The sharp rise in Egyptian external debt in the last few years has triggered an alarm in some quarters, according to Capital Economics Tuesday research note.
However, the note says that debt has been accompanied by a large increase in FX reserves, suggesting that risks are currently manageable.
Furthermore, Egypt’s external debt has increased steadily since 2015 and breached $100bn in Q1 of this year, the note explains.
As a share of GDP, it has levelled off at around 35%, a ratio not seen since the early 2000s. ( Most of this external debt is government borrowing, although a lot of short-term (maturing within one year) external debt is owed by the central bank (CBE).
Capital Economics added in a research note that external debt can generate problems for several reasons, explaining that there are roll-over risks, revealing that if risk appetite deteriorates, it can become much more difficult to access new financing from abroad to roll over maturing debts.
Moreover, the note explained that since external debt is generally (and in Egypt’s case almost entirely) denominated in foreign currencies, the exchange rate depreciation pushes up debt ratios and can create debt-servicing problems.
“ The risks in Egypt are mitigated by a couple of factors. First, the rise in external debt has been more than matched by a large increase in foreign exchange reserves,” according to Capital Economics.
Egypt’s Foreign exchange reserves have increased from $16bn in 2016 to $44.91bn at the end of July.
Moreover, the research centre says the EGP looks relatively fairly valued, although the real exchange rate has appreciated in the last few years, it is still 15% lower than it was before the devaluation in 2016.
“The risk of a large currency fall, which would raise the EGP value of foreign currency-denominated debt, is low,” it continued.
Egypt signed with the IMF a three-year loan program in 2016, as part of the IMF programme, carrying out economic reforms including a steep devaluation of the pound, deep cuts to its energy subsidies and the introduction of new taxes.
Capital Economics stated that Egypt’s current account deficit has narrowed to just 1% of GDP from 7% a few years ago, also suggests a large exchange rate adjustment is unlikely.
“The upshot is that, unless external borrowing is ramped up much further, Egypt’s external debt shouldn’t pose a significant risk,” it concluded.
Unfortunately, days ago the World Bank unveiled that Egypt’s external debt hiked Y-0-Y recording $106.2 bn during the first quarter (Q1)of 2019, up from $88.16 bn, a hike of 20.4%.
Meanwhile, days ago the Ministry of Finance stated in a press statement, that the government aims to cut the government debt-to-GDP ratio gradually in the next three years, to reach less than its level in 2011 by the end of FY 2021-2022.”
“The Egyptian government targets to reduce the government debt to GDP to record 77.5% by the end of June 2022, which will subsequently reduce the burden of the country`s debt service bill,” according to the Minister.