As a positive development for Egypt’s economy, ratings agency Capital Intelligence (CI) has changed the outlook on Egypt’s long-term local and foreign currency debt from negative to stable, while keeping the short-term debt rating at B. This decision follows one made by Moody’s in August of last year, which decided to extend the negative review of Egypt’s credit rating for an additional three months due to the ongoing assessment of economic reform initiatives and the poor dollar liquidity.
The Decision’s Context
Several factors influenced CI’s decision to upgrade the outlook for Egyptian debt to stable, which can be summed up as follows.
• Debt-to-GDP Ratio Stability: Between the first quarter of 2021-2022 and the second quarter of 2022-2023, the Egyptian external debt-to-GDP ratio remained stable at an average of 32 percent, showing that the country’s external debt is still below the Debt Sustainability Framework risk limit of 50 percent.
• Positive Outlook: The likelihood that the Gulf Cooperation Council (GCC) states and the International Monetary Fund will provide assistance to the Egyptian government is rising, according to CI. However, it has warned that external support will be subject to a degree of conditionality, especially in light of GCC aid being tied to the IPO program.
A positive outlook could be achieved within a year, according to CI, if the country successfully implements permanent structural and financial reforms to stabilize macroeconomic conditions, reduce its exposure to external shocks, and address social and economic weaknesses, as well as if it is able to build a large amount of foreign exchange reserves supported by a stable exchange rate system.
• Constant Balance: CI is attempting to strike a balance between the successes of the government IPO program and the financial and structural reform agenda on the one hand, and the indications of persistent weakness in external liquidity on the other, taking into account the outflow of net foreign assets, which exceeds the volume of recent asset sales, a situation that impairs the ability to sustainably increase foreign exchange liquidity before increasing debt service payments during the upcoming fiscal years 2024-2025 and 2025-2026.
• Positive Banking Sector Performance: The banking sector’s net foreign assets deficit decreased by about $805 million in July of last year, marking the biggest improvement since the start of the economic crisis Egypt experienced in the wake of the Russian-Ukrainian war. The gap between the banking sector’s foreign assets and its liabilities in foreign currencies to non-residents shrank to $26.2 billion from $27.1 billion in June. Additionally, according to the most recent information provided by the Central Bank of Egypt, the total amount of foreign currency deposits in the banking system, excluding the Central Bank, increased to $50.595 billion, or EGP 1.560 trillion, during the preceding month of July from $49.162 billion, or EGP 1.516 trillion, in June of last year.
• Joining the BRICS: The BRICS’ invitation to Egypt to join the grouping has probably contributed to raising expectations for the Egyptian economy, particularly in light of the potential economic benefits associated with membership, such as increasing trade exchange volumes with member states, which will ease pressure on foreign exchange, assist in securing strategic commodities like wheat and rice, and draw more foreign direct investments.
A Review of Egypt’s External Debt
As a result of the difficulties the world economy has faced over the past three years, the majority of governments have been forced to borrow money from other governments or from international organizations, which has led to expectations that by the end of 2023, the level of global sovereign debt will reach record highs. In this section, we make an effort to analyze how the global financial crisis has affected the amount of Egyptian external debt by using some metrics provided by the Central Bank of Egypt.
Egypt’s external debt was approximately $162.93 billion in the second quarter of fiscal year 2022-2023 (October, November, and December 2022), up from approximately $154.98 billion in the first quarter of the same year, representing a 5.12 percent quarterly increase. As can be seen in figure 1, the total amount of external debt increased during the review period, rising from $137.42 billion in the first quarter of 2021–2022, to $162.93 billion by the second quarter of 2022–2023.
Figure 1: Egypt’s quarterly external debt
Source: Central Bank of Egypt, Monthly Statistical Bulletin
There are two types of external debt: long-term and short-term. According to the chart below, the ratio of long-term debt to total external debt is evidently higher than that of short-term debt, which was lower at about 18.56 percent until the second quarter of 2022-2023.
Figure 2: Quarterly external debt, long-term and short-term
Source: Central Bank of Egypt, Monthly Statistical Bulletin
Despite an increase in both types of external debt, long-term debt does not put stress on the government and does not necessitate quick repayment. However, the cost of long-term debt is higher than that of short-term debt, and it increases the generational debt burden as it is passed on from the current generation to the next.
It is worth noting that there are four strategies that can be implemented to lessen the burden of public debt, both foreign and domestic, namely 1) improving the state’s ability to collect tax revenues and increasing the return on state assets through the implementation of prudent economic policies and the completion of state financial asset restructuring programs, all the while fostering greater public-private collaboration in investment areas; 2) keeping a lid on the state’s overall spending, especially in light of the new demands placed on it, through measures such as reprioritizing funds, increasing investments in infrastructure and public services, and automating data storage and retrieval systems, which will allow the state’s limited resources to be allocated more effectively; 3) reforming the public business sector to ensure that the goods and services provided by these businesses in various sectors are being paid for appropriately; and 4) bringing the industrial localization program to a successful conclusion and promoting the manufacturing industry in order to generate more revenue for the state’s general budget, which ultimately helps to increase its revenues.
In conclusion, Egypt’s external debt is still manageable, especially given the absence of non-payment or default concerns. This, does not, however, diminish the significance of making efforts to reduce debt and the tendency towards increasing revenues and sustainable sources of foreign exchange, such as luring foreign direct investments, putting the of state-owned businesses up for sale, and involving the private sector.
