Egypt: New deal with IMF expected, despite exceeding lending quota

During a press conference on Sunday 15 May, premier Madbouly said a new accord with the IMF, which has disbursed loans worth $20bn in total to the North African country since 2016, is expected to come into effect “in a […] few months”, but he did not disclose the expected value of the financing component.

Allen Sandeep, director of research at Cairo-based investment bank Naeem Holding, believes that a new loan from the IMF could be between $4bn to $6bn. Whichever the case, he tells The Africa Report that an IMF agreement will boost investors’ confidence in the Egyptian market and pave the way for euro-denominated bond issuances.

In another scenario, “the influx of Gulf financial support could act as a substitute for direct IMF lending and mean ongoing talks with the IMF focus on technical advice for policy rather than […] financial assistance that comes with policy contingencies”, James Swanston, Middle East and North Africa economist at Capital Economics, tells The Africa Report.

Sale of state assets

As per recent directives by President Abdel Fattah al-Sisi, Egypt will be looking to sell $40bn worth of state assets in the coming four years, a step he says is meant to enable the private sector to play a greater role in the economy. Sisi has also called for the listing of stakes in army-owned companies, none of which has ever been traded on EGX, this year.

He first announced the intention to float stakes in military firms, which generally fall in a wide range of sectors, in 2019. Gulf investors are tipped to show great interest in such shares when they are up for grabs. Abu Dhabi’s state holding company, ADQ, has lately acquired Egyptian government-owned stakes in five major EGX-listed firms, worth overall $1.85bn, giving Egypt a liquidity respite.

Egypt's military economy under threat from the IMF https://t.co/FPidOq1LQa

— محمود وهبه من نيويورك (@MahmoudNYC) May 14, 2022

The IMF has been urging the state to make way for the private sector to be more entrenched in the economy, a step that is hoped to boost growth rates and alleviate financing pressures off the Egyptian government’s shoulders.

Foreign debt

Egypt’s foreign debts stood at $145.5bn (up from $137.4bn the previous quarter) by the end of the second quarter of the current 2021/2022 fiscal year, which started in July last year and ends  on 30 June 2022.

This jump prompted the Egyptian government to form a committee in April to limit foreign borrowing by seeking to stimulate hard currency sources and increase funding allocations for national projects that significantly contribute to GDP growth.

We do not think Egypt is facing the same debt strains as some other EMs

FYQ2 – from October to December 2021 – was characterised by diminishing real interest rate, which counts the inflationary impact on the actual borrowing cost and yields. This has fomented non-resident portfolio investment outflows and corresponding higher borrowing cost, taking external debts closer to 30% of Egypt’s GDP. This level, according to economists, is still not alarmingly high.

However, FYQ3 – from January to March 2022 –  in which debt levels are yet to be disclosed, will be the first to reflect the exacerbating impact of the war, as Egypt’s financing needs are growing harder to fulfil, so long as the fighting in Eastern Europe is unabated.

However, Jihad Azour, the IMF director of the Middle East and Central Asia, shrugs off Egypt’s rising foreign debts, given that its largest portion is EGP-denominated. “We do not think Egypt is facing the same debt strains as some other EMs (Emerging Markets),” says Capital Economics.

Devaluation

In late March, Egypt devalued the local currency by over 15%, with the current exchange rate at approximately 18.30 to the dollar. The CBE governor, Tarek Amer, announced on Wednesday 18 May that the March devaluation increased Egypt’s USD inflows by around 30%.

The Central Bank of Egypt (CBE) also raised deposit and lending rates by 100 basis points each to 9.25% and 10.25% respectively. The central bank will review the rates once again on Thursday.

The government has also imposed restrictions on importing and put forward a LE130bn ($7bn) stimulus package that introduces tax incentives and increases social safety measures.

These measures were highly recommended by credit ratings agencies to maintain macroeconomic stability and restore some of the Egyptian debt market’s attractiveness, but they may have a downside in the longer-term:

• Budget deficit: “While monthly data showed the budget deficit narrowed to 7.6% of GDP in the 12 months to February, a 2.0% of GDP economic relief package [worth $7bn] will cause the deficit [to] widen again,” says a recent note by Capital Economics. “We think the government will miss its budget target this [fiscal] year”, which is set at 6.2% of GDP.
• Debt-to-GDP ratio: The London-based research company also expects the Egyptian pound to plunge 25% in total by end-2024, forecasting it to trade at $21. “This would, all else equal, push up the total public debt-to-GDP ratio by more than 6%-pts, taking it towards 100%”, which could further spook debt investors. “A weaker currency and tightening global financial conditions do pose a risk.” Egypt’s current debt-to-GDP ratio is 86%, according to Prime Minister Mostafa Madbouly.  The IMF forecasts that it will stand at 94% by the end of the current financial year.
• Yields: The CBE is expected to further raise interest rates this year to tame the rampant inflation, which hit 13.1% in April, the highest in almost three years, and is forecasted to keep climbing in the coming months. The tightening cycle is also meant to keep Egyptian debt instruments appealing to foreign investors as the US Federal Reserve is set to hike rates to about 2.5% by the end of 2022. The central bank will review the rates on Thursday.

“Since the start of April, sovereign dollar bond spreads have widened by over 50bp and yields have breached 10%,” says Capital Economics, expecting the CBE to opt for further 350bps this year, taking the overnight deposit rate to 12.75% and lending rate to 13.75%. This will culminate in higher EGP yields, which will add to Egypt’s debt burden.

Foreign exchange reserves

Egypt’s foreign exchange reserves fell to $37.08bn by the end of March this year, from $40.99bn the previous month – the first drop since May 2020 – due to soaring importing bills, the decline in tourism and a portfolio investor exodus.

The fall in FX reserves, which slightly edged up to $37.123 in April, came despite the $5bn deposit that Egypt had earlier received from Saudi Arabia, part of a support initiative rolled out by wealthy Gulf states – worth $22bn in total – to mitigate the war’s pernicious effects on the third-largest Arab economy.

Nevertheless, Egypt already has large external funding needs to cover current account deficit and debt maturities, estimated at about $30bn in total and due in the upcoming 2022/2023 fiscal year, which starts in July, Krisjanis Krustins, director of sovereigns at Fitch Ratings, tells The Africa Report.

As pressure on Egypt’s foreign exchange reserves continues, it may be forced to rely on international capital markets to fill the funding gap.