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Egypt economy rating downgraded as mass protests gather pace

Standard & Poor's has downgraded its rating on Egypt and warned that another cut was possible as a week of anti-government protests has almost crippled the nation and ground the economy to a virtual standstill.

S&P became the third international ratings agency in under a week to downgrade Egypt because of the unrest.

Demonstrators have focused their anger on President Hosni Mubarak - 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," S&P credit analyst Kai Stukenbrock said.

Yesterday, 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 travellers who had booked trips to Egypt are quickly cancelling.

With tourism likely to take a major hit, the 6% GDP growth figure which officials as recently as three weeks ago were projecting for this year now seems to be wishful thinking. A growing number of companies have halted production and others are withdrawing their foreign staff, at least temporarily.

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% of GDP in 2010, well above the BB median of 42% of GDP.

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