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International investors have rushed into Egypt’s debt after the most populous Arab nation secured a $55bn bailout and Gulf investment package to reboot its troubled economy and prevent it succumbing to fallout from the war in Gaza.
Demand for short-term bonds issued by Egypt at double-digit interest rates has surged since last month’s financial rescue, and a large devaluation in Egypt’s pound, staved off a debt crisis that only weeks ago loomed over the country.
Investors bid $21bn for $2.4bn in one-year Treasury bills on offer from the Egyptian government over the past month — it sold $8.5bn — in a return of the “hot money” flows that had shunned the country as too risky only a few weeks ago. Yield on the bills fell from 32 per cent to 26 per cent.
“Everybody wants a piece of Egypt now. It’s quite a change from just a few weeks ago,” said Farouk Soussa, Middle East and north Africa economist at Goldman Sachs.
President Abdel Fattah al-Sisi’s government came under mounting pressure during the past year, as the IMF and Cairo’s traditional Gulf partners refused to step in to again save an economy they have had to repeatedly bail out.
Egypt, the second largest debtor to the IMF after Argentina, has taken multiple loans from the fund since 2016, while repeatedly balking at implementing difficult reforms including floating its currency.
But the outbreak of war in neighbouring Gaza helped to change the attitudes of donors, who feared Egypt was heading towards default and economic collapse.
“The US doesn’t want Egypt to be destabilised because there would be repercussions for Israel and the region. Europe is also terrified of a migration crisis,” said Riccardo Fabiani, north Africa director of the International Crisis Group. “When they say Egypt is too big to fail, this is true.”
Tourism revenues and receipts from trade through the Suez Canal dropped amid the conflict, undermining two of Cairo’s key foreign currency earners. But the war also underscored Egypt’s strategic importance in a volatile region, including its role in negotiations to free Israeli hostages as well as the provision of aid in Gaza.
The new financial support for Egypt has included an $8bn IMF loan, $6bn from the World Bank over three years and more than $7bn from the EU until 2027.
But the biggest short-term impact has come from a $35bn deal with the United Arab Emirates to buy development rights of prime land on Egypt’s Mediterranean coast in the Ras al-Hekma area. The first tranche gave Cairo the buffer it needed to float its currency, a much-delayed move that met a key IMF condition.
The Egyptian pound has since fallen to about 47 to the dollar, down from about 30 before it was floated.
The result is that Egypt now looks to have stabilised after two years of crisis marked by soaring inflation — which topped 35 per cent in February — and a suffocating foreign currency shortage.
A question now is whether Cairo will stick with reforms or revert to former practices such as fixing the exchange rate.
Ziad Bahaa Eldin, a former deputy prime minister, said Egypt could either “rely on these new inflows to defer reform and continue to run the economy in the same way that brought about the current crisis, or . . . use it as an opportunity to adjust policy”.
Arguing for the latter, he added: “We need policies aimed at encouraging industry, tourism and exports and we need to reduce the role of state-owned enterprises.”
Under Sisi, Egypt has spent billions of dollars on a debt-fuelled infrastructure programme overseen by the military which includes building a grandiose new capital. Critics say this has helped drive up debt and produced little in terms of exports and foreign currency revenues, although Sisi has defended the spending as necessary to create millions of jobs.
Cairo has now committed to keeping a flexible exchange rate regime and reducing state infrastructure spending to help create a level playing field for the private sector which has to compete with privileged military and state-owned enterprises.
Ivanna Vladkova Hollar, the IMF Egypt mission chief, said the new exchange rate system had to be “sustained”. She also noted that Cairo had committed to capping infrastructure spending and bringing transparency to the finances of dozens of state-owned agencies, adding that military-owned companies were not exempt.
“The same measures that we are discussing to reduce the competitive advantage state-owned firms have vis-à-vis private sector firms, applies to military-owned firms as well,” she said.
Goldman’s Soussa said Egypt’s reforms had given confidence to the short-term investor community now piling into the debt market. “This is assurance that Egypt’s going to revert to a more orthodox policy trajectory and that it’s going to roll back some of the excesses that brought us to this place in the first place,” he said.
“There’s now an opportunity,” he added. “If it’s wasted, it will be because of a reversion to poor economic policy and policy decisions.”
