A sudden reduction in the duration of daily blackouts together with an unexpected resumption of Israeli gas imports, a new Samurai bond offering, yet another credit-rating downgrade, a hike in petrol prices, a plan to offer ports to private investors, and expectations of lower tourism revenues on the back of the war on Gaza — last week was an important one for those observing new economic developments in Egypt.
The government is trying to circumvent persistent economic challenges topped by the foreign currency shortage by moves whose efficacy will depend on the impact of the ongoing war on Gaza on the local economy.
After two weeks of suffering daily two-hour blackouts, people might now be going back to the one-hour power cuts they have been experiencing since July. Thanks to a move to use Mazut imports to fuel the national power grid, according to local media outlets, together with a resumption of Israeli gas imports, Egypt now has enough energy to keep the power on for longer.
Anonymous sources told Reuters this week that Israeli natural gas exports to Egypt have resumed after a disruption last weekend but in small volumes.
The halt of gas imports came as Israel suspended production at Chevron’s Tamar Field soon after the fighting escalated in Gaza. In parallel, supplies were also redirected through a pipeline in Jordan, rather than the direct subsea pipeline to Egypt.
The cabinet stated last week that Egypt’s gas imports from Israel had gone down to zero compared to 800 million cubic feet per day before the war started. Some reports put the volume after the partial resumption at only 250-350 million cubic feet per day.
Egypt relies on Israeli gas imports to meet some of its domestic demand, and it also re-exports it to Europe to earn scarce foreign currency.
Last week, the government decided to cut gas supplies to energy-intensive industries to preserve supplies for the electricity grid, a move that raised fears that economic activity outside of the energy sector was set to suffer.
“Natural gas production in Egypt has been in decline since the fourth quarter of 2021, and with growing consumption Egypt has become a net gas importer for the first time since 2020. A large share of this gap had been plugged by Israeli exports,” a Capital Economics research note commented.
Meanwhile, there had been hopes from officials that as the hot summer seasonal demand fell, Egypt could restart re-exports of gas via its liquefied natural gas (LNG) terminals in Damietta and Idku.
This would have provided a much-needed fillip to Egypt’s hard-currency receipts. However, it now seems unlikely and will mean that the exchange crunch in the economy will persist and could intensify with rationing by the Central Bank of Egypt (CBE).
Looking to non-traditional funding to cover the exchange crunch, Egypt tapped Asian financial markets for the second time in less than a month through a yen-denominated (Samurai) bond offering worth $500 million last week. The step, according to Finance Minister Mohamed Maait, aims to diversify the funding base and cut the cost of borrowing. The offering bears an interest rate of 1.5 per cent and has a five-year maturity.
It comes only two weeks after a Chinese yuan-denominated (Panda) bond offer, also equivalent to $500 million, in the Chinese market at an interest rate of 3.5 per cent. The cost of both is much less than that of dollar-denominated bonds, according to Maait.
Egypt has been trying to diversify its funding resources as it muddles through its worst economic turmoil in recent years with ballooning debt and a foreign-currency crunch. The high interest rates in the international markets and the successive downgrades in its credit score have made conventional debt markets costlier.
DOWNGRADE: Earlier this week, ratings agency Fitch Ratings followed Moody’s and S&P and lowered the credit score of Egypt’s debt to B- citing a heavy debt burden and increased financial risks.
“The downgrade reflects increased risks to Egypt’s external financing, macroeconomic stability, and the trajectory of already high government debt,” Fitch said.
The move puts Egypt on a par with Nigeria and Bolivia.
The downgrade will make the government’s task of obtaining needed funding from international markets even harder.
Meanwhile, Egypt has to introduce a flexible exchange rate in order to get the rest of the $3 billion rescue deal it agreed with the International Monetary Fund (IMF) last year. But experts believe such a politically and socially sensitive move will not be taken before the presidential elections in December.
According to its deal with the IMF, Egypt has devalued its currency three times since early 2022, but it still keeps control of the foreign-exchange market with the official rate standing at LE30.8 to the dollar for most of the year compared to its surging to LE47 in the parallel market.
Meanwhile, rumour has it that Egypt is in discussions with the IMF to increase the loan to over $5 billion. So far, Egypt has only received the first tranche of the loan equivalent to $377 million.
Fitch maintained a “stable” outlook on the economy, which reflects its “baseline expectation that reforms, including privatisation, the slowdown of megaprojects, and exchange-rate adjustments, will accelerate after the presidential elections in December, likely paving the way for a new and potentially larger IMF programme and additional support from the Gulf Cooperation Council,” a statement noted.
As a part of its aim to meet its pledge to the IMF to widen the role of the private sector in the economy, the government is inviting the private sector to manage the country’s ports. It is looking to launch tenders for the operation and management of seaports, dry ports, and public transport lines, said Prime Minister Mustafa Madbouli at a conference last week.
“We are sure that the private sector is the most suitable to manage and operate various projects and facilities, whether airports or seaports. We are keen to explore partnership opportunities with the private sector in the management and operation of mass transit lines,” he said.
However, contrary to the IMF’s recommendations of a tighter monetary policy, the CBE in its latest meeting on Thursday opted to keep interest rates on hold, a move that was unanimously expected by experts.
“The International Monetary Fund’s forecast for a slowdown in Egypt’s real GDP growth to be at 4.2 per cent in 2023, compared to 6.7 per cent in 2022, suggests that the Egyptian economy is already slowing down and that the higher interest rates could further dampen growth, said Dina Al-Wakkad, an economist with Ostoul Securities.
This news comes despite a set of new developments that dictates hikes in interest rates.
“The rise in inflation leads to an increase in the required return on investment. If we look at the Egyptian economy at the present time, we will find that the inflation rate is currently 38 per cent and that the interest rate has reached 19.25 per cent, which means that the real interest rate is -18.75 per cent, and this indicates a decrease in the return offered on savings,” Al-Wakkad commented.
She said the CBE needs to raise interest rates in order to compensate depositors for the erosion of their savings due to the rise in the inflation rate. This reinforces the need for the CBE to follow a more stringent monetary policy in raising interest rates, she said.
Moreover, the requirements related to the first and second reviews of the IMF loan programme, including the liberalisation of the exchange rate, will require taking proactive steps and tightening monetary measures, including raising interest rates, she said.
The Israeli invasion of Gaza and its impact on foreign currency flows in Egypt, which might lead to further inflationary pressures, illustrates that the peak of inflation may not have arrived yet.
Egypt’s annual urban consumer price inflation rose to a historic high of 38 per cent in September, climbing from 37.4 per cent in August.
The Madbouli government hiked 95-octane, 92-octane, and 80-octane fuel by nine, 12, and 14 per cent, respectively, on Friday. A Ministry of Petroleum statement noted that the decision was due to changes in the energy market on the back of the wars on Gaza and Ukraine that had translated into Brent crude oil prices surpassing $90 per barrel.
Egypt’s fuel-pricing committee, which meets every three months to decide the price of different fuels according to an equation that factors in international prices, refrained from increasing the price of diesel fuel, which is widely used in public transportation and trucks that transport vegetables and fruit from farms to markets.
As a result, changes are not expected in the prices of these items. Petrol prices were raised by 16 to 25 per cent in March.
The government during the last quarter had bought oil-hedging contracts, a kind of forward contract according to which it has agreed to buy 35 per cent of its oil imports for the year ending June 2024 at $75-80 per barrel.
The 2023-2024 state budget had been calculated according to a crude oil price of $85.
* A version of this article appears in print in the 9 November, 2023 edition of Al-Ahram Weekly
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