Analysis-Egypt faces sharp rise in costs to finance proposed $30 billion deficit

div classBodysc17zpet90 cdBBJodivpBy Patrick Werrp

pCAIRO Reuters – Higher interest rates, a weak currency and broader investor wariness of emerging markets suggest Egypt could pay steeply to finance a projected 30 billion budget deficit for the financial year starting in July.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pEven before U.S. Federal Reserve rate hikes that started in March and Russias invasion of Ukraine, Egypt had been struggling to sustain appetite for its local and foreign borrowing to plug current account and budget deficits and fend off pressure to let its currency weaken, analysts say.p

pAs well as the two events sparking a portfolio investment outflow calculated at 20 billion by the country‘s prime minister, the Ukraine war delivered a new shock to Egypt’s tourism sector – an important earner of foreign currency – as well as driving up the price of wheat and other key commodities required for the governments vast food subsidy programme.p

pThe price of Egypt‘s 2032 dollardenominated Eurobond is currently about 75 cents on the dollar, falling as investors drawn in after the IMFmonitored reforms of 2016 grow increasingly wary of the government’s finances.p

pThat suggests Egypt will have to pay higher rates if it seeks to issue more bonds, even as it tries to diversify its debt with green, shariacompliant and yendenominated samurai bonds.p

pJames Swanston, Middle East and North Africa Economist at Capital Economics, pointed to the “quite significant” increase in the proportion of Egypts debt issued in foreign currency in recent years.p

pMedium and longterm external debt more than tripled to 121.5 billion over the sevenyear period to Oct 1, 2021, according to central bank data. p

p“The risk is that if, as we expect, the Egyptian pound weakens further, it pushes up the debt to GDP ratio further, and also that any attempt to roll over debt or issue new debt would be at much higher interest rates given the tightening of global monetary conditions,” Swanston said. p

pThe government, currently seeking a new round of assistance from the International Monetary Fund, presented a draft budget to parliament last week that projects 202223 spending of 2.07 trillion Egyptian pounds on revenue of only 1.52 trillion, leaving a deficit of more than 558 billion pounds 30.5 billion.p

pA Finance Ministry official did not respond to a request for comment. p

pPRIVATE PARTICIPATION p

pA debt servicing bill where domestic and foreign interest payments alone are set to swallow 45.4 of all revenue – up from a projected 44.6 this financial year – leaves little room for spending once government salaries and subsidies are paid for, analysts say. p

pEgypt is also working on or has announced a series of megaprojects over the last few years, including a 60 billion new administrative capital city, a 23 billion highspeed rail network and a 25 billion nuclear power station. p

pPrime Minister Mostafa Madbouly told a news conference on Sunday such projects were essential to absorb a million people entering the workforce each year. p

pHe said Egypt plans to raise 10 billion by the end of the year and another 30 billion in the subsequent three years by way of “private participation”, including the sale of stakes in state firms on the stock exchange.p

pThe government has been talking about such moves for years, in 2018 announcing it would offer minority stakes in 23 stateowned companies in a plan to raise up to 80 billion pounds.p

pHoweover, the programme has been repeatedly delayed due to weak markets, legal hurdles and the readiness of each companys financial documentation, according to government officials.p

pMeanwhile, foreign debt payments of almost 16 billion in 202223 include nearly 2 billion owed to the IMF, mainly for the 12 billion financial package secured in 2016.p

p “Even when that debt is concessional it adds to balance of payments pressures. The fact that Egypt has to find almost 6 billion to repay the IMF in 2025 is a case in point,” said Farouk Soussa, senior economist at Goldman Sachs.p

pTaking into account principal repayments, total debt servicing costs will amount to 965.5 billion pounds, according to the draft budget. p

pThe central bank in March allowed the pound to fall by 14 to about 18.40 to the dollar, making it more expensive to buy foreign currency. Streetlevel black market dealers were buying dollars for 19.40 pounds last week.p

pHowever, Egypt may also be able to turn to its traditional allies in the Gulf for support. In March, Saudi Arabia said it had deposited 5 billion with Egypts central bank.p

p1 18.2700 Egyptian poundsp

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pp Additional reporting by Mahmoud Salama Editing by Kirsten Donovanp

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