Egypt Rating Cut by Fitch on Concern Turmoil to Curb Growth

Egypt’s credit rating was cut by Fitch Ratings on concern that the ouster of President Mohamed Mursi will damp economic growth and fan political instability.

The “military coup” that overthrew Mursi and the resulting political turmoil will set back the country’s economic recovery and make it harder to implement fiscal and structural changes needed to secure assistance from the International Monetary Fund, Fitch said today in a statement. The long-term foreign-currency rating was reduced one level to B-, or six levels below investment grade, with a negative outlook.

Fitch’s warning comes after Egypt’s stock market posted its biggest rally in more than a year yesterday, sending the benchmark index up 7.3 percent, on speculation the overthrow will open the way for a new government to take over with broader political support. The yield on Egypt’s $1 billion of dollar bonds due 2020 extended yesterday’s record drop, falling 0.26 percentage point to 9.03 percent as of 1:45 p.m. in New York.

“There’s a lot of uncertainty about how this will play out,” Steffen Reichold, an emerging-market economist at Stone Harbor Investment Partners LP, which oversees $66 billion of assets, said in an interview from New York. “People weren’t happy with how the last government managed the economy. Some think there’s a prospect for better policies going forward.”

Fitch’s rating gives Egypt the same classification as Greece, Cyprus and Ecuador, according to data compiled by Bloomberg. It is one level lower than Egypt’s grades from both Moody’s Investors Service and Standard & Poor’s. politicians take charge and the IMF deal is expedited, he added.

Debt Payments

Military officials said they aimed to restore stability when they forced Mursi out of office on July 3. The country is struggling with the worst economic slump in two decades and facing the Middle East’s biggest budget deficit as a percentage of economic output.

“There is a risk of a material deterioration of domestic political stability, with downside risks for economic outcomes and creditworthiness,” Paul Gamble, director of the sovereign group at Fitch, wrote in today’s report.

Egypt has about 169 billion pounds ($24 billion) of local-currency debt repayments this quarter, a record, according to data compiled by Bloomberg. Political bickering since Mursi became the country’s first democratically elected president a year ago has prolonged talks with the International Monetary Fund for a $4.8 billion loan.

The Market Vectors Egypt Index ETF (EGPT) rallied 3.9 percent today to $43.69, which would be the highest closing level since May 30. Oil producer Circle Oil PLC, which has assets in Egypt, jumped 10 percent in London.

Yield Spread

While the stock and bond markets have rallied since the overthrow, they both slumped earlier this year.

The benchmark EGX 30 Index tumbled 13 percent in the first half of 2013, led by Commercial International Bank Egypt SAE, compared with a 1.7 percent drop in the MSCI Emerging Markets Index.

The extra yield investors demand to hold Egypt’s dollar bonds instead of U.S. Treasuries has jumped 3.4 percentage points this year to 7.93 percentage points, according to data from JPMorgan Chase & Co. That compared with an average increase of 0.81 percentage points for emerging markets tracked by JPMorgan’s EMBIG index.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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