Towards reducing the debt

Safeya Mounir , Friday 22 Jul 2022

Egypt’s external debt has reached new highs, but experts remain confident it is at sustainable levels.

Towards reducing the debt

 

Egypt’s foreign debt rose in the first quarter of 2022 to $157.8 billion by the end of March, up from $145.592 three months earlier.

Mohamed Hassan, managing director and CEO at BLOM Bank Egypt Investments, said Egypt along with some other countries had a large external debt. He said the current international situation had raised concerns among investment banks about Egypt’s eventual ability to repay it.

According to Reuters, FIM Partners, an investment firm, estimates that Egypt has $100 billion of hard currency debt that will come due over the next five years, including some $3.3 billion in bonds in 2024.

However, Mohamed Abu Basha, head of research at EFG Hermes, an investment bank, said the issue of foreign debt was not so much about the amount as about the ability to pay it off and the country’s hard currency revenues.

Egypt’s foreign debt will increase further due to the loan it is expected to receive from the International Monetary Fund (IMF), Abu Basha pointed out. Negotiations with the IMF have been ongoing since March, but it is not yet clear when the new loan will come through or its amount.

Earlier this week, President Abdel-Fattah Al-Sisi called on Egypt’s “friends in Europe” to send a message to the IMF and the World Bank that “the reality in our country cannot tolerate the standards that are in place during the current period.”

He was speaking during a joint press conference with German Chancellor Olaf Schulz on the sidelines of the Petersberg Climate Dialogue in Berlin.

Abu Basha expects the IMF loan to range between $5 and $6 billion, helping Egypt pay off and restructure its current debts. Abu Basha anticipated Egypt’s external debt could soon be contained, especially with Gulf deposits in the banks turning into investments, as has previously been announced.

Gulf deposits at the Central Bank of Egypt (CBE) include UAE deposits of $5.67 billion, Kuwaiti deposits of $4 billion, and Saudi Arabian deposits of $2.3 billion, according to the CBE.

In October, the Saudi Ministry of Finance said it had deposited $3 billion with the CBE and extended previous deposits of $2.3 billion.

Turning deposits into investments contributes to lowering Egypt’s debt-to-GDP ratio, Prime Minister Mustafa Madbouli has been quoted as saying.

Madbouli added in March that Egypt was adopting measures to attract investments to the tune of $10 billion annually in a move coordinated by Egypt’s Sovereign Fund and the Saudi Public Investment Fund.

At present, Egypt’s foreign debt stands at 30 per cent of GDP, which is acceptable, Abu Basha said. More important, however, is the amount of the debt servicing and the revenues Egypt collects in foreign currency.

Around 50 per cent of government revenues currently go towards debt-service repayments. Meanwhile, hard currency earners such as the tourism sector have been heavily affected by the war in Ukraine.

Hassan of BLOM Bank Egypt Investments said the country’s way out of the current debt situation was to increase production and exports in order to increase income in foreign currencies.

Hani Geneina, a professor of finance at the American University in Cairo, forecast the IMF loan to stand at $15 to $20 billion, saying that as soon as it acquires the loan Egypt’s credit rating will improve, enabling it to issue bonds on the international market at reasonable rates of interest.

According to Reuters, spreads on Egyptian bonds are now over 1,200 basis points.

The IMF loan will not increase Egypt’s debt, Geneina explained, adding that the debt will be restructured and part of it will be paid over a longer period.

On another positive note, Reuters reported that Francesc Balcells, CIO of emerging markets debt at FIM Partners, estimates that roughly half the $100 billion Egypt needs to pay by 2027 is to the IMF or is bilateral debt mainly held by the Gulf countries.

“Under normal conditions, Egypt should be able to pay,” Balcells said.

*A version of this article appears in print in the 21 July, 2022 edition of Al-Ahram Weekly.

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