During the current fiscal year, about 40 per cent of Egypt’s budgeted expenses will be directed to debt-servicing, including both principal and interest repayments. Standing at LE569 billion, the bill is the largest single spending item in the budget.
Egypt’s total debt is ballooning as domestic debt (covering both the debt of the government and other economic agencies) mounted to LE4.2 trillion ($260 billion) in March. The foreign debt, reflecting loans, eurobonds and dollar-denominated treasuries, jumped to $108.7 billion at the end of June, marking a 17 per cent increase from its level a year earlier.
Together they represent 114 per cent of GDP, according to economic consultancy Pharos Securities’ calculations.
To deal with the problem, the Ministry of Finance started adopting a new debt strategy in April to gradually reduce the growing rate of debt as a percentage of GDP to reach 80 per cent by the end of June 2022. The strategy includes several pillars, the most important of which is extending the maturity of the debt, both in the form of treasuries or eurobonds targeting international markets.
Earlier in the year, Ahmed Kouchouk, the deputy minister of finance, revealed to the US financial service Bloomberg plans to increase the percentage of long-term bonds to 70 per cent of the total offering by 2020 and from only five per cent at the end of 2017-2018.
He explained that by depending on short-term treasury bills the government had found itself obliged to resort to the debt markets to refinance the maturing debt. A shift to longer-term debt will reduce Egypt’s annual debt-servicing bill to 20 per cent of GDP, it is hoped.
Three Egyptian eurobonds issues hit the international markets during 2019, in February, April and November with an overall value of $8 billion. In November, Egypt issued $2 billion worth of eurobonds in three tranches with maturities of four, 12 and 40 years. The latter is the longest-term international bond in the Middle East and Africa. April’s offering contained a tranche with a 30-year maturity.
According to the strategy, Egypt would market $12 billion of dollar-denominated eurobonds and another $10 billion worth in currencies other than the dollar before 2021-2022. “The Ministry of Finance has been shifting towards less costly sources of financing by gradually increasing the portion of external debt through eurobonds auctions and euroclear certification,” noted a Pharos research note issued in mid-December.
The external debt’s share of overall debt surged from an average of 15 per cent in 2014/2015 to almost 40 per cent in 2018 /2019. The new debt-reduction plan will also see the government tapping new international debt markets, using new instruments and new currencies for borrowing.
The Ministry of Finance is considering issuing bonds denominated in Japanese yen and Chinese yuan, as the interest rates paid to holders are less than those on dollar-denominated bonds. Issuing Islamic bonds, or sukuk, is another strategy aimed at attracting new investors. The regulations covering trading in these Sharia-compliant bonds were issued in April, and the government said the first sukuk issue was expected in the first quarter of 2020.
The Central Bank of Egypt has been maintaining its easing cycle and has lowered interest rates four times this year by an overall value of 4.5 per cent as a prerequisite for the success of the strategy to reduce debt payments. According to government calculations, every percentage point decline in average treasury rates lowers debt-servicing by LE4 billion.
Egypt’s overnight deposit and lending rates currently stand at 12.25 per cent and 13.25 per cent, respectively. The cuts, according to analysts, will not make government treasuries less attractive to investors, as they are still among the highest in emerging markets. The US Federal Reserve has also cut its rates.
Over the last three years, Egypt has depended heavily on foreign debt, whether from international financial institutions like the World Bank and the International Monetary Fund (IMF) or from countries like Saudi Arabia and the UAE.
In 2019, which saw Egypt getting the last tranche of the IMF’s $12 billion loan, the World Bank provided Egypt with loans worth a total of $1.5 billion, ranking it as the fourth-largest recipient of loans from the Bank behind India, Indonesia, and Jordan.
Analysts believe the time is ripe for Egypt to start seeing a retreat in its debt levels. Pharos pointed out that as the primary balance, the difference between state revenues and expenses after deducting interest payments, turned positive in 2017-18 and in the light of the projected economic growth rate of 5.9 per cent, the debt-GDP ratio is also expected to decelerate.
“Fiscal consolidation through reducing public expenditure and subsidies will also help reduce the government’s share of debt,” Pharos said.
Moreover, the supportive macroeconomic environment over the next three years should help to reduce the debt and decelerate the speed at which debt is accumulated, it added.
On the foreign-debt front, Pharos expects external debt to decline to 33 per cent of GDP in the current fiscal year from 36 per cent in 2018-19.
The repayment plans for external debt have most payments maturing in the current fiscal year with a debt-servicing payment of $16 billion due. This would justify the government’s shift towards external debt to rollover some payments and reduce costs.
*A version of this article appears in print in the 26 December, 2019 edition of Al-Ahram Weekly.