Egypt hopes to borrow its way out of crisis

Ahmed Feteha, Saturday 8 Oct 2011

Borrowing is the only solution, say Egypt's financial heads, as foreign investment, tourism and currency reserves all struggle

Egypt foreign debt stands at 15 per cent of GDP (Photo: AP)

A quick look at Egypt's finances is quietly mortifying.

A widening budget deficit, shrinking government revenues, struggling balance of payments and decaying international reserves -- these are just the headlines, and mask all manner of hardships.
The government's current answer to the challenge? Just borrow more. 
Egypt has three main options to maintain economic stability and cover its budget deficit, which is forecast to reach 8.6 per cent of GDP in the 2011-2012 financial year. The country can either borrow locally, borrow internationally through direct loans, or issue bonds in international markets.
On Wednesday, the finance minister said Egypt is now planning to increase its reliance on foreign borrowing to cover its public spending needs.
Egypt’s external debt reached US$34.9 billion in June 2011, a rise of 3.6 per cent or $1.2bn on the same month the year before, according to the latest bulletin released from the Central Bank of Egypt (CBE).
Local debt is the most expensive of the three options, with yields on Egyptian pound denoted treasury bills recently surging above 13 per cent, their highest levels since the last quarter of 2008.
Foreign debt is significantly less expensive than domestic debt, but carries the risk of local currency devaluation which impedes the debtor's ability to pay. Sometimes it can end up making the loan actually more expensive.  
This happened in June when Egypt's foreign debt grew mainly due to currency fluctuations, and the slump of the Egyptian pound slumping against the US dollar adding $2.4bn to the total value of the country’s overseas loans.
Only 8 per cent of Egypt's foreign debt is through bonds and notes, which are currently priced at around 6 per cent. Such loans are taken with no conditions as to how they should be spent. 
The rest of the portfolio consists of less expensive, conditioned direct loans from other countries and financial institutions.
Egypt's government is currently facing a major challenge with workers strikes sweeping the country, demanding improved pay and working conditions. 
Such a situation renders hopes of directing borrowed funds away from mere consumption towards investment far from realistic, for the government that already holds 77 per cent of Egypt’s foreign debt, most of which is in long-term facilities. 
"The protestors have legitimate demands, their salaries can't meet their needs, but we don't have resources to pay them," Finance Minister Hazem El-Beblawi told reporters on Sunday, echoing what the cabinet have been saying for the past six months.
After the January 25 uprising, billions of dollars in loan packages were promised to Egypt from Arab and Western as well as from international financial organisations.
Some packages were said to support small and medium enterprises, some to support the country’s transition to democracy; others aimed to help the country’s economy without specifying how.
Precise information about the status of these packages is not readily available. Ahram Online tried contacting officials in the ministry of finance and international cooperation but received no satsifactory answers.
“For now we get more promises than real engagements,” Beblawi said on Wednesday, referring to Gulf countries that vowed generous aid packages to post-revolution Egypt.
El-Beblawi confirmed that Egypt had concluded a $500 million lending facility with Saudi Arabia and one for the same amount with Qatar without giving details on terms of borrowing.
Saudi Arabia vowed earlier in May to give Egypt $4 billion in aid, including a $1 billion deposit at the Central Bank of Egypt and $500 million in bond purchases.
Arab countries make up only 5 per cent of Egypt's foreign debtors. International financial organisations such as IMF or World Bank held around one third of debt, at $10.65 billion dollars in March 2011.
More than 40 per cent of debt is owed to four countries: Japan (12 per cent), Germany (11 per cent), France (10.6 per cent) and the United States (9.2 per cent).
Around 40 per cent of Egypt’s foreign debt is held in US dollars. One third of debts are denoted in the Euro, and 12.6 per cent in the Japanese Yen.
In June, Egypt rejected a $3 billion loan from the IMF offered at the low interest rate of 1.5 per cent. It also ended negotiations with the World Bank for a two year $2.2 billion credit facility. Instead, Samir Radwan, then finance minister, declared that Egypt would work on cutting its deficit and financing it through local borrowing.
Radwan’s stand on foreign borrowing, which was a direct reflection of Egypt's military rulers’ view on the subject, was reflected in heavy local borrowing which drove yields upwards.
"Turning down the loan was more a political than an economic decision," says Hani Genena, chief economist at Pharos Holding, saying that foreign borrowing is vitally important to Egypt because it provides much-needed foreign currency.
Egypt has been tapping into its foreign reserves to feed the economy’s appetite for hard currency. 
On Wednesday, the Central Bank announced that the country’s net foreign reserves slipped to US$24.008 billion in September from $25.01 billion at the end of August. Since December 2010, the month before the revolution, they have dropped one third, or $12bn.
Tourism, which was a vital provider of foreign funds, has also been under strain. Government figures show the number of tourists arriving fell almost 29 per cent in June compared to the same month in 2010.
Foreign investment in Egyptian debt and equities has also dried up over the past sixth months. This was especially evident in September when the country's military leaders and political parties failed to fully agree on a road map for the transition of power, says Cairo-based investment bank Beltone Financial.
Beltone said foreign holdings of Egyptian treasury bills fell by 60 per cent since December, mirroring the lack of trust in Egypt's political future.
"We should view the decay in reserves as if an average LE6 billion of liquidity leaves the country on a monthly basis. Instead of tapping into excess liquidity of the banking system, we can resort to foreign borrowing," Genena adds.
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