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Egypt had repaid USD3 billion to Saudi Arabia in July, exerting
short-term pressure on its foreign reserves, although the
subsequent SDR allocation of USD2.8 billion through the
International Monetary Fund (IMF)'s new SDR allocation (USD650
billion) effectively balanced out the repayment of Central Bank of
Egypt (CBE) liabilities.
Saudi Arabia has deposited the new funds at the Central Bank of
Egypt and has extended the maturity of USD2.3 billion worth of
existing deposits on better terms. The move should reduce investor
concern about the potential withdrawal of GCC deposits, which stand
at USD15 billion according to CBE figures.
The reversal of the deposit outflow, together with the
USD2-billion bank facility the Egyptian government is currently
raising in the market, would represent a significant boost to the
country's FX buffers and in meeting its funding needs for
FY2021/22.
Given the concern over its external liquidity, Egypt's bond
spread has been under pressure in recent months. From an 8 January
2021 low of 504 basis points, and 512 basis points in early June,
its EMBI+ Index, which measures the average spread of its
dollar-denominated reference bonds versus US Treasuries, had risen
to 664 basis points in late October, clearly underperforming the
wider emerging market asset class. It stood at 658 basis points at
the close on 4 November, not yet having adjusted to reflect this
improvement in Egypt's reserve position.
Despite the higher yields on its international public debt,
Egypt is on a good path to meet its external funding needs this
fiscal year. This year's budget called for USD5 billion-USD6
billion of net foreign borrowing for FY 2021/22. The government
already raised USD3 billion from recent Eurobond issuance and is
preparing a syndicated loan facility worth USD2 billion from
commercial banks (re-financing an earlier loan that matured in
August 2021).
The future external borrowing pipeline and a debut sovereign
sukuk issuance is likely to be completed in Q2 2022. Additionally,
the World Bank has approved a USD360-million facility to support
Egypt's post-pandemic recovery. The development policy financing
(DPF) loan will be used to support the private sector, increase
transparency at state-owned enterprises (SOEs), and encourage
female participation in the workforce. The Asian Infrastructure
Investment Bank (AIIB) is also considering parallel financing of
the same amount, but no detail is available on the use of proceeds
or the specific timetable for the loan's approval. IHS Markit
assesses that there is a strong likelihood of Egypt undertaking
another modestly-sized international issuance in Q1 2022.
In addition, when Egypt is re-included on the JPMorgan bond
index at the end of 2021, the measure is expected to attract USD1.4
billion-USD2.2 billion of portfolio inflows into the Egyptian
treasury market from funds that track the index. Egyptian bonds
were expected to become "Euroclearable" by November, but this will
be delayed to Q1 2022 given an issue over how Egypt calculates the
withholding tax on government securities.
Outlook
Egypt has structurally high financing needs (with a gross
external requirement averaging 6% of GDP in 2021-25), which we
expect to be met mainly through debt inflows. Egypt's external
position has faced potential pressure from the recent widening in
the current account deficit (CAD), driven mainly by rising global
energy and commodity prices. The CAD widened by USD7.2 billion to
USD18.4 billion in FY 2020/21 compared with USD11.2 billion in the
previous year, owing to the adverse effect of the COVID-19 pandemic
on tourism. The widening in the CAD is roughly the same as the drop
in tourism revenues in FY2020/21.
Tourism is likely to show an accelerated recovery, thanks to the
return of Russian tourists and a general revival in the tourism
sector. Russian tourism at the Red Sea resorts restarted in August
after a six-year hiatus (since the 2015 Metrojet crash) as Russia's
flight ban finally ended. Russia is set to increase the number of
weekly flights from Moscow to Sharm El Sheikh and Hurghada from
early November to as many as 25 flights on a weekly basis.
The speed of the tourism recovery will be the critical factor
shaping up Egypt's external balances over the next year. By end of
2022, IHS Markit expects key foreign-currency earners such as
tourism to return to around their pre-pandemic levels and that
hydrocarbons will be making a stronger net external contribution to
the current account.
Overall, recent developments lead us to forecast a largely
stable EGP over the next 12 months and stable domestic policy rates
at least to the first half of 2022, despite the Federal Reserve's
announcement to wind down its USD120-billion per month stimulus
program from mid-November.
Posted 11 November 2021 by Yasmine Ghozzi, Senior Economist, IHS Markit
