"Egypt sinks deeper into junk status," a headline in the Financial Times says after Moody's announcement that it has downgraded the country's bond rating from B2 to B3 with a threat to downgrade it further "depending on the severity of possible adverse developments".

Moody's gives three reasons for yesterday's downgrade:

1) The economic impact of the intensification of civil unrest, as reflected by the recent decree announcing a state of emergency.

2) The further weakening in Egypt's external payments position given the large drop in January in the level of international reserves held by the Central Bank of Egypt (CBE).

3) The continued uncertainty surrounding the Egyptian government's ability to secure financial support from the International Monetary Fund (IMF).

It warns that a further downgrading could result from one of more of the following factors:

1) The absence of substantial and predictable external financing support;

2) an assessment of a likely further weakening of the external payments position and further run-down of official international reserves;

3) instability in the banking system, which may prompt the imposition of tighter capital controls on domestic deposits or foreign-exchange transactions; or

4) a sharp rise in the government's funding costs above previously elevated levels to a level that significantly heightens refinancing risks.

One major issue here is continuing uncertainty about a possible $4.8 billion load from the International Monetary Fund which, under the terms of the new constitution, may have to be vetted by religious authorities.

Reuters reports that the Salafist Nour Party is objecting to payment of interest on the proposed loan and is considering legal action to ensure that any deal is submitted to scholars at al-Azhar for their approval:

"Such a challenge could complicate the Muslim Brotherhood-led administration's effort to finalise the International Monetary Fund deal that was tentatively agreed last year but shelved following political unrest in Cairo.

"Abdullah Badran, head of the Nour Party's bloc in the upper house of parliament, told Reuters the move was intended to 'activate the role of the Senior Scholars' Authority in all matters pertaining to sharia (Islamic law)'. He said the party was studying its legal options ...

The constitution states that the opinion of al-Azhar's Senior Scholars' Authority must be sought 'on matters pertaining to Islamic sharia'. It does not say whether their opinion is binding on government nor make clear the scope of al-Azhar's role.

As Egypt's currency reserves dwindle to critical levels, politicians seem oblivious to the economic crisis facing the country. On Monday, members of the Shura Council (the upper house of parliament) were devoting their time to some ludicrous debate about whether sexual harassment is the fault of women. 

Speaking in Alexandria on Sunday, US ambassador Anne Patterson gave what she described as "a bleak picture" of the Egyptian economy and called on politicians to take ownership of the problem: 

"Every economy goes through bad periods, but economies only recover when they are tended. And that means someone has to take ownership of the solutions (even if they are difficult) and lead the way out. People must be shown a vision of how the future will reward the sacrifices of the present. 

"The most catastrophic path is for the government and the political leadership of the country – whether in power or in opposition – to avoid decisions, to show no leadership, to ignore the economic situation of the country. When management of the economy is treated as a by-product of political disputes instead of a core function of political leadership, the business community is left trying to protect itself instead of investing and growing."

Ambassador Patterson is surely right about that, whether or not one agrees with her ideas about what measures should be taken. It's time for Egypt's politicians to stop messing about and start treating the economy as a top priority. 

Posted by Brian Whitaker, 13 February 2013.