Egypt will still feel the heat despite US rate cuts

Reuters

• Payments to fall if US rates drop
• Public external debt hit $110bn in 2022
• Public debt to GDP ratio reaches 98pc

Likely US interest rate cuts will lower Egypt’s interest repayment costs on its vast public debts. But this will do little to ease pressure on the country to sell national assets in order to reduce its overall borrowings.

Egypt’s public external debt – money borrowed in foreign currencies – was $110 billion in 2022, having more than trebled over the preceding decade, the most recent data from the World Bank shows.

President Abdel Fattah el-Sisi, a former field marshall who came to power in 2014 after a coup in 2013, has led a spending splurge.

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“Sisi gambled that if he invested heavily in infrastructure projects, it would lead to a multiplier effect that would boost other sectors of the economy,” says Sami Hamdi, managing director of consultancy The International Interest.

“But he underestimated the grip the army has on many of those sectors, which prevents any real innovation.

“So, while you create infrastructure to ease traffic in Cairo or build a new city, for example, there’s no space for any competition to take advantage of that.

“The money Sisi thought would move around the economy stayed in the same place as a result of the army’s monopoly position in many industries.”

Egypt sealed multibillion-dollar agreements with the European Union, the International Monetary Fund and the UAE in March that included additional borrowing.

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S&P Global data shows that Egypt’s public debt-to-GDP ratio peaked at 98 percent in 2023 and will fall to 92 percent this year.

Egypt’s interest payments will equate to 66 percent of government revenue in 2024 before declining to 63 percent in 2025, AGBI calculates, based on S&P data.

US 10-year treasury yields, the most important determinant of government borrowing conditions worldwide, have soared after sustained US interest rate rises that have lifted the Federal Reserve’s benchmark rate to a two-decade peak of around 5.3 percent, from near-zero in February 2022.

The Fed kept rates unchanged after its most recent meeting on March 20. However, at a subsequent press conference the Fed’s chairman, Jerome Powell, said the institution planned to make three rate cuts this year.

“Interest rate reductions will help reduce Egypt’s debt servicing costs,” says Monica Malik, chief economist at Abu Dhabi Commercial Bank.  

However, Hamdi says, this respite will not solve Egypt’s broader problems regarding its borrowings.

“That's reflected in the way Egypt is now opening individual talks with many of its creditors,” he says.

“Egypt isn’t betting on rate cuts making a huge difference and will continue to sell state assets, mostly to Gulf states, in an urgent search for money that can be used to reduce its public debt.”

Sisi will negotiate with private creditors in the coming months, and those in the oil and gas sector are most critical, Hamdi says. Yet even if Egypt succeeds in restructuring its debts for more favourable terms such activities will deter non-sovereign foreign direct investment.

“Private creditors are extremely frustrated, but their opportunities for recourse are limited – there’s not much they can demand,” Hamdi says.

Asset sales

Egypt signed contracts to sell state-owned assets worth nearly $2 billion last July. These included a deal to offload minority stakes in three oil and petrochemical sector companies to the Abu Dhabi sovereign wealth fund ADQ for $800 million; an agreement to raise $700 million by selling stakes in a portfolio of hotels; and the sale of 31 percent of the steel company Ezz Dekheila for $241 million.

Last June Egypt’s assistant prime minister, Osama El Gohary, said the government would sell its stakes in 250 companies as part of a privatisation programme.

Public asset sales may indicate the military acknowledges it needs to loosen its stranglehold on the economy, Hamdi says.

“Even the army might be beginning to feel there is an existential crisis that will endanger it too,” he says.