Because the US and the EU are preventing the Egyptian crash
Egypt is about to receive more funding from the IMF (an increase in the program from $3 billion to $8 billion) and the EU (a new strategic partnership program worth $8 billion). The point of Mali Chivakul, Emerging Markets Economist by J. Safra Sarasin.
When Egypt and the IMF agreed on the $3 billion program (for 4 years), we highlighted significant risks to the program, as the amount was significantly less than Egypt's external financing needs (20 billion dollars estimated at the time for 2024, including current account deficits, dollar bond payments and repayment to the IMF). In our view, the program needed more external support beyond the asset sales assumed in the program.
Program reviews (which would have released further tranches of the IMF loan), which were supposed to take place in 2023, did not take place as Egypt struggled to implement reforms and privatize state assets. Some asset sales have been made to Gulf countries ($1.9 billion as of mid-2023). However, external financing needs were much higher and Egypt had to postpone payments for imports, including wheat. The shortage of US dollars has led to a sharp decline in goods imported to the port.
In late 2023, Egypt was hit by other shocks: the conflict in Gaza and the disruption of the Red Sea . The conflict's proximity to Egypt has likely led to a reduction in tourism, while attacks in the Red Sea have led to a reduction in revenue from the Suez Canal. The two shocks add to the already difficult external financing situation and highlight Egypt's vulnerability. The $35 billion deal to develop Ras El-Hekma (an area west of Alexandria on the Mediterranean coast) between the United Arab Emirates and Egypt highlights Egypt's strategic importance to the region.
The amount is historic, in the sense that it is worth 7% of the GDP of the United Arab Emirates (UAE). Abu Dhabi's rapid disbursement of the fund ($15 billion in the first two weeks and $20 billion by April) demonstrates how important it is for the UAE to quickly provide a lifeline to Egypt. The first tranche of the disbursement has in fact allowed the Egyptian Central Bank to devalue the pound (EGP) and move to a more flexible exchange rate regime, a probable preliminary action to the revision of the IMF programme.
The world does not want to see growing instability in Egypt. Egypt is about to receive more funding from the IMF (an increase in the program from $3 billion to $8 billion) and the EU (a new strategic partnership program worth $8 billion). The IMF increase indicates support from the United States, while the EU has underlined that Egypt is at the center of the EU's efforts to stem migration flows.
The significant external support implies a much more comfortable short-term external financing situation and a marked improvement in the sovereign credit outlook. Egypt's rating remains B-/Caa1 according to the three rating agencies, but the improvement is already reflected in market prices, with credit spreads falling from 945 bps at end-2023 to 628 bps. Fitch has just upgraded the outlook to positive.
Furthermore, there may be further agreements for foreign investments in the coming months, as the press has reported ongoing discussions with Saudi Arabia. The easing of external financing in the short term should allow the Egyptian government to refocus on fiscal consolidation, reforms and the new exchange rate regime. The latter could be particularly challenging as it is new territory for Egypt. Egypt has suffered numerous devaluations in recent years.
After each gradual devaluation in 2016, 2022 and 2023, Egypt resorted to pegging to the US dollar and was unable to control inflation. As a result, the real exchange rate appreciated to the point that Egypt had to devalue again. The implementation of the new exchange rate regime and other reforms would favor the sustainability of public debt and external debt in the medium term. Furthermore, it could bring more external support.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/usa-ue-egitto/ on Wed, 01 May 2024 05:48:42 +0000.