Fri 01 Mar 2024:
Egyptian officials indicated their country will receive USD15 billion in FDI within a week of the deal’s announcement on 23 February 2024, some of which has already been transferred, with a further USD20 billion to be received in two months. This would represent an aggregate fresh inflow of USD24 billion (equivalent to around 6.3% of GDP in 2024, based on Fitch estimates), after discounting USD11 billion of UAE deposits held at the Central Bank of Egypt that will be rolled into the investment.
The scale of the FDI is large relative to Fitch’s expectations when we downgraded Egypt’s rating to ‘B-’, from ‘B’, with a Stable Outlook in November 2023. At the time, we assumed Egypt would receive around USD12 billion in the fiscal year ending June 2024 (FY24). The increase will significantly improve Egypt’s gross external financing position, even in the context of increased pressure on Egypt’s current-account position stemming from the ongoing Gaza conflict and disruption of Suez Canal traffic by Yemen’s Houthi forces.
Fitch expects the boost to Egypt’s foreign-currency liquidity to facilitate an adjustment of the country’s exchange rate. It should also limit the magnitude of the adjustment and the risks of the currency overshooting. The parallel rate, which was around EGP60:USD1 before the announcement of this deal and had reached around EGP70:USD1 in January, has now dipped below EGP50:USD1.
The exchange-rate adjustment would provide a catalyst for the IMF to approve an enhanced support programme with Egypt, which would in turn facilitate additional funding from other multilaterals and official partners. A successful adjustment could also support increased remittance and portfolio investment inflows, which have been constrained by expectations about a further devaluation of the Egyptian pound.
Easing of foreign-exchange supply constraints and a better-functioning exchange market, including the absence of a parallel rate, would be a clear positive for the economy. Moreover, increased capital inflows, including the FDI deal, may limit the additional inflationary impact from a weaker official rate if they reduce the scale of the exchange-rate realignment needed to resolve external imbalances. Nonetheless, Egypt’s macroeconomic situation will remain difficult in FY24 and FY25 with high inflation and relatively weak growth, although we expect inflation to trend down in yoy terms in 2H24 due to the high base of comparison.
Fiscal challenges will also be pressing, despite the government’s record of posting budget surpluses before interest costs in recent years. General government debt/GDP reached about 95% in FY23, and we project interest to exceed 50% of government revenues in FY25, a very high level compared with other Fitch-rated sovereigns. Interest costs may come down if the Egyptian authorities are able to stabilise the macroeconomic environment, supported by reforms under the IMF programme, but we expect the process would take many years.
The deal provides much needed breathing room for Egypt’s external finances and an opportunity to restore confidence, but the durability of the improvement will depend on the implementation of reforms to prevent renewed imbalances, such as a more flexible exchange-rate regime and policies to develop a more competitive export sector. We assume Egypt will adhere to its IMF programme, which should reduce the risk of reforms stalling in the near term following the easing of its external liquidity stress.
