Egypt is vulnerable to external financing shock on faster US rate increases

The country has one of the highest ratios of interest-to-government revenue in Africa and “much of this goes to foreign investors due to the portfolio inflows into the local debt market”, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. Bohlund says he shares the concerns of asset managers and credit rating agencies with regards to Egypt’s external debt sustainability.

Foreign-held treasury bills accounted for around 70% of total forex reserve holdings as of October. Prospects for higher US interest rates in 2022 mean that foreign investors will have less incentive to buy them. The US Federal Reserve has said it is likely to raise interest rates in March. According to Reuters, the market has now moved beyond the previous scenario of three Fed increases this year, and rate futures indicate the chance of four or more hikes in 2022 is above 60% and rising.