Previous Quarterly Editions
Expropriation Risk: 60 59 60 59 ▼Political Violence Risk:67 67 66 66 ►Terrorism Risk:59 61 61 58 ►Exchange Transfer and Trade Sanction Risk: 55 63 63 63 ►Sovereign Default Risk:66 74 74 82 ▲
TREND ▲
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Low LowAll protest: Low Low
Cost-of-living protest risk in 2023*Wage protest: Medium Food/fuel policy protests: 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 calculations, see the introductory essay.
Inflation reached record levels in the first quarter of 2023, putting severe pressure on household spending. The government has taken steps to ease these pressures by increasing salaries, pensions, and social benefits, while maintaining extensive subsidies on basic commodities.
The Central Bank of Egypt has pushed up interest rates in response to the inflationary surge, which in turn has squeezed private sector credit. This is the second inflationary surge the Egyptian public has had to endure during the presidency of Abdel-Fattah el-Sisi. He was originally elected in 2014, following the coup he executed the previous year against Mohammed Morsi. Sisi is expected to seek re-election in early 2024 for a third term.
The deterioration in living standards has raised questions about Sisi’s stewardship of the economy. However, there is little political space for any credible rival to emerge. This highlights the risk of a popular insurrection inspired both by the rise in the cost of living and the repressive nature of the Sisi regime. However, there is little evidence Egyptians are prepared for another mass uprising. The Sisi regime also enjoys considerable external support, as there is a consensus in the West and in the Gulf Arab states that a fresh political upheaval in Egypt would have damaging effects on regional stability.
The headline inflation rate, based on the Consumer Price Index, rose above 30% in February to its highest level since mid-2017. The food basket, which has a one-third weighting in the Index, showed a year-on-year increase over 61.8%. Core inflation – calculated by the central bank and excluding volatile items – reached 40.3%, well above the previous record of 35% set in July 2017.
The main driver of inflation is the 50% depreciation of the Egyptian pound since March 2022. The central bank carried out a series of devaluations after about USD20 billion in portfolio investment was withdrawn between October 2021 and March 2022, in reaction to U.S. rate hikes and Russia’s invasion of Ukraine in February 2022. Gulf Arab states – Saudi Arabia, the United Arab Emirates and Qatar – helped to bolster foreign reserves by depositing USD13 billion with the central bank. Gulf investors have also invested several billions of dollars in acquiring share-listed Egyptian assets, and they are preparing to invest more through taking strategic stakes in state-owned companies.
The government has also signed a 48-month extended fund facility with the IMF, although for a relatively small amount of USD3 billion, because Egypt has gone over its quota. Exchange rate flexibility is a core commitment in the IMF deal. This means that the Egyptian pound may depreciate further, which could push up inflation.
Another issue is energy subsidies. According to the previous IMF deal, signed in 2016, the government has set up a system to adjust petroleum product prices in line with actual cost every three months, with a maximum variance of 10%. Prices of petrol have been regularly increased since March 2022, reflecting the rise in crude prices and the depreciation of the local currency. However, there has only been one increase in the diesel price. In March 2023, after a delayed first-quarter adjustment, the diesel price was unchanged in local currency terms, but it has fallen to the equivalent of just 24 U.S. cents per litre in dollar terms, among the lowest in the world.
The government may be obliged to hike diesel prices as a condition of passing the first review of the new IMF programme. This would feed through into further increases in costs for food production and distribution.
Mitigation measures have included a minimum EGP1,000 per month increase in state salaries, a further hike in the minimum wage to EGP3,500 per month (it was previously increased in July and October 2022), a 15% hike in pensions, and a 25% increase in cash benefits for about 20 million people enrolled in the World Bank-backed Takaful and Karama schemes, ‘social safety net’ schemes targeted at vulnerable groups.
Inflation is likely to start to ease in the second half of 2023, but it is doubtful whether it will return to single digits until 2025. The IMF is likely to show some latitude on
applying austerity measures across the budget spectrum, but the Fund will insist on exchange rate flexibility.
TREND ▼
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 nationalisation, and expropriation is only permitted where it can be established that it is 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 32 companies for privatisation – targeted at Gulf Arab investors in particular – as well as courting foreign investment across the board.
If this programme is successful there may eventually be a popular backlash against the extent of foreign ownership of Egyptian assets. This could be prompted by the behaviour of the new owners, for example if they lay off workers, strip assets, starve projects of investment, or transfer excessive dividends. However, that it 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, limiting the scope for organising 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 Sisi remains wary of the risk of a challenge to his regime coming from within the military establishment.
Armed Islamist groups remain active in northern and central Sinai. Their potency has been diminished since the armed forces launched a major counter-insurgency operation in 2018, but they have by no means been eradicated. The frequency of terrorist incidents in major population centres has decreased markedly in the past three years.
Egypt has experienced severe foreign exchange shortages since the USD20 billion outflow of portfolio investment between October 2021 and March 2022. The authorities have responded through devaluing the currency and imposing import curbs. Following a change of leadership at the central bank in August 2022, Egypt allowed the local currency to depreciate further, while reining in the imports. These actions were a pre-condition for IMF support.
The foreign exchange pressures continued while the estimated USD14 billion import backlog was cleared, a process that is now almost complete. The current account has been boosted by strong growth in exports, led by liquefied natural gas and energy-intensive products such as fertilizers, petrochemicals, iron, steel, and aluminium. Tourism is also staging a strong recovery, and annual Suez Canal revenue has increased to about USD8 billion from a previous average of USD5 billion.
Remittances have been supported by the strength of the economies of the Gulf, where more than four million Egyptians work. The capital account has been supported by the USD13 billion in Gulf deposits and by strong inflows of foreign direct investment. These reached USD9 billion in the first nine months of 2022, the best performance since the mid-2000s.
On the other side of the balance sheet, Egypt’s import costs have been inflated by the rise in global commodity prices, and foreign debt-servicing costs have risen as external borrowing has increased over the past ten years.
Egypt’s default risk has soared in recent months, with the credit default swap spread spiking at over 1,000 basis points during market turbulence in October 2022 and March 2023. This implies a market perception the risk of Egypt defaulting on its stock of about USD30 billion in sovereign bonds is more than 20%.
Despite the elevated risk perception, Egypt managed to raise USD1.5 billion in three-year sovereign sukuk in February. There was a strong response to the issue, which was priced at 10.825%, compared with the initial offer price of 11.625%.
The government used part of the proceeds to pay off a maturing bond of USD1.25 billion. Further bond repayments totalling USD2.5 billion are due by mid-2024. The government is also paying regular instalments of its earlier USD12 billion loan from the IMF. These will continue until late 2026.
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