Bank of Egypt, the National Bank of Egypt International, Commercial International Bank, the Egyptian American Bank, the Export Development Bank of Egypt, Al-Watany Bank of Egypt, Credit Agricole Indosuez-Egypt, Misr Iran Development Bank and Suez Canal Bank. Banks share the same rating as the government. In fact, the government rating is the ceiling for banks and companies. According to Hani Tawfiq, this downgrade means that portfolio managers worldwide will buy fewer Egyptian investments for their portfolios. Moreover, it means that the cost of acquiring funds is now higher for Egyptian companies and institutions. Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES), an independent think tank, believes that this downgrade has come a bit late; at a time when indicators show recovery. "For the first time in two and a half years, there are signs of an arrest to a decline, if not the beginning of a recovery," he said. He also pointed out that, the gap between the official and black market rates on the foreign exchange market is narrowing, non-oil exports are picking up, and so is tourism. Indeed, the Business Barometer July 2002, a semi-annual report prepared by ECES, revealed a modest improvement in the economic situation. Galal also revealed that businessmen were beginning to hire new hands and have exhausted their inventories. However, issues raised by the international ratings agencies remain on the table. The foreign exchange issue still hasn't fully been addressed and policy needs to be revised. Criticism abounds with respect to the pace of economic reforms. "On some reforms we are hardly moving and we remain a protected and closed economy," said Galal. He also felt that Egypt wasn't addressing issues of institutional reform, taxation and conflict resolution quickly enough. On the whole "the pace of reform is not as rapid or coherent as we would like it to be," he added. Asked about foreign direct investment (FDI) and portfolio investments, Galal said that "the situation can't get any worse, since there is hardly any FDI or portfolio investment at the moment, however, it [the new ratings] will hurt in terms of attracting fresh capital." However, Galal is counting on the fact that investors are sophisticated, will make independent analyses, and not be over-reliant on Fitch's new ratings advice.
