Index trend
Previous quarterly editions
Expropriation risk: 59 57 56 56 ► Political violence risk:68 67 67 68 ►Terrorism risk:55 58 58 58 ►Exchange transfer and trade sanction risk: 63 63 44 44 ►Sovereign default risk:82 82 65 65 ►
Overall Risk Temperature: 62 (Significant 1) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
4
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
Egypt is implicated to varying degrees in multiple conflicts along its borders and in the wider region. The country is not militarily engaged in these conflicts directly but has employed gray zone actions to protect its interests. The main conflicts are Israel-Palestine and its extensions to Lebanon and Iran, Sudan, Libya, Ethiopia and Yemen. Other interested regional parties with which Egypt must deal in relation to these conflicts include the United Arab Emirates, Saudi Arabia and Turkey.
Egypt’s formal role in the Gaza war has been that of a mediator in the efforts to broker a ceasefire between Israel and Hamas. At the same time, Egypt has taken gray zone actions through beefing up its military presence along the border with Gaza in response to the occupation of the Philadelphi corridor along that border by the Israel Defense Forces and in reaction to Israeli accusations that Egypt had enabled Hamas arms smuggling.
Egypt’s core interest has been to block any mass transfer of Palestinians from Gaza to northern Sinai. In this, Egypt has broad support from regional and international allies. President Abdel-Fattah el-Sisi has to take account of the strong popular support for the Palestinian cause in Egypt and among sections of the military high command. Under his rule, the military has been strengthened both in its economic role and in the capability of its various forces, thanks to diversification of procurement to include not just the U.S. but also France, Italy, Russia, Germany and China.
It will take some time for the new materiel to be deployed effectively, but there is little question that sections of the military high command continue to view Israel as Egypt’s central military challenge. Conversely, Egypt has developed heavy dependence on imports of natural gas from Israel. For this reason, Egypt will prioritize de-escalation: Full-scale war between Israel and Hezbollah/Iran would lead to a shutdown of Israel’s offshore gas installations. In this context, the rapprochement with Turkey may help Egypt to move forward with plans to link gas fields in Cyprus to its systems.
Egypt’s gray zone action in Sudan is on a smaller scale than that of the many other actors involved in the conflict. Egypt has backed Sudanese Armed Forces (SAF) leader General Abdel-Fattah Burhan, but it has also maintained contacts with Rapid Support Forces (RSF) leader Mohamed Hamdan Dagalo (Hemedti). Whereas other gray zone actors are looking to profit from the Sudan conflict — whether through extracting resources such as gold and oil or through securing strategic footholds along the Red Sea coast — Egypt is focused on trying to broker a political settlement in the interest of stemming the flow of refugees over the border and enlisting Sudanese support on the Grand Ethiopian Renaissance Dam issue. Egypt is also concerned to prevent other parties establishing naval bases on Sudan’s Red Sea coast — whether that be Russia or Iran (supporting the SAF) or the United Arab Emirates (U.A.E.) (supporting the RSF). The free-for-all trading in Sudanese gold also cuts across Egypt’s efforts to attract reputable global mining companies to develop its gold resources along the Red Sea to the north of the border with Sudan. Another consideration for Egypt is the actions of the Libyan National Army (LNA), which Egypt broadly supports within Libya. The LNA is a major source of fuel and arms for the RSF, in return for smuggled gold.
In Sudan and in the Horn of Africa, Egypt is in effect the target of aggressive gray zone activity by the U.A.E., despite the U.A.E. ostensibly being one of Egypt’s key regional allies and a vital source of aid and investment. The U.A.E. has been supportive of Ethiopia in the interest of developing its naval presence on the Red Sea. This has dismayed Egypt, as the U.A.E.’s support benefits Ethiopia in the Grand Ethiopian Renaissance Dam issue. The U.A.E. already has a strong presence in Djibouti and Somaliland through DP World, the operator of port facilities in both countries. Ethiopia relies on Djibouti for access to the sea, and it has recently acquired a port access agreement with Somaliland. Egypt, meanwhile, has been building up its security relations with Somalia, in a move to counter the U.A.E.-Ethiopia alliance. There have also recently been overtures toward Eritrea.
The recent improvement in relations with Turkey has been a boost for Egypt in its dealings with both Libya and Somalia. Turkey has a strong involvement in both countries. This was previously a source of tension, but the two powers are now working more cooperatively.
The most consequential gray zone activity in terms of its direct impact on Egypt has been the ongoing Yemeni Houthi blockade of the Red Sea. This has cut Suez Canal traffic by over half, hitting one of Egypt’s main sources of foreign exchange revenue and impairing efforts to attract more investment to the Suez Canal development zone. Egypt has held back from direct confrontation with the Houthis, however. In common with other Arab parties that have been affected, notably Saudi Arabia, Egypt is wary of being perceived as helping the Israeli war effort, in light of the Houthis’ assertion that their actions are in support of Palestine.
TREND ►
Successive investment laws passed since 1974 have included guarantees against expropriation. The current law, from 2017, reiterates these guarantees. Investments are protected against nationalization, and expropriation is only permitted where it can be established that it is in the national interest.
The government is focused on attracting more foreign investment. This has included the restoration in July 2024 of the post of investment minister after a five-year hiatus. The minister is Hassan el-Khatib, a former banker. Under the current regime, any shift toward a more nationalist policy that might include expropriation is highly unlikely. However, the heavy involvement of the military in the economy means that investors will continue to face potential obstacles from a powerful and largely unaccountable institution.
Some recent deals have attracted criticism on the grounds of erosion of sovereignty. In February 2024, the government announced its largest-ever foreign investment deal, involving the development of 170 square kilometers of land around Ras el-Hikmah, a resort town on the Mediterranean, 215 kilometers west of Alexandria. ADQ, an Abu Dhabi investment fund, will own 65% of the project, with upfront payments of $35 billion in total: $24 billion for development rights and $11 billion through the conversion of Abu Dhabi deposits with the Egyptian central bank into grants.
The deal was highly advantageous to the government in the short term, but there has been little scope for public scrutiny of its implications in the longer term. Likewise, questions have been raised about the benefits to Egypt of AngloGold Ashanti’s proposed $2.5 billion takeover of Centamin — Egypt’s largest gold producer. These criticisms are marginal, however, and will have little impact on policy unless there is a change in the political regime.
The Egyptian security services impose tight surveillance on civil society, which limits the scope for organizing protests. Tens of thousands of people have also been detained on political grounds. There is widespread resentment at the lack of civic freedoms and at the rise in the cost of living, and the Gaza conflict has served to intensify anti-Israeli sentiment. However, the power of the security state is a deterrent against active protest. The end-2023 presidential election passed off without serious incident.
Ultimately these sources of discontent could lead to a spontaneous uprising along the lines of 2011, which would unleash a violent response from the authorities. The regime itself has a narrow base, with power concentrated in the General Intelligence Service. The extensive turnover of senior officers in the army and other intelligence agencies indicates that the president remains wary of the risk of a challenge to his regime coming from within the military establishment.
The Gaza conflict has created a wide range of potential terrorist threats for Egypt. The stretch of northern Sinai running from the Gaza border to the Suez Canal has seen a long-running struggle between the security forces and armed Islamist insurgents with links to some of the major tribal groups. The potency of this insurgency has diminished in recent years, and the central government has cultivated support from tribal leaders through promising economic development.
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, as they have been able to derive profits from the stepped-up international aid effort, and they will be in a position to reap gains from any eventual reconstruction.
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 being used to transport Egyptian gas to Israel.
Egypt’s chronic foreign exchange shortage has been resolved for the time being, thanks to a series of agreements with Abu Dhabi and multilateral agencies that 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 the $35 billion Ras al-Hikma deal with ADQ, an Abu Dhabi government-owned investment fund.
This deal allowed the Egyptian central bank to press ahead with the flotation of the currency, 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. The real test of the policy shift will come when the currency comes under pressure to depreciate.
The risk of trade sanctions is low.
The capital inflows from the Ras al-Hikma deal, the $8 billion IMF agreement, and some $16 billion in pledged finance from the World Bank and the European Union 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 600, reflecting the improvement in market sentiment about the medium-term sovereign default risk. The net international reserves of the central bank have risen by more than $10 billion since February to about $46 billion, and the net foreign assets of the banking system have returned to a surplus after falling into deficit in early 2022.
