Two of the most influential international credit rating agencies, Moody’s and Standard & Poor’s (S&P), followed by the world’s most powerful merchant bank, Goldman & Sachs, have just sent discreet but firm warnings to Marshal-President Abdelfatta Al-Sissi: be careful, Egypt could well be the next victim of “the volatility of the world’s funding conditions”; put simply, the rise of interest rates in the USA might lead to a massive flight of capital from yours and many other emerging countries, as well as a stronger dollar which would seriously weaken the Egyptian pound and add to the country’s debt repayment burden (presently over 130 billion dollars).
The Egyptian government’s financial strategy since its 2016 accord with the International Monetary Fund (IMF) has consisted in remunerating foreign capital lavishly in order to finance the national budget deficit as well as the current account deficit in the balance of payments. Year in and year out, its overall financing needs flirt with the incredible figure of 35% of the GNP, whereas even in 2020—when the Covid-19 pandemic peaked—they never rose above 10% in the principal Western countries. Cairo offers some of the world’s highest interest rates, 13 to 14% per annum for loans in the local currency, 7 to 8% for loans in foreign currencies. According to the US credit rating agency Bloomberg, which keeps close tabs on 50 emerging countries, Egypt’s real rates of interest (nominal rate minus rate of inflation) are the highest in the world.
An unsustainable debt
This policy has paid off. Egypt is one of the rare Arab countries to have known positive growth in 2020 (between 2 and 3%), to have held out against a pandemic which has mostly affected the tourist trade, a key sector of its national economy (10% of the GNP) and to have continued to attract foreign investors. Half the Arab countries saw their ratings go down, but not Egypt. In less than a year, twenty billion dollars worth of bonds were purchased from the government, Egypt’s principal borrower. The downside of the operation is, of course, its cost to the budget; the interests paid out by the Egyptian Treasury amount to 45% of the State income, almost 10% of the GNP. The appeal of Egyptian certificates (liabilities, Government bonds, etc.) rests on the difference between their remuneration and that of US or European certificates which is scarcely more than 0%. Now if the latter rates go up, as is expected, Cairo will have to follow suit and considering the current levels, this will be mission impossible. If the US Fed, having to cope with a rise in the rate of inflation of over 2% per annum, raises its interest rates by 2%, the Egyptian central bank will, at the very least, have to match this move and impose an unbearable burden on the State finances. What then will be left to pay the other government expenses, and especially the military and security budgets? The strategy of high interest rates will have outlived its usefulness and the Egyptian authorities will find themselves faced with an unprecedented financial crisis.
The fact that inflation is back certainly does not improve matters since it leaves the central bank with little room for manoeuvre. The bank wishes it could lower its interest rates but as of 16 September, it continued to keep them high. The general price index for 2021–2022 is expected to rise by 6.6%, driven up by public utility charges (energy) which have risen by 9% following the drastic cuts in electricity and fuel subsidies decided at the beginning of last Summer. Consumers are being made to pay for the handouts to foreign speculators.
S&P suggests reforming the way the double deficit is financed, by resorting less to indebtedness and giving a higher priority to direct foreign investment (FDI) which has the advantage of not being refundable. At present it hardly represents 2% of the international capital entering Egypt. And for good reason. The Egyptian army has a stranglehold on the country’s economy and leaves little room for private activity, either domestic or foreign, with the exception of hydrocarbons, a traditional monopoly of the Italian firm ENI. The generals have not forgotten the attempt made by ex-president Hosni Mubarak and his son to strengthen private entrepreneurs vie privatisations and various advantages. The 2011 revolution swept away this crony capitalism and the army officers are now on the offensive to take over new sectors and, at the very least, prevent civilians from returning to positions of command in the Egyptian economy.
The army’s decisive role
Another solution would be to reduce the trade deficit which has skyrocketed (46.3 billion dollars in 2019) by stimulating exports. According to S&P, the country’s export base is especially weak, scarcely more than 13% of the GNP, including both goods and services (tourism, Suez Canal…). At the present time, Egypt mostly exports concrete, medicaments and handicraft products. The savings which emigrant workers send home (312 billion dollars) amount to far more than the export revenue (25 billion dollars, not counting hydrocarbons). Egypt earns more from the work of its men abroad than from exports. It would help to add to that modest list some more remunerative commodities by investing in new activities. But the regime’s high interest rates policy makes this impossible, Egyptian SMEs do not actually have access to bank loans since they cannot afford to pay the extortionate rates of interest demanded at the instigation of the ECB. As for the government, it invests in real estate, devoting a major share—not made public—of the borrowed capital to the construction of a turnkey capital to the East of the Nile.
As for the army, it is mainly interested in the income from domestic niches obtained through the personal connections between generals and all-out government backing. So there are not many players left to revive export sales! Given these conditions it is hard to see how the share of the foreign debt could be brought down from today’s 90% of the GNP to 84% in 2024 as the government predicts, along with a rapid future growth (over 5.5% per annum), brandishing a talisman which has already seen yeoman service, “structural reforms.” Last Spring the cabinet solemnly adopted a National Structural Reform Program without giving any precise details concerning its content, much to the discouragement of the IMF experts. Since then, not much has been heard about it, and the “reforms” have been confined to cutting subsidies, when the country runs the risk of a very serious social crisis with the unemployment of young people now over 25%…