The impact on Egypt of the war between Russia and Ukraine will be multifaceted, though most pronounced when it comes to commodities such as wheat. Egypt consumes 22 million tons of wheat annually. It produces 10 million and imports the rest, making it the world’s largest wheat importer, with 80 per cent of total wheat imports coming from Russia and Ukraine. Russia is the third largest producer of wheat with an annual output of 86 million tons; Ukraine the ninth global exporter with 27 million tons.

Egyptians are not to worry, say officials. Egypt has wheat stocks that can last for nine months, Ibrahim Ashmawi, deputy minister of internal trade and supply and the head of the Internal Trade Development Authority, said this week on television. Besides 4.5 months of wheat stocks, this year’s crop will be harvested in April, with a bumper harvest expected.

Instead of the 3.4 million feddans cultivated in the recent past, this year the area cultivated with wheat rose to 3.6 million feddans. With higher yields per feddan, this means Egypt is on target to meet 60 per cent of its wheat needs locally compared to 46 per cent currently, said Ashmawi.

Strategic stockpiling, Ashmawi added, has been made possible by the building of modern silos which have helped cut waste from 22 per cent each year to less than three per cent.

Egypt will continue to import wheat from other producers, said Ashmawi, who pointed out that wheat imports from France, Romania, and Germany all come with cheaper shipping bills than either Russia or Ukraine.

While there are other sources of wheat, price will be an issue. Reuters reported on Monday that the General Authority for Supply of Commodities (GASC), Egypt’s state grain buyer, had already cancelled an international tender for wheat for shipment, with no purchase made. The three trading houses which participated in the tender were unwilling to cut their price offers at a time when the Ukraine crisis is reducing supplies of Black Sea wheat on world markets. GASC cancelled another tender on 24 February after a single supplier expressed interest. According to Reuters, French wheat was offered at $429.22 a ton, cost and freight (c&f), nearly double the price of a year ago. On 17 February, GASC bought 180,000 tons at $338.55 a ton c&f after receiving 20 offers from trading houses.

More expensive wheat means higher import bills, which in turn means a potentially higher budget deficit. Finance Minister Mohamed Maait has said the government is targeting a deficit of 6.6 per cent of GDP in the current fiscal year, and 6.1 per cent in the next. The government has also trailed its intention to reform the bread subsidy system, but provided few details. (A loaf of bread currently costs LE0.70 to produce, and is sold at LE0.05.) Minister of Supply Ali Moselhi has been quoted as saying that any new system will not affect the most vulnerable, and according to Ashmawi, LE90 billion of the budget is earmarked for subsidised goods.

Meanwhile, Mustafa Al-Naggari, a member of the Agricultural Export Council, argues that to ensure greater domestic wheat supplies for subsidised bread, the government needs to improve the prices it pays local producers. While the government has promised LE820 per ton, the private sector is likely to be willing to offer more, meaning the government could lose consignments.

Oil is another commodity being affected by the Ukraine crisis. On Monday, Reuters reported oil prices as high as $105 per barrel as more sanctions were imposed on Russia, including blocking it from SWIFT, the global payment system, which could severely disrupt Russian oil exports.

Increased oil prices heap more pressure on the government’s budget, and may translate into higher prices at the pump. The government raised the price of fuel used by passenger cars in February, following three separate increases in 2021. Decisions on pricing are taken by the Automatic Pricing Committee, affiliated to the Ministry of Petroleum, which reviews fuel prices every three months, taking into account international oil prices and the value of the dollar.

While soaring global oil prices are alarming, hikes of between 50-60 per cent in natural gas prices could be a source of relief for Egypt, a net exporter of gas. Russia is the largest provider of natural gas to Europe, supplying 35 per cent of the continent’s needs. As Russian supplies slow down due to the conflict, there is room for Egypt to step in and help supply some of the shortfall.

Egypt has the infrastructure necessary to handle and transport natural gas, with a main network of 7,000 km of pipelines, a distribution network of 31,000 km, and 29 gas-treatment plants to supplement major LNG facilities at Idku and Damietta.

According to a Standard and Poor’s January research note, Egypt will have the capacity to export 7.5 million metric tons (mt) per year of gas and LNG by June, thanks to an expansion in drilling activity and new exploration agreements.

Egypt’s gas production surged by 17 per cent in 2021 compared to the previous year, reaching 53.1 million mt/year, and LNG exports hit a record high in the third quarter of 2021.

Egypt has been exporting gas since 2013, with more than 20 countries receiving Egyptian gas, most of them in Europe.

The increase in exports has been fuelled by the return, after an eight-year hiatus, of the Eni-operated Damietta liquefication facility, supplementing production at the Shell-operated Idku plant LNG terminal of 7.2 million mt/year.

In 2020, Egypt started importing Israeli gas. It currently imports around 450 million cubic feet of gas per day (mmcf/d) from Israel, to be liquefied and re-exported to Europe.

The Russian-Ukrainian war will also affect Egypt’s agricultural exports. Russia is currently the destination of 22 per cent of Egypt’s agricultural exports, including oranges, potatoes, onions, pomegranates, and vegetables.

Egyptian exporters ship to Russian ports overlooking the Black Sea, explained Al-Naggari, and with the possible closure of the existing maritime routes, shipping to other parts of Russia will be more costly. Russia’s exclusion from SWIFT, the global messaging system that makes cross-border payments possible, will also impact on trade, though Al-Naggari says one solution could be to barter goods.

Inevitably, the war will weigh down on investments as worldwide investors seek safe havens or ultra-high yields.

“Rates on fixed income instruments will increase, as will global commodity prices. Sovereign debt issuances will rise, alongside yields on treasury instruments. Investors will demand higher rates of return given the increase in perceived risks,” says Radwa Al-Sweify, head of research at investment bank Al-Ahly Pharos.

This will weigh heavily on Egyptian coffers in terms of debt service. In the dollar-denominated debt market Egypt is considered vulnerable given its large financing requirements and heavy dependence on the carry trade. Like other emerging markets with large budget deficits, it will find any increase in rates to cover risk painful.

According to the latest statements by the minister of finance, the government is keeping to its target of reducing the public debt-to-GDP ratio from 91 per cent at the end of fiscal year 2020-21 to 84 per cent in 2022-23.

According to Capital Economics’ MENA analyst James Swanston, even if the ratio declines, debt composition remains a key concern: a large proportion of Egypt’s government debt is denominated in foreign currencies — almost 24 per cent of GDP, or more than a quarter of the overall debt burden.

As far as local bonds are concerned, Egypt offers the world’s highest yields when adjusted for inflation.

The stability of the pound and high T-bill yields have enticed foreigners to buy Egyptian pounds to invest in short-term T-bills and reconvert them to dollars when exiting, gaining high profits. This helped Egypt buck the recent global trend of negative returns as inflation remains below the Central Bank of Egypt’s targeted rate of plus or minus seven percent. Egypt’s real interest rate — the difference between its deposit rate and inflation — is 2.35 per cent, while the US’s January rate was negative 6.55.

Several asset managers told Bloomberg they are bullish about Egypt’s bond market, predicting double-digit gains in 2022, sentiments that have been bolstered by Egypt’s inclusion in the JP Morgan emerging market debt index.

Egyptian debt has seen a return of 156 per cent over the past five years, as the IMF-backed reform programme and Gulf financing attracted investor inflows — beating emerging markets’ 26 per cent and S&P 500’s 133 per cent returns over the same period, according to Bloomberg.

With the Federal Reserve now under pressure to hike interest rates as the war drives inflation higher, the CBE is likely to follow suit.

Even before the war, observers were expecting rates to be raised by at least one per cent during 2022 “to maintain lucrative carry trade in the fixed-income market, particularly with the rise in global rates posing a risk to inflows into emerging markets,” said investment bank Beltone Financial in a research note earlier this month.

While it is not yet unclear how FDIs to Egypt would be affected by the war, Russian investments are expected to come to a standstill in the face of growing sanctions.

Russia has signed agreements to set up two industrial zones in Egypt. The first, in East Port Said, was expected to attract $7 billion in investments, with 32 Russia-based companies setting up production lines there. Some of the zones’ factories were supposed to start operating this year. Investors include companies working in the engineering, chemicals, metallurgy and pharma industries.

The second zone, in Ain Sokhna, was agreed in July 2021 after a deal was signed guaranteeing the producers’ right to sell all their output in Egypt, and that 90 percent of the zone’s workforce would be Egyptian. Also last year, Egyptian drug maker Minapharm signed an agreement with the Russian sovereign wealth fund RDI to manufacture 40 million doses annually of the Sputnik V vaccine. It is currently producing trial batches.

On Thursday, EGX fell 3.6 per cent amid heavy selloffs by foreigners. While the market will inevitably reflect economic losses because of the war, not all sectors of the economy will be affected equally.

“Industrial producers of exported commodities are key beneficiaries of global commodity prices and any potential strength in the dollar,” according to Al-Ahly Pharos, said Al-Sweify. Banks and non-bank lenders will also realise gains from soaring inflation and rising interest rates. “Inflation and exchange rates feed into nominal balance sheets and income statements for banks. Higher rates will feed into bank and nonbank lenders’ margins,” she wrote.

Risk aversion and inflation could also fuel demand for real estate as a safe store of value, adding to the profits of real estate developers, she said.

Companies in key defensive sectors, where cyclical demand is not affected by political or economic changes, will be the least affected. They include the telecom, education, healthcare, and tobacco sectors, which will pass additional costs directly to consumers through higher prices.

A version of this article appears in print in the 3 March, 2022 edition of Al-Ahram Weekly.