Big money bailout

Niveen Wahish , Tuesday 26 Mar 2024

Niveen Wahish examines Egypt’s economic prospects following the recent wave of investment and financing pledges

Big money bailout


Egypt is awaiting approval from the executive board of the International Monetary Fund (IMF) for the disbursement of a tranche of its $8 billion expanded loan agreement. Though not yet on the board’s agenda, reports suggest a board meeting has been scheduled for the end of March with Egypt requesting a $5 billion first payment to boost its foreign currency liquidity. Whether the requested sum will be approved remains to be seen. When the original $3 billion agreement was signed in 2022, the first tranche disbursed was just $347 million.

The past four weeks have seen Egypt receive pledge after pledge of investments and financial assistance. The $35 billion Ras Al-Hekma deal on 23 February was followed in quick succession by an IMF staff-level agreement, last week’s promise from the European Union of $8 billion through 2027 and the World Bank’s announcement that it would provide $6 billion in support over the next three years.

Yet apart from $10 billion in fresh funds from Ras Al-Hekma deal and the unlocking of a $5 billion UAE deposit with the Central Bank of Egypt (CBE), the eyewatering sums remain pledges. The promised funding has nonetheless managed to change credit rating agencies’ outlook for Egypt. Following the 6 March decision to allow free trading of the Egyptian pound, S&P Global Ratings revised its outlook for Egypt from stable to positive while Moody’s Ratings upgraded its rating from negative to positive.

The change by credit rating agencies has made a world of difference, says finance expert Khaled Hamza. He explains that the deterioration of Egypt’s credit rating over the past two years had left it unable to refinance maturing debt. Such refinancing is common practice across the globe. With the improved outlook, he says, Egypt has been able to attract back portfolio investments, or so-called hot money.

“Hot money is not in itself a curse… it is how it is used to match maturities that matters.” Egypt’s past mistake, says Hamza, was to use hot money, which is by nature short-term debt, to finance long-term projects.

While hot money is not sustainable, in Hamza’s view foreign investors buying into Egypt’s local debt to benefit from high interest rates — they are currently close to 30 per cent — can act as a lifeline as long as the lessons of 2022, when Egypt suffered the flight of around $20 billion in the aftermath of the war in Ukraine and escalating US interest rates, are heeded.

With foreign currency risk receding and yields on government bonds at a record high, portfolio investors are returning to the Egyptian debt market according to Ramona Moubarak, director of MENA Country Risk at BMI, a Fitch Solutions company. The authorities have yet to provide a figure for total portfolio investments but reported numbers vary between $5-10 billion, she told Al-Ahram Weekly. Moubarak warns, however, that such investments could expose Egypt to swings in investor sentiment in the event of shocks.

“Portfolio investments are volatile, costly, and short. Any shock, such as greater geopolitical instability from the Israel-Hamas war and the Red Sea crisis, will be a source of risk for Egypt’s macroeconomic stability.”

Given the promised funds and portfolio investments, Egypt should not worry about its financing gap, said a source who asked to remain anonymous.

He estimates the gap at $24 billion in calendar year 2024 and $13 billion in 2025 and points out that a major reason behind the dollar crunch over the past two years was because 33 per cent of Egypt’s outstanding debt was due in three years, an unrealistic timetable.

Hamza laments that the exact size of Egypt’s debt remains unclear because the budget of a number of authorities continues to be excluded from the state budget, one of the reasons why the IMF has been calling for fiscal consolidation.

In recent press statements, Minister of Finance Mohamed Maait said the state plans to include the revenues and expenses of dozens of public economic entities in the state budget. Last week he said 40 economic bodies will be added in fiscal year 2024-25, with an additional 19 included over the next five years.

Moubarak estimates Egypt’s external financing needs for fiscal year 2024-25 at about $15 billion. The figure includes expenses in hard currency such as the current account deficit, which stands at around $8 billion, and principal debt repayments of $7 billion.

“The recent pledges will be enough to cover the needs and generate a surplus,” she says.

US investment house Goldman Sachs estimates Egypt’s financing gap will shift into a surplus of $26.5 billion in four years.

It is essential to take into account that the incoming funds will result in a higher budget deficit given the increased cost of debt servicing, cautions Hamza.

Interest payments already absorb more than half of government revenues, leaving little room for productive spending, explains Moubarak. According to a Fitch Ratings note on 1 March, general government debt to GDP reached 95 per cent in fiscal year 2023. Projecting interest payments to exceed 50 per cent of government revenue in fiscal year 2025, “a very high level compared with other Fitch-rated sovereigns,” the note added that “interest costs may come down if the Egyptian authorities are able to stabilise the macroeconomic environment, supported by reforms under the IMF programme, but we expect the process will take many years.”

Delivery of reforms and opening up the economy to the private sector is key to exiting the spiral of debt, attracting foreign direct investment and ensuring short-term portfolio investments are not scared away, argued the anonymous source.

* A version of this article appears in print in the 28 March, 2024 edition of Al-Ahram Weekly

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