Egypt: Fiscal challenges continue to weigh on the outlook despite some improved prospects

Event

In recent years, Egypt has faced substantial financial and economic pressures due to its deep structural macroeconomic vulnerabilities and numerous external shocks. This year, however, the country’s fortunes improved significantly, especially thanks to the large external support from multilaterals and regional partners. Nonetheless, important challenges persist for the near-to-medium term amid enduring external pressures (refugees fleeing Sudan’s civil war, a sharp drop in Suez Canal revenues and a high energy import bill), lasting macroeconomic weaknesses and very weak public finances.

Impact

The acute liquidity pressures Egypt was experiencing since 2022 seem to have alleviated given easing commodity price pressures and external support from regional partners (such as the UAE and the EU) and multilaterals (such as the IMF and the World Bank). Owing to this, foreign exchange reserves have surged from around USD 25 billion at the end of 2023 to around USD 34 billion in August 2024. Still, some liquidity pressures remain as Suez Canal revenues are impacted by the maritime traffic disruptions in the Red Sea. Moreover, the underperforming gas production is leading to high energy import bills. In September 2024 for instance, news sources reported that Libya and Saudi Arabia helped Egypt finance LNG imports amid important energy needs and limited funds.
 

The most pressing risk for Egypt remains, however, its very weak public finances. Despite the ongoing fiscal consolidation under the IMF EFF programme, significant fiscal challenges will persist in the near-to-medium term. Indeed, in FY 2023/2024, public debt was estimated at 90.9% of GDP, which is a very high level for a lower-middle income country. More worryingly, Egypt was facing the highest public interest payments burden in world, estimated at above 70% of public revenue. Over the medium-term, despite the projected gradual decrease of public debt levels, risks will persist as the public interest payments burden is projected to remain very large (see graph below). Furthermore, the already challenging path for public debt sustainability is further complicated by the difficult socioeconomic conditions in the country and ongoing regional tensions. Any reversal or an insufficient implementation of these reforms could jeopardise medium-to-long term macroeconomic stability.

In this context, Credendo maintains a stable outlook for Egypt’s short-term political risk rating given the improved liquidity prospects despite ongoing pressures. Still, amid the important public finance challenges, the outlook for the medium-to-long term political risk rating is negative.

Analyst: Andres Hernandez Cardona – a.hernandezcardona@credendo.com