Egypt's foreign debt rose to $79 billion in the 2016-17 fiscal year that ended in June, up 42 per cent from 2015-16, the Central Bank of Egypt (CBE) said this week. This is $5 billion higher than its level at the end of March and compared to the $56 billion a year before. Egypt has been heavily borrowing from abroad in order to fund its budget deficit and cover its dollar shortage after years of political instability following the 25 January Revolution negatively affected investment inflows and tourism revenues. Egypt has a financing gap, the difference between its dollar-denominated revenues and expenses, of around $10 billion. Its fiscal deficit stood at 10.9 per cent of GDP at the end of June. In addition to reaching financing deals with multinational lenders like the IMF, World Bank, and African Development Bank, the country has resorted to the international debt markets. It raised $7 billion from the sale of Eurobonds in the last fiscal year. The $79 billion figure does not include the $1.25 billion second tranche of the IMF loan Egypt received two months ago. More importantly, the figure is expected to be inflated by the end of the year with the expected disbursement of $2 billion, representing the third tranche of the IMF loan, the last $1 billion installment of a three-year World Bank loan, and the last $500 million from the African Development Bank, as well as a pending Eurobond issue in November. “We are studying market conditions to see if we are going to be able to sell bonds before the holiday season in December,” Finance Minister Amr El-Garhy said Tuesday in a press conference. However he added: “My guess is that the sale will happen in January, February — starting with the dollar-denominated bonds then the EURO- denominated ones.” The government has approved a Eurobond programme worth around US$7 billion to be issued during the 2017-2018 fiscal year that began in July, according to a statement by prime minister Sherif Ismail. Commentators believe that increased confidence in the economy following the government's reform programme will guarantee the success of the issue, which is expected to have a 10-year period and will be cheaper than the cost of internal borrowing, currently standing at 15 per cent. “Foreign debt is within safe amounts, as per international standards,” the CBE said in a report last week. However, Prime Securities, an investment firm, last month warned that the structure of the external debt was worrisome as the portion of the debt maturing in the short term had increased, putting burdens on the economy. “There is a noticeable squeeze the country will face starting from fiscal year 2018/2019 with a projected $12.7 billion worth of maturing debt [$8.2 billion of which are deposits maturing at the CBE], unless the government succeeds in renewing such deposits,” it said. Prime said in a note that any appreciation in the local currency would be offset by repaying external debt and outflows in treasury-bill investments. It expects the current exchange rate of LE17-18 to the dollar to be maintained until the end of 2017 and not to appreciate until sustainable sources of foreign currency are replenished. The pound was trading at around LE17.63 to the dollar on Thursday. It has strengthened marginally in recent weeks, after hovering at around LE18 just after the currency was floated. The floatation of the pound came as part of an overhaul of forex policy in November that saw Egypt lifting restrictions on foreign currency trading. The CBE limited its interference in the market to support the local currency, a change in policy that helped it to feed its reserves, with foreign currency revenues pushing them to pre-revolution levels of $36 billion. The CBE said on Sunday that its net international reserves had increased marginally to $36.535 billion at the end of September, up from $36.143 a month earlier.However, these were built mainly on acquiring loans. “This makes them fragile, especially since foreign investments in treasury bills have exceeded $10 billion since the decision to liberalise the currency in November 2016,” Prime noted. The increased interest emerges from the fact that the bills pay one of the highest yields worldwide. The CBE has raised key interest rates by seven per cent in three stages since it floated the pound in November. Some $7 billion worth of treasury bills are to mature before the end of 2017. This is added to around $1.7 billion in projected medium- and long-term external debt services to be repaid before the current year. The most important are repaying the Turkish loan signed in September 2012 worth $1 billion in October 2017, $500 million owed to Libya, and $100 million to Saudi Arabia. Citing Egypt's increased external exposure, in addition to its weak finances, the international ratings agency Moody's last month opted neither to upgrade Egypt's junk credit rating nor improve its outlook from “stable”. At B3 rating, Egypt is six steps below Moody's investment grade and on a par with Lebanon, Argentina, Pakistan and Ghana.
No change in interest rates
IN A MEETING of its Monetary Policy Committee on Thursday, the Central Bank of Egypt (CBE) kept the overnight deposit rate at 18.75 per cent and the overnight lending rate at 19.75 per cent, citing lower inflation and improving economic growth. Since the last meeting of the committee almost two months ago, the annual inflation rate has dropped from 33 per cent in July to 31.9 per cent and the monthly inflation rate declined from 2.3 to 1.1 per cent in August. Moreover, the food inflation rate recorded its lowest increase since August 2016 and services prices stabilised, with the exception of transportation which hiked due to the increase in fuel prices in July. According to a CBE statement, the decision came as economic activity showed improvements, with the GDP growth rate for the fourth quarter of 2016/2017 (ending in June 2017) coming in at five per cent and pushing the overall growth rate for the second half of the fiscal year to 4.6 per cent, its highest since 2009/2010. More importantly, the unemployment rate declined to 12 per cent, its lowest level in seven years. “Economic growth became more sustainable as the consumption contribution declined and that of exports and investments increased,” the CBE said. Jason Tuvey, Middle East economist at research group Capital Economics, saw the CBE's statement as a move to downplay expectations that interest-rate cuts would quickly follow even as inflation is falling. “Given the increased emphasis on tackling the country's long-standing inflation problem, any move to ease policy at this stage would have dented the CBE's improving, but still fragile, credibility,” he said. He believes that a rate cut at the next committee meeting in November is unlikely. But “with inflation set to plunge by as much as 10 per cent over the coming months, an easing cycle should get underway in December, and interest rates will fall further than most expect in 2018-19,” he said. While Tuvey believes the first cut in interest rates will come at the committee meeting towards the end of December, he also expects the overnight deposit rate to be lowered to 12.75 per cent by the end of 2018 and 10.50 per cent by the end of 2019.
