Previous Quarterly Editions
Expropriation Risk: 60 59 59 59 ►Political Violence Risk:66 66 66 68 ▲Terrorism Risk:61 58 58 55 ►Exchange Transfer and Trade Sanction Risk: 63 63 63 63 ►Sovereign Default Risk:74 82 82 82 ►
TREND ►
Protest intensity to date* 2022 2023 Low Low Unrest risk in 2024**Cost of living: Very-HighAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
Egypt faces enormous challenges in coping with its elevated level of public debt. Most of this debt is domestic, but the foreign component has increased rapidly in recent years, and it now amounts to about US$85 billion out of total external debt of US$165 billion (made up mostly of Gulf Arab deposits with the central bank and borrowing by commercial banks).
The government has a medium-term strategy of reducing its public debt through generating primary fiscal surpluses amid steadily rising real GDP growth. The budget has continued to show primary surpluses of between 1% and 2% of GDP, but public debt is rising, partly because the budget costs of servicing the debt have been pushed up by higher interest rates. Public debt has climbed back over 90% of GDP, and it will be hard for the government to get back on track toward its target of bringing it below 80% of GDP by 2027.
According to the Ministry of Finance, interest on public debt now accounts for almost 40% of total budget expenditure. As global interest rates have risen, the foreign component of Egypt’s budget debt servicing is starting to increase — but from a low base of below 10% of total interest costs in the past two years.
The annual inflation rate reached 37.4% in August 2023, based on the Consumer Price Index, while core inflation was 40%. The central bank has hiked interest rates by a cumulative 1,100 basis points since March 2022, with its main operation rate now standing at 19.75%. Further rate rises may be ahead if the government complies with the demand from the International Monetary Fund (IMF) for it to relaunch the flexible exchange rate system, which was frozen in March 2023.
A devaluation is expected after the presidential election, which has been brought forward three months to December 2023. This is likely to trigger a fresh spurt in inflation, although the inflation rate should start to come down from mid-2024, if only because of base effects.
President Abdel-Fattah el-Sisi appears to have recognized that Egypt cannot afford to keep the IMF waiting indefinitely for the exchange rate reform that is required for the disbursement of fresh tranches from the US$3 billion Extended Fund Facility that was signed in December 2022. At the same time, he would not want to devalue the currency before the election, even though he is unlikely to face any credible opposition.
Sisi is also trying to assuage public discontent at the rising cost of living through a range of compensatory measures. These have included four increases in the state sector minimum wage since July 2022, the most recent of which was in mid-September, shortly before the election date was set. The government has also boosted benefit payments under programs aimed at the poorest families, and the income threshold for paying income tax has been raised twice. Cairo has made minimal increases to fuel prices, which are supposed to be indexed to actual costs, and plans to raise electricity tariffs so as to eliminate consumer subsidies have been deferred for the second year running. There has been no mention of cutting the bread subsidy.
The IMF is likely to accept the need for most of these compensatory measures, as long as the government sticks by its commitments to the flexible exchange rate and structural reforms. There is a risk that the relentless pressures on living standards will trigger popular protests, but these are unlikely, given the widespread fear of Sisi’s security apparatus.
Successive investment laws passed since 1974 have included guarantees against expropriation. The current law — introduced in 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 has launched a new investment strategy that is aimed at reducing the presence of the state sector, including the military, in the economy. To this end, it is offering at least 35 companies for privatization — targeted at Gulf Arab investors in particular — as well as courting foreign investment across the board.
If this program is successful, there may 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; however, that is a remote prospect, and the risk of expropriation will remain low for the time being.
TREND ▲
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; however, the power of the security state is a deterrent against resistance.
Ultimately, this could lead to a spontaneous uprising along the lines of 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 extensive turnover of senior officers in the army and other intelligence agencies indicates that Sisi remains wary of the risk of a challenge to his regime coming from within the military establishment.
The presidential election is likely to be tightly policed. Sisi is almost certain to win a third term, but the turnout is likely to be low.
Armed Islamist groups remain active in northern and central Sinai. Their potency has been diminished since the armed forces launched a major counterinsurgency operation in 2018, but they have by no means been eradicated. The frequency of terrorist incidents in major population centers has decreased markedly in the past three years.
The chronic shortage of foreign exchange within the Egyptian financial system has led to increasing difficulties for businesses and individuals seeking to transfer funds abroad. The parallel foreign exchange market has reemerged after being dormant for the past five years.
Arrears on payments due to international oil companies for natural gas have started to mount up. In another symptom of the crisis, the net foreign assets of commercial banks have fallen into a widening deficit, which reached about US$15 billion in mid-2023.
The market is awaiting a fresh devaluation at the end of 2023. In the meantime, there are some bright spots in the balance of payments: Foreign direct investment is rising, on the back of asset acquisitions by Gulf Arab investors; tourism is growing rapidly; exports have reaped some benefits from devaluation; and Suez Canal revenue has increased significantly in the past two to three years.
Egypt faces a daunting debt service schedule in the next few years. This includes about US$1.6 billion per year in interest payments on its stock of US$30 billion in sovereign bonds, plus US$3.5 billion in principal repayments up to mid-2025. The government should be able to cope with this; however, US$11.8 billion must also be repaid to the IMF in 2024 to 2025, mostly involving principal on the US$12 billion loan that was approved in November 2016.
Negotiations about the possibility of stretching out these repayments or increasing the most recent IMF loan to help Egypt to meet its obligations are likely to occur. Credit default swap spreads on Egyptian bonds shot up from around 500 basis points to 1,500 in March 2023, after the government reverted to a fixed exchange rate system. They have remained elevated ever since but will come down if the government reaches an agreement with the IMF on the first and second reviews of the December 2022 loan.
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