Index trend
Previous Quarterly Editions
Expropriation risk: 57 59 59 57 ▼ Political violence risk:66 68 68 67 ►Terrorism risk:58 55 58 58 ▲Exchange transfer and trade sanction risk: 63 63 63 63 ►Sovereign default risk:82 82 82 82 ►
Overall Risk Temperature: 68 (Medium high) TREND ►
Special topic: Relationship with the 'global rules-based order'
Egypt is actively involved in international and regional institutions due to its history, geostrategic importance and dependence on financial support from multilateral institutions. The plethora of active conflicts around Egypt — Gaza, Sudan, Libya, Yemen — and the dispute with Ethiopia over a major dam on the Blue Nile mean that Egypt is also deeply engaged in international diplomatic forums. At the same time, the government faces persistent criticism of its record on human rights and democracy as well as the perception that it fails to adhere to the basic standards of the liberal international order.
In its approach to conflicts in the Middle East region, Egypt tends to adopt a low-key approach, consistent with support for the global rules-based order. The Ministry of Foreign Affairs puts up a solid diplomatic front, while key decisions are taken within the presidential office. President Abdel-Fattah el-Sisi has been known to lay down “red lines” in extreme circumstances. For example, in the Gaza conflict, Cairo was quick to insist that Egypt would not admit large numbers of Palestinian refugees for resettlement on its territory. On this question and the possibility of an Israeli offensive against Rafah, a city straddling the Gaza/Sinai border, Egypt has hinted that its 1979 peace treaty with Israel could come into question. It is unlikely that Egypt would walk away from the treaty, however. Such a move would damage its relations with Western powers. Moreover, the Egyptian armed forces and intelligence services would be reluctant to jeopardize relationships built up with their Israeli counterparts over decades. This includes Israeli approval of waivers allowing Egypt to deploy considerably more military assets in Sinai than specified in the treaty. Another consideration is Egypt’s growing dependence on Israeli natural gas.
The Sisi regime has sought to play up its role as a constructive regional force for stability and security in the face of multiple threats both inside and outside the country; however, its human rights record and the severe limits on expression and political participation dent this representation. The regime came into power through a military coup in 2013, during which over a thousand supporters of the previous regime were killed. Since then, tens of thousands of people have been detained on political grounds. The U.S. has continued to provide military aid, but there have been periodic deductions on human rights grounds. The government has responded with piecemeal gestures to placate its critics. Several European Union (EU) member states have also strongly criticized the Sisi regime, but others — France, Italy and Germany — have increased economic aid and weapons sales. Egypt occasionally makes small concessions, for example, lifting travel bans on several prominent human rights activists in March 2024 days after the EU announced a 7.4-billion-euro economic support package.
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Successive investment laws passed since 1974 have included guarantees against expropriation. The current law, No. 72 of 2017, reiterates these guarantees. Investments are protected against nationalization. Expropriation is only permitted where it can be established that it is in the national interest.
The government has launched a new investment strategy aimed at reducing the presence of the state sector, including the military, in the economy. It is offering at least 35 companies for privatization — targeted at Gulf Arab investors in particular — as well as courting foreign investment more broadly. There may, however, eventually be a popular backlash against the extent of foreign ownership of Egyptian assets. This could be prompted by the behavior of the new owners, for example, if they lay off workers, strip assets, starve projects of investment or transfer excessive dividends. On balance, however, the risk of expropriation will remain low for the time being.
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The security services impose tight surveillance on civil society. This limits the scope for organizing protests, even though there is widespread resentment at the lack of civic freedoms and the rise in the cost of living. The Gaza conflict has intensified anti-Israeli sentiment, but the power of the security state is a deterrent against active protest. The 2023 presidential election passed off without serious incident.
Ultimately these factors could lead to a spontaneous uprising similar to the one in 2011, which would unleash a violent response from the authorities. The Sisi regime itself has a narrow base, with power concentrated in the General Intelligence Service. The frequent replacement of senior officers in the army and other intelligence agencies indicates that Sisi is wary about the possibility of a challenge to his regime coming from within the military establishment.
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The Gaza conflict has created a wide range of potential terrorist threats for Egypt. The Sinai Peninsula has seen a long-running struggle between the security forces and armed Islamist insurgents, but its potency has diminished in recent years. The government was quick to rule out any large-scale relocation of Gaza Palestinians in Sinai. This would have risked alienating local tribes while storing up problems for the future if those Palestinians sought to organize armed operations against Israel. At the same time, the Gaza conflict has brought benefits to prominent tribal figures with military connections. They have benefited from the stepped-up international aid effort, and they will be in a position to reap gains from any eventual reconstruction. The strong presence of the military and tribal militias in this area will lower the terrorism risk.
Regional actors such as the Houthi group in Yemen will continue to pose a terrorism risk. They have already harmed Egypt through attacks on shipping that have cut Suez Canal revenue by more than half. One potential terrorist target is the pipeline system bringing Israeli gas to Egypt. Most of this is undersea, but onshore facilities could once more come under attack, as happened in 2011 – 2012 when the pipeline was used to transport Egyptian gas to Israel.
Egypt’s chronic foreign exchange shortage has been resolved for now, through agreements with Abu Dhabi and multilateral agencies. These deals will generate inflows of more than $50 billion over the next three years. A significant portion of this has already entered the financial system as part of a $35 billion deal with Abu Dhabi Developmental Holding Company (ADQ), a government-owned investment fund, to develop land around Ras el-Hikmah, a resort town on the Mediterranean.
This deal allowed the Central Bank of Egypt to proceed with currency flotation in early March, triggering a 40% devaluation. Without the Abu Dhabi funds, a much larger devaluation would have been necessary to close the gap between the official and black-market exchange rates. The currency has since appreciated as dollar savings and remittances have flowed into Egyptian pound deposits, with the attraction of a 600-basis-point hike in interest rates.
Importers and foreign companies looking to repatriate dividends will find it much easier to manage exchange transfers thanks to the increase in foreign currency liquidity in the banking system; however, much depends on whether the central bank will remain committed to the flotation. In the short term, the Egyptian pound is likely to appreciate against the dollar and euro. The real test of the policy shift will come when the currency comes under pressure to depreciate. Trade sanctions risk remains low.
The capital inflows from the Ras al-Hikma deal, a $8 billion IMF agreement, and some $16 billion in pledged finance from the World Bank and the EU will help Egypt to deal with a daunting debt service schedule in the next two to three years. This includes about $1.6 billion per year in interest payments on its stock of $30 billion in sovereign bonds, plus $3.5 billion in principal repayments up to mid-2025. There is also $11.8 billion to be repaid to the IMF in 2024 – 2025, mostly involving principal on the $12 billion loan that was approved in November 2016. Credit default swap spreads on Egyptian bonds have fallen sharply from over 1,500 basis points to around 500, reflecting the improvement in market sentiment about the medium-term sovereign default risk.
