Fitch Cuts Egypt Rating on Unrest as Bonds Drop Most Under Mursi

Fitch Ratings downgraded Egypt’s debt citing political violence and budget strains, as the country’s bonds fell the most since President Mohamed Mursi was elected in June.

Egypt’s “fiscal position has worsened” and “serious divisions have opened within society, contributing to sporadic outbursts of violence,” Fitch said today. It lowered the rating by one step to B, five below investment grade.

Egypt’s 5.75 percent dollar bonds due in April 2020 extended losses after the announcement, pushing yields up 38 basis points, or 0.38 percentage point, to 6.28 percent at 5:40 p.m. in Cairo. That’s the largest advance since June 22, two days before Mursi was declared winner of Egypt’s presidential elections. The yield has soared 69 basis points this week, while the cost of protecting Egyptian bonds against default has risen 39 basis points to 481 yesterday.

Mursi is battling to control unrest that has gained momentum since Jan. 25, the second anniversary of the start of the uprising that ousted Hosni Mubarak. At least 50 people have been killed nationwide in street battles, and Mursi imposed emergency rule including an overnight curfew in three provinces.

The latest wave of violence is undermining efforts to restore political order and revive an economy growing at the slowest pace in two decades.

‘Political Risk’

“Clearly political risk is not declining,” said Abdul Kadir Hussain, who was the top Gulf Cooperation Council fund manager in 2012 as chief executive officer at Mashreq Capital DIFC Ltd.

The Egyptian pound has weakened 7.4 percent in the past month, after reserves slumped about 60 percent since the end of 2010. The currency will depreciate another 6 percent this quarter, according to a Bloomberg News survey of bankers. The government is seeking a $4.8 billion loan from the International Monetary Fund to shore up finances.

Fitch’s move may not have “huge significance” because investors are “already wary of the political and economic risks in Egypt” and are “focusing more on the political developments,” said Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes Holding SAE.

The country’s benchmark stock index, the EGX 30, rose from a one-month low, gaining 1.5 percent, as reform leader Mohamed ElBaradei called for a meeting between Mursi and the opposition.

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