Egypt’s mounting debt raises doubts amid stalled reforms and inflows

CAIRO — Egypt’s increasing reliance on debt is raising growing concern both at home and abroad about the impending repayment schedule and Cairo's struggle to secure external funds.

The draft budget for the 2023/2024 fiscal year unveiled by the Egyptian government on May 9 earmarks more than half of all allocations for debt service, and projects nearly half of all revenues to come from more debt. The news came after the world’s Big Three credit rating agencies and major investment banks had voiced concerns about Egypt’s ability to meet external debt obligations.

“Overall, the situation is concerning, but we do have more confidence that Egypt’s default avoidance options will work in the next two years,” Callee Davis, an economist at Oxford Economics Africa, told Al-Monitor. “However, after 2025 we see risks remaining elevated.”

From 2016 until shortly before the Russian invasion of Ukraine, Egypt became heavily dependent on portfolio investments — mainly hot money — to shore up its financial account, offset its current account deficit, and ultimately keep its external position afloat.

The outbreak of the war and the successive interest rate hikes in the United States, however, triggered a massive capital flight. In the 2021/2022 fiscal year, up to $21 billion flowed out of Egypt, according to the Central Bank (CBE).

The government has stated that it plans to develop three other sources of capital inflows: foreign direct investments, exports and the private sector. But in the meantime, Cairo has turned to the sale of state-owned enterprises and additional debt to plug its financial gap.

The International Monetary Fund (IMF) estimated that Egypt will have a financing gap of about $17 billion over the next 46 months, provided structural reforms outlined in the economic program that the two signed last December as part of a $3 billion loan are implemented.

Some consider that the gap could be even larger. Oxford Economics Africa, for example, considers that Egypt’s external financing gap may be closer to $20 billion already this year and $29 billion in 2024, Davis said.

In the document accompanying Egypt’s deal with the IMF, Cairo stated it hoped to sell state-owned enterprises to raise $2.5 billion by June 2023. Yet so far only a fraction of these sales have materialized, despite authorities allowing the local currency to depreciate by 50% against the dollar over the past year.

State agencies this month sold their stakes in Paint and Chemical Industries (Pachin) and a 9.5% stake in Telecom Egypt, in the first such moves since February. But the government raised just the equivalent of $146 million, and much of that was in local currency.

The draft budget for the 2023/2024 fiscal year earmarks 56.1% of allocations to debt service ($78.8 billion) and expects 49.21% of revenues ($69.2 billion) to come from debt. The figures raised significant doubts and criticism from several members of parliament.

Reform and Development Party MP Ayman Abu el-Ela stated, “There is no hope for the people to pay a budget deficit of a trillion and a little more, or the interests of the loans,” according to independent news outlet Al-Manassa. Wafd Party MP Muhamad Abdel-Alim Daoud said the new debt “strangles future generations.”

Moody’s credit rating agency placed Egypt’s rating on review for downgrade on May 9, stating that Egypt’s inability to secure inflows and reduce depreciation pressures exacerbates debt affordability challenges.
On May 5, Fitch downgraded Egypt’s rating due to increased external financing risk. S&P Global Ratings revised Egypt’s outlook to negative on April 21.

The investment bank JPMorgan stated in May that if Egypt continues to delay its monetary and structural reforms, doubts about debt sustainability will increase. And although it ruled out a near-term default, the bank noted that there is growing anxiety about the medium-term outlook, especially given the state’s tight debt repayment schedule.

“If Egypt is unable to attract the necessary external debt inflows from, for example, the GCC, the IMF, and other multilateral lenders, authorities will first explore more stringent foreign currency restrictions before considering external public debt restructuring,” Davis said. “We would also expect to see a quickening of the drawdown on foreign reserves.” 

At the end of April, the cost of insuring against an Egyptian sovereign default over the next 12 months hit a new record high, Bloomberg reported, before cooling down, suggesting that some investors are losing confidence.

“Egypt’s Eurobonds have been sliding in recent months, and are now midway between defaulters and those likely to avoid it,” Charles Robertson, global chief economist at the frontier investment bank Renaissance Capital, told Al-Monitor. “Relief could come in if we see mega-sized Gulf investments into the Egyptian economy, with the takeover of big banks or corporates.”