Analysis-Egypt faces sharp rise in costs to finance proposed $30 billion deficit

By Patrick Werr

CAIRO (Reuters) – Higher interest rates, a weak currency and broader investor wariness of emerging markets suggest Egypt could pay steeply to finance a projected $30 billion budget deficit for the financial year starting in July.

Even before U.S. Federal Reserve rate hikes that started in March and Russia’s invasion of Ukraine, Egypt had been struggling to sustain appetite for its local and foreign borrowing to plug current account and budget deficits and fend off pressure to let its currency weaken, analysts say.

As well as the two events sparking a portfolio investment outflow calculated at $20 billion by the country’s prime minister, the Ukraine war delivered a new shock to Egypt’s tourism sector – an important earner of foreign currency – as well as driving up the price of wheat and other key commodities required for the government’s vast food subsidy programme.

The price of Egypt’s 2032 dollar-denominated Eurobond is currently about 75 cents on the dollar, falling as investors drawn in after the IMF-monitored reforms of 2016 grow increasingly wary of the government’s finances.

That suggests Egypt will have to pay higher rates if it seeks to issue more bonds, even as it tries to diversify its debt with green, sharia-compliant and yen-denominated samurai bonds.

James Swanston, Middle East and North Africa Economist at Capital Economics, pointed to the “quite significant” increase in the proportion of Egypt’s debt issued in foreign currency in recent years.

Medium- and long-term external debt more than tripled to $121.5 billion over the seven-year period to Oct 1, 2021, according to central bank data.

“The risk is that if, as we expect, the (Egyptian) pound weakens further, it pushes up the debt (to GDP) ratio further, and also that any attempt to roll over debt or issue new debt would be at much higher interest rates given the tightening of global monetary conditions,” Swanston said.

The government, currently seeking a new round of assistance from the International Monetary Fund, presented a draft budget to parliament last week that projects 2022/23 spending of 2.07 trillion Egyptian pounds on revenue of only 1.52 trillion, leaving a deficit of more than 558 billion pounds ($30.5 billion).

A Finance Ministry official did not respond to a request for comment.

Private participation

A debt servicing bill where domestic and foreign interest payments alone are set to swallow 45.4% of all revenue – up from a projected 44.6% this financial year – leaves little room for spending once government salaries and subsidies are paid for, analysts say.

Egypt is also working on or has announced a series of megaprojects over the last few years, including a $60 billion new administrative capital city, a $23 billion highspeed rail network and a $25 billion nuclear power station.

Prime Minister Mostafa Madbouly told a news conference on Sunday such projects were essential to absorb a million people entering the workforce each year.

He said Egypt plans to raise $10 billion by the end of the year and another $30 billion in the subsequent three years by way of “private participation”, including the sale of stakes in state firms on the stock exchange.

The government has been talking about such moves for years, in 2018 announcing it would offer minority stakes in 23 state-owned companies in a plan to raise up to 80 billion pounds.

Howeover, the programme has been repeatedly delayed due to weak markets, legal hurdles and the readiness of each company’s financial documentation, according to government officials.

Meanwhile, foreign debt payments of almost $16 billion in 2022/23 include nearly $2 billion owed to the IMF, mainly for the $12 billion financial package secured in 2016.

    “Even when that debt is concessional it adds to balance of payments pressures. The fact that Egypt has to find almost $6 billion to repay the IMF in 2025 is a case in point,” said Farouk Soussa, senior economist at Goldman Sachs.

Taking into account principal repayments, total debt servicing costs will amount to 965.5 billion pounds, according to the draft budget.

The central bank in March allowed the pound to fall by 14% to about 18.40 to the dollar, making it more expensive to buy foreign currency. Street-level black market dealers were buying dollars for 19.40 pounds last week.

However, Egypt may also be able to turn to its traditional allies in the Gulf for support. In March, Saudi Arabia said it had deposited $5 billion with Egypt’s central bank.

($1 = 18.2700 Egyptian pounds)

(Additional reporting by Mahmoud Salama; Editing by Kirsten Donovan)