Hope for Egypt despite payment risks piling up

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It has been a torrid time for Egypt in the global risk rankings this year, with the country slumping to 115th out of 174. That makes it a tier-four, high-risk option, with broadly similar risk characteristics to Mongolia, Russia, Brazil and Gabon.

In the latest Euromoney Country Risk survey, for Q2 2022, the contributing experts downgraded all 15 of Egypt’s economic, political and structural risk indicators.

With capital access and debt ratings scores worse off, it is unsurprising that the government non-payments/non-repatriation indicator has been downgraded the most, highlighting the creeping risk of a loan default.

Egypt is not alone in that respect. So far this year, analysts have downgraded this particular indicator for 95 countries, most notably Russia, Ukraine and Sri Lanka, with Egypt among those registering the biggest falls.

By contrast, the credit-rating agencies have barely reacted, despite the evidently higher risks.

Fitch, which increased its rating from B to B+ (stable) in March 2019, and S&P – unchanged at B stable since 2018 – have felt no need to respond to the latest developments, with only Moody’s putting its B2 rating on negative in May.

All of this has been brought about by the effects of the pandemic and the war in Ukraine. This is what Marco Vicenzino, director of the Global Strategy Project (GSP), refers to as a perfect storm. Like other emerging markets, he says it reflects a combination of “multiple adverse and often cross-feeding factors”.

Soaring oil and commodity prices have hit one of the world’s largest wheat importers hard, as has the loss of tourists from Russia and Ukraine. Its textiles sector, another leading exports income earner, is similarly affected.

The IMF and Egyptian authorities should not agree to any loan programme that further raises the cost of living without dramatically increasing investment in universal social protection programmes 

 - Gamal Sharaf

Naturally, this is undermining Egypt’s economic prospects, with the IMF downgrading its forecast for real GDP growth in fiscal year 2022-23 (July-June) to 4.8% in July from 5% in April, although it would not be surprising if even that proved optimistic.

And all of this is happening concurrently with a hefty debt repayment and servicing schedule, made worse by emerging-markets risk aversion as investors ditch Egyptian assets.

It is no wonder then that, on Wednesday, the central bank governor Tarek Amer resigned after seven years in charge, just a day before an interest-rate meeting, amid reports of foreign-currency shortages and the mounting economic crisis.

According to the World Bank, Egypt accumulated $158 billion-worth of foreign debt as of the end of March. Some $33 billion is to be repaid by March 2023, a sum roughly equivalent to the country’s net foreign-currency reserves worth $35.5 billion at the end of May.

A total of $18 billion is scheduled to be paid by the end of this year, with the authorities believed to be discussing repayment delays with some of its Gulf-based lenders.

That questions the viability of reserves coverage to pay for the higher-priced imports.

Gamal Sharaf, an economist at the Cairo-based Upwork Global, says the conflict has put pressure on Egypt’s currency and prompted it to seek IMF assistance to secure more foreign currency and plug the budget deficit.

“Egypt is considering raising a loan of about $2.5 billion, according to those with knowledge of the plans, and is seeking to garner $41 billion to pay for its current-account deficit and maturing debt by the end of 2023.”

However, it seems clear that the IMF and Egyptian authorities do not quite see eye-to-eye over the loan conditions.

GSP’s Vicenzino believes a deal will be agreed, nevertheless, with the US using its influence on the IMF to ensure that Egypt obtains what it needs, and to contain the risks of a debt crisis or currency shock and all that might imply in terms of political instability.

However, he qualifies that by adding: “It is important not to exclude the possibility that initial complications may occur if the IMF insists that Egypt loosens its exchange-rate restrictions.”

Sharaf at Upwork Global notes that the IMF has not, so far, achieved the reforms needed to meaningfully address the military’s growing and unaccountable role in the economy or to expand the social safety net to adequately protect people’s economic rights.

[Egypt has] never failed in any earlier commitments, so I believe it will continue, and for sure the GCC support is always there as a last resort 

 - Walid El sherbiny

With progress on badly needed reforms remaining elusive, millions of Egyptians have been left more vulnerable to external shocks in the global economy.

“The IMF and Egyptian authorities should not agree to any loan programme that further raises the cost of living without dramatically increasing investment in universal social protection programmes to ensure the right to an adequate standard of living, including food, for all,” he says.

Even before the pandemic, roughly one-in-three Egyptians – around 30 million people – lived below the national poverty line, according to Egypt’s Central Agency for Public Mobilization and Statistics, and just under another third were considered vulnerable, according to the World Bank.

“Egypt’s two cash-transfer programmes, Takaful (Solidarity) and Karama (Dignity), cover only about 11 million people, leaving tens of millions living in or near poverty without support even as prices, particularly for food, have dramatically increased,” adds Sharaf.

That desperation is underlined by the latest figures for the annual inflation rate, measured by the consumer price index, which accelerated to 13.6% in July from 13.2% in June.

From a low of 5.6% in November, inflation has shot up on account of currency devaluation and rising global prices, moving above the central bank’s target range of 5% to 9% for a fifth month in succession to its highest level since 2019. Food prices are up by 22.4% year-on-year.

Sharaf says that, as far as he knows, the IMF also wants the government to take some pre-deal procedures such as facilitating measures on documentary credit and liberalizing the exchange rate to help meet importers’ dollar needs.

He complains that there are many who ask to open documentary credit to import unnecessary goods.

“If the IMF is serious about helping to improve Egypt’s governance and building an economy that works for all Egyptians, it will need to dramatically change its approach, and they should always take social dimensions into account,” he adds.

Still, a deal seems likely to be concluded eventually, according to Walid El sherbiny, general manager of the Suez Canal Bank.

In his view, Egypt is only facing the same problems as other countries. He is hopeful a deal will be reached and that the consequences with regards to the exchange rate will be taken into consideration.

With that in mind, he expects Egypt to honour its commitments.

“They have never failed in any earlier commitments, so I believe it will continue, and for sure the GCC support is always there as a last resort,” he says.

Investors will be feeling relieved, and so will the millions of Egyptians that are solely concerned with obtaining the necessities, such as food.