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Saturday, April 13, 2024

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Egypt

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GDP: USD476.7bn (World ranking 32)
Population: 111.0mn (World ranking 14)
Form of state: Semi-presidential republic
Head of government: Abdel Fattah el-Sisi (President)
Next elections: 2025, Legislative

Strengths

  • Domestic and foreign investments in infrastructure and construction, as well as positive demographics, drive high economic growth rates, despite structural challenges
  • Access to alternative financing has improved, including modest privatizations and different markets, such as the Panda bonds
  • Suez-related revenues and tourism receipts contribute to a relatively balanced current account, showcasing the country’s ability to stabilize key income sources

Weaknesses

  • High inflation rates, particularly for food prices, pose a significant challenge to the economy, impacting purchasing power and creating difficulties in managing the exchange rate
  • Potential for social unrest, driven by issues such as youth unemployment, currency depreciation and geopolitical tensions, poses a risk to political stability
  • A decrease in Suez Canal and tourism revenues due to regional conflicts may add to existing challenges in accessing diverse funding sources due to high global interest rates, large credit default swap spreads and a difficult dialogue with the IMF, ultimately leading to a sovereign default

Economic overview

Austerity-led growth to cope with political and regional pressures

The Egyptian economy has maintained high growth rates despite the difficulties arising from structural imports of food, energy and refined products in a context of high population growth and increased investment (domestic and foreign) in infrastructure and construction. The economy is expected to grow by +3.5% in 2024, following an estimated +2.8–3% in 2023. However, this goes in parallel with very high levels of inflation (+33.7% in December, with food still at +79%) and evident difficulties in maintaining an acceptable buffer of foreign exchange reserves and refinancing debt.

The conflict between Israel and Gaza, which has more tha 2mn people gathered in the southern portion of the Gaza Strip that borders Egypt, as well as international pressure to resume the negotiations with the International Monetary Fund (IMF), both had an impact on the early presidential elections that took place in December 2023, several months ahead of schedule. The election confirmed President El-Sisi with nearly 90% of votes, with essentially no contenders and an official turnout of 67%.

Along with currency depreciation, sovereignty remains a hot topic and is probably the main supporting factor for the military-backed government. In recent years, the government has faced popular protests against ceding the two Red Sea islands of Tiran (just 6km from the tourism resort of Sharm El Sheikh) and Sanafir to Saudi Arabia in exchange for some financial assistance. Saudi Arabia finally added them to its country map in September 2023. Any such development involving the Suez Canal remains unlikely as long as the government is solvent. Over the summer, the government privatized several state-run companies whose total value should bring in some USD1.9bn. The buyers have generally been sovereign wealth funds, subject to the diplomatic benevolence of the Arab world (Abu Dhabi, Saudi Arabia). The most desirable assets, such as a company that operates gas stations and one that sells beverages and bottled water, have not been put up for sale yet.

Remittances are likely to decrease significantly, but Egypt’s current account remains close to balance due to shrinking imports. Suez-related revenues increased in recent months, bringing in an additional USD400mn on average per quarter in FY 2022-2023. The increase in transit fees between the end of 2022 and the beginning of 2023 has certainly helped, as has the strategic nature of the Canal. Authorities confirmed the increase in transit revenues to a projected total of USD9.4bn for the full FY, which would mean a +52% increase in Q4 compared to the average of the previous three quarters. Tourism receipts have also increased, thanks to rising prices and the general recovery in tourist flows seen in other countries. Both revenue channels are likely to slow down in the first half of 2024 due to resurging regional conflicts.

Strategizing amid funding challenges

Egypt’s funding alternatives have been limited. High global interest rates, along with investor anxiety over economic policy, have rendered the issuance of Eurobonds unfeasible. Credit default swap spreads are worryingly large and Egypt’s USD3bn IMF program has been halted after the country deviated from plan rules on the exchange rate and with economic pluralism lagging behind. Egypt’s first Panda bond offering on the Chinese market has helped the Ministry of Finance raise about USD500m. The Treasury is hoping to raise an additional USD1bn in Japanese bonds and sign a commercial bank loan to assist in financing a huge budget deficit and to reduce pressure on foreign exchange reserves. Egypt will face a maturity wall on public external debt in 2024 totaling around USD10.7bn (equal to 2.5% of GDP and around 20% of projected tax revenues, also considering the devaluation of the Egyptian pound).

The deterioration of sovereign risk goes hand-in-hand with a marked increase in Egypt’s credit default swap spreads. A USD1.5bn sukuk (Islamic bond) was issued in early 2023, suggesting that other areas of the capital market remain active and officials had explored the potential of issuing Panda bonds, although it was uncertain whether the terms would be permissible. Compared to the interest rates on Egypt’s USD29bn in conventional notes, Panda bonds have a much more attractive interest rate of 3.5% over a three-year tenure. Egypt has maintained a “darling” reputation among multilaterals and its continued capacity to attract foreign financial support, exemplified by the partial guarantees from the Asian Infrastructure Investment Bank and the African Development Bank, has kept the yield low.

Balancing social control and potential unrest

Despite the president’s tight control over institutions and the army’s support, the autocratic political system carries a hidden risk of social unrest. Going forward, rising social discontent related to high youth unemployment, low purchasing power and currency depreciation, as well as potential misalignment with other Arab countries over the relationship with Israel and the protection of Palestinians, may trigger revolts and institutional changes. Security risks related to latent conflict in Libya and Sudan also weigh on the downside, as do claims against Ethiopia over the upstream allocation of water from the Nile basin.

If the government manages to keep accessing alternative sources of money on favorable terms, particularly through bilateral aid, it may not need to comply with previous IMF recommendations. If this happens, market reforms that the government would prefer not to implement, such as the privatization of state assets, may be sidestepped.

 

CEOWORLD magazine - Insights - Egypt