Egypt’s external debt rose to $145.5 billion at the end of December 2021, with an alarming increase of $8 billion in just three months, according to figures released by the Central Bank of Egypt (CBE). last week.
Fears of even bigger debt hikes following the fallout from the war with Ukraine that began in February prompted the government last week to form a committee headed by the planning minister to consider ways to curb foreign borrowing.
The figure does not include the $500 million of Samurai bonds issued by Egypt last month. Talks are also underway to secure new financing from the International Monetary Fund (IMF), the value and timing of which have not yet been announced.
Egypt is not alone in increasing its debt, as the state of the global economy is likely to push global sovereign borrowing to hover around $10.4 trillion in 2022, 30% above their current levels. before the pandemic, according to a report by S&P Global Ratings.
The rating agency noted that Egypt is set to overtake Turkey as the largest issuer of sovereign debt in emerging economies in Europe, the Middle East and Africa (EMEA), with 73 billion in bond sales by the end of the year.
However, Egypt’s creditworthiness, and therefore the cost it will pay to borrow, is good. S&P and Fitch Ratings confirmed last week that Egypt’s credit ratings had a stable outlook.
“The stable outlook reflects our expectation that the Egyptian authorities’ policy response, alongside strong external support, should prevent a significant deterioration in the external and fiscal positions due to higher commodity prices,” an S&P note said. Global.
The UAE injected nearly $1.8 billion in investments into a number of Egyptian-listed companies last week. Qatar said in late March it would back Egypt with $5 billion, and Saudi Arabia deposited $5 billion in the CBE and said its wealth fund would invest some $10 billion in Egypt.
The IMF loan and support from the Gulf Cooperation Council (GCC) will help Egypt bridge the gap between its resources and its foreign exchange needs.
According to broker Prime Securities, an IMF loan would help narrow the financing gap by a range of $2 billion to $3 billion. The latest investment inflows from the GCC are expected to boost foreign direct investment (FDI) in 2022-2023 to end the year at $10 billion.
But the increase in external debt nevertheless burdens the budget with high interest rate payments that will eat away nearly 45% of the total revenue of the new 2022-23 budget.
The inflated external debt figure comes as Egypt’s foreign currency sources show weakness that is here to stay, a fact that prompted the CBE to devalue the pound by 10% against the dollar in March.
Egypt’s external financing needs in the six-month period ending June 2022, according to estimates by Prime Securities, are expected to reach $21.3 billion. “The rapidly escalating geopolitical tensions in Eastern Europe, coupled with the dramatic change in global monetary conditions, threatens the country’s ability to access funds to finance its external needs,” he said.
Overall, Egypt’s balance of payments, which reflects the country’s trade, financial and services transactions with the rest of the world and thus gives an idea of the state of foreign exchange resources, recorded a deficit of $325 million in the second quarter of 2021-22. ending in December against a surplus of $311 million in the first quarter.
These are the most recent official figures available, and they do not cover the quarter in which the war in Ukraine broke out.
Commenting on the figures, Mona Bedeir, chief economist at Prime Securities, said that while the current account deficit part of the balance of payments, which shows the balance of trade and services, had been fixed at a lower level during the second half of the year to hit $14.2 billion on the back of a recovery in tourism and liquefied natural gas (LNG) exports from a year earlier, “seems unlikely to happen now.”
She expects the current account deficit to widen in the new fiscal year to $16.7 billion.
While an expected recovery in LNG exports due to a price spike would help the country cope with the higher cost of imported petroleum products, the non-hydrocarbon trade deficit will remain a source of weakness, Bedeir said.
“It will also be subject to further deterioration despite the CBE’s measures to curb imports, due to rising import bills and the risk of long-lasting global supply disruptions affecting global commodities, in especially food imports,” she wrote in a note.
In addition to efforts to limit imports, the government is trying to reduce the current account deficit by seeking new tourist markets and increasing Suez Canal tolls.
In the first half of 2021-22, tourism revenue jumped to $5.8 billion from $1.8 billion the previous year as the sector recovered from the pandemic. “However, this preceded the war in Ukraine, which means that data for the year to date will show a deterioration in tourism revenues, as expected,” noted investment bank Al-Ahly Pharos.
Egypt’s deputy tourism minister said last week that the country was considering markets in Western Europe and the Gulf to make up for the loss of Russian and Ukrainian tourists, who were hoped to return this year.
Russian and Ukrainian tourists made up around 30% of foreign visitors to Egypt until 2015, when a terrorist attack grounded a Russian flight, killing all passengers. A ban was imposed on Russian flights for almost five years before being lifted in November 2021.
On Suez Canal revenues, the Suez Canal Authority (SCA) raised toll fees by 10-20% last month, depending on the type of vessel and cargo.
Suez Canal revenues surged 17% to $3.4 billion in the second half of 2021-2022, marking the rebound in global trade in the second half of 2021 after the pandemic.
On a negative note, net portfolio investment, representing purchases of Egyptian government securities by foreigners, reversed into a $2.5 billion deficit in the six months to December and an influx of $10.2 billion in the comparable half of the prior year, reflecting the tightening and perceived risks surrounding emerging markets in the second half of 2021.
The fourth quarter alone saw the drain of $6 billion given the absence of any international bond issuance from October to December 2021.
The outflow figure is expected to rise, as in the two weeks since the outbreak of war in Ukraine, officials told Bloomberg that a whopping $15 billion fled the country.
As expected, the country’s net foreign exchange reserves reflected these losses, declining last month for the first time since the outbreak of Covid-19 in the first quarter of 2022. Reserves stood at nearly $37.1 billion. at the end of March, against 41 billion dollars. at the end of the previous February.
The CBE noted that it had used part of these reserves to cover outflows and ensure the availability of imported strategic goods and repay external debt obligations on time.
Another worrisome indicator is Egypt’s net foreign assets (NFA), which in February fell from LE 60 billion to minus LE 50.3 billion, marking the fifth consecutive month of decline. NEAs represent banking system assets held by nonresidents.
According to Reuters, they reflect changes in import or export flows, foreign portfolio outflows, foreign debt repayment, changes in the flow of workers’ remittances or a slowdown in tourism.
*A version of this article appeared in the April 28, 2022 edition of Al-Ahram Weekly.