Previous Quarterly Editions
Expropriation Risk: 52 52 53 52 ▲ Political Violence Risk: 58 59 59 59 ► Terrorism Risk: 61 59 57 59 ▲ Exchange Transfer and Trade Sanction Risk: 64 55 55 64 ▼ Sovereign Default Risk: 75 75 75 74 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Despite significant wind and solar potential, Egypt’s progress on the path to decarbonisation is undercut by fiscal constraints and a desire to build up conventional energy connections with key trading partners.
The 2015 discovery of the Mediterranean’s largest natural gas field in Egypt’s territorial waters has catapulted the country’s ambitions to become a net exporter of natural gas. Egypt has since invested in export capacity and has partnered with other Mediterranean states including Israel and Cyprus to serve as a regional energy hub. The gas find has also been crucial to regime stability, allowing the government to address politically toxic power outages, while easing balance-of-payment pressures. Amid the Ukraine crisis, Egypt is rushing to increase natural gas output to capitalise on Europe’s desire to wean itself off Russian gas.
Egypt has also prioritised gas in its foreign policy, with Cairo as the headquarters for the East Mediterranean Gas Forum, composed of members such as Cyprus, Greece and Israel that Egypt has sought to use as a front against common foe Turkey, which has contesting claims to the eastern Mediterranean.
Egypt’s energy security needs and geopolitical rivalries therefore ensure that hydrocarbons -- and not renewables -- dictate government priorities. The country’s oil minister recently emphasised “the right of African countries to exploit their natural gas and petroleum resources as part of a just transition”, capturing the government’s outlook on calls for rapid decarbonisation.
The war has also sent the price of wheat soaring, which will inflate Egypt’s import and subsidy bill (Egypt is the world’s largest wheat importer). Fiscal and balance-of-payment pressures will constrain the government’s ability to allocate resources towards reducing the share of fossil fuels in Egypt’s energy mix.
However, as the host of the COP27 UN global climate action summit in November 2022, Egypt’s climate policies will come under the spotlight. COP27 will probably see the government commit to new targets for fossil fuel reduction, renewables generation capacity and energy efficiency. Egypt will face questions about its Nationally Determined Contributions, which are more descriptive than they are quantitative. An important focus of the summit will be the concept of ‘loss and damage’, which refers to the costs that countries are incurring from climate-related impacts and disasters- costs that disproportionately hit the world’s poor and vulnerable.
In COP26 2021, richer nations rejected a proposal by the world’s poorest countries to create anew loss and damage funding facility. At COP27, Egypt will want to be seen as advocating climate justice, that is, calling for a facility that raises money for developing nations so that they can meet the costs of loss and damage and do their part in adaptation.
Egypt currently generates 10% of its electricity from renewable sources. In 2018, the International Renewable Energy Agency said it would be feasible for Egypt to aim for 53% of power generation from renewable sources by 2030. These targets seem remote as Egypt’s economy reels from the successive shocks of COVID-19 and the Ukraine crisis. Russia and Ukraine represent Egypt’s two largest tourism markets, meaning that a nascent recovery in the country’s tourism sector has been dealt a huge blow.
TREND ▲
Amid fiscal constraints, Egypt is seeking investment in sectors ranging from power and water to mining and hydrocarbons. The country’s sovereign wealth fund is seeking partners to invest in 17 renewable energy powered desalination plants, highlighting the government’s desire to open the economy.
The oil and gas and real estate sectors remain the main foreign direct investment (FDI) plays but there is a focus on promoting manufacturing in the Suez Canal Economic Corridor project, to boost job creation. FDI inflows fell 12% to USD13.9 billion in fiscal year 2020/21 from USD15.8 billion the year before, reflecting COVID-19’s impact.
TREND ►
President Abdul Fattah al-Sisi has consolidated loyalists in Egypt’s intelligence and military services and enjoys full parliamentary support. A combination of rising food inflation and unemployment would indicate a rapidly rising risk of massed, economically motivated protests, though this remains unlikely given Egypt’s access to foreign finance and financial support from Gulf states. However, the rising cost of wheat remains a concern.
Meanwhile, the domestic crackdown on the Muslim Brotherhood is likely to continue, including expropriating its members’ assets, as Cairo continues to see the Brotherhood as a regime stability threat.
Last year, Islamic State claimed responsibility for a roadside bomb that killed eight members of Egypt’s security forces in the restive northern part of the Sinai Peninsula. The attack demonstrates that Egypt- especially the less developed North Sinai- remains vulnerable to the ambitions of extremist militants.
The Taliban takeover of Afghanistan after the international coalition’s departure in August 2021 may embolden regional jihadist groups.
In January, the International Monetary Fund (IMF) projected 5.6% economic growth for Egypt, on the back of a recovery in the tourism sector and continued capital expenditure by the government. However, those assumptions have been upended by the Ukraine crisis, which has proven a multi-layer shock to the Egyptian economy.
Ukraine and Russia together account for three quarters of Egypt’s wheat supply and are major sources of tourism. In March, as the crisis escalated, Egypt’s pound lost 16% of its value and the central bank responded to inflationary pressures by raising interest rates- for the first time since 2017- by 100 basis points. These steps are in line with economic orthodoxy and are expected to pave the way for another funding package from the IMF.
The government is unlikely to risk unnerving investor sentiment by imposing capital controls or restricting profit repatriation. Such steps would preclude Egypt’s access to IMF financing, which it is actively seeking to secure.
Rating agencies have not revised their Egypt ratings, a sign of confidence, even though Egypt’s debt-to-GDP (gross domestic product) had risen to around 84% before COVID-19 hit in 2020-21, given heavy government infrastructure spending. Additional financing needs created by the crisis in Ukraine will increase pressure on Egypt’s credit ratings.
Cairo has succeeded in lengthening the maturity structure of its debt burden, which will help to contain sovereign default risks. International reserves have also risen in recent months, though not yet to pre-COVID levels, reflecting the recovery in portfolio investments and access to emergency IMF support.
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