In a statement issued last night, the ratings agency said the government’s deficit reached 10.7% of gross domestic product in the year ending June 2012 and was forecast to reach 11.2% this year. The government’s debt-to-GDP ratio was forecast to reach 84% – double the average for countries with a B rating.

‘Spending on subsidies, interest payments and the public sector wage bill are rising and a weak economy is hitting revenues,’ Fitch explained.

The agency also highlighted a shortage of foreign exchange reserves, which could push up inflation and, in turn, increase the government’s subsidy bill. This situation had been exacerbated by the absence of funding from the International Monetary Fund, Fitch noted. The IMF was still discussing a $4.8bn loan with the Egyptian government.

Fitch also warned that political conditions were ‘complicating’ economic policy-making and could delay agreement on the IMF programme until after parliamentary elections, expected in April.

‘The political transition, while making significant progress, has at times been mishandled and serious divisions have opened within society, contributing to sporadic outbursts of violence. Parliamentary elections, likely in April, are a potential flashpoint,’ it explained.

The political situation has also hit growth, which is forecast to average 3.3% this year and next – ‘well below’ the pace needed to create enough jobs to satisfy the 700,000 new entrants to the Egyptian labour force every year.

Allocating a negative outlook on Egypt’s new rating, Fitch warned that a further downgrade could be required if no IMF programme was implemented by the end of the calendar year.

Egypt’s rating could also be cut further in the event of an ‘abrupt depletion of reserves and a disorderly devaluation of the currency, which could result from strain on external finances stemming from a delay to the IMF programme’, the agency added.