Fitch Ratings downgraded Egypt’s long-term foreign and local currency issuer default ratings to B- from B with a negative outlook. In addition, the ratings agency downgraded the Country Ceiling to B- from B, while affirming the short-term rating at B.

The rating action reflects a material deterioration of domestic political instability following the army backed ouster of elected President Mohamed Morsi with the potential of downside risks for economic outcomes and creditworthiness. In the view of the rating agency, the new political environment makes it harder to implement fiscal and structural reforms necessary to secure an IMF Standby package with heightened uncertainty and inflamed political tensions likely to set back an economic recovery and may negatively affect a seriously deteriorating fiscal situation.

According to Fitch, the political instability will dim GDP growth prospects to below 3% in FY 2013/2014 (year-ending June), in turn lowering budget revenues. As a result, Fitch forecasts another double-digit budget deficit in FY14 and a further rise in the debt-to-GDP ratio from the current 85%. While the ratings agency expressed concerns over the impact of foreign exchange shortages on private sector economic activity, the ratings agency foresees a continuation of ad-hoc bilateral inflows from the GCC.