Previous Quarterly Editions
Expropriation Risk: 52 56 60 59 ▼Political Violence Risk:59 60 67 67 ►Terrorism Risk:57 59 61 61 ▲Exchange Transfer and Trade Sanction Risk: 64 55 55 63 ▲Sovereign Default Risk:66 57 66 74 ▲
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Egypt is among key regional U.S. allies that has chosen to remain neutral in the Russia/Ukraine crisis. While Egypt voted in favour of a UN resolution censuring Russia, the Arab world’s most populous nation has not enforced Western-led sanctions against Russia and has continued to strengthen cooperation with both Russia and China. The 25th edition of the St Petersburg International Economic Forum that Russia’s President Vladimir Putin hosted in June featured Egypt as the guest nation, with Egypt’s President Abdelfattah Al-Sisi providing a keynote address.
Egypt has resisted pressure from its U.S. and European allies to pare back its military and diplomatic cooperation with both Russia and China, two powers Washington treats as ‘strategic competitors’. Egypt has over the years stepped up its purchases of Russian weapons systems as a hedge against Washington’s willingness to freeze arms sales over human rights concerns, including earlier this year when the Biden administration withheld USD130 million in military aid from Egypt. As such, Egypt has become an increasingly significant buyer of Russian fighter jets, despite the risks of triggering U.S. sanctions.
Egypt’s control of the Suez Canal, one of the world’s most important maritime chokepoints and trade routes, makes it a strategically important partner to the U.S. and Europe. The standstill in global trade caused by last year’s Suez Canal obstruction underscored the route’s importance to global supply chains. Bordering the Gaza Strip, Egypt has also played a crucial de-escalatory role between Israel and armed Palestinian factions when conflict has flared up across there. Egypt’s 1979 peace treaty with Israel has been an anchor for stability in the region. Washington views favourably Egypt’s ever-deepening security cooperation with Israel, to combat terrorism and contain Iran’s regional ambitions.
Egypt and its Western partners therefore need each other in various security and economic realms. The European Union, U.K., and U.S. continue to be Egypt’s largest donors and creditors. Despite Egypt’s deliberate steps to diversify military purchases, Cairo by far still views relations with Washington as its most important bilateral relationship. This is partly because Washington brokered Egypt’s peace treaty with Israel and remains its single largest provider of foreign military assistance (USD1.3 billion per year). In the Egyptian state, where the military is the sole power broker, the need to preserve the U.S. security alliance dominates national security thinking.
The Sisi government, however, has shown greater willingness to foster ties with China and Russia. Egypt shares historic ties with both countries, having firmly been in the Soviet Union sphere of influence during much of the Cold War. More recently, Egypt has looked to China and Russia to finance mega-scale development projects that have become emblematic of the Sisi era.
In late August, as Russia and the West escalated their proxy confrontation, Egypt confirmed it was moving ahead with a nuclear power plant project that was awarded to Russia’s state-owned nuclear power company Rosatom. Similarly, Chinese firms, under the Belt and Road Initiative, have built port and rail infrastructure in Egypt and are anchor investors in Egypt’s New Administrative Capital, a cornerstone of Sisi’s development programme. While countries such as the U.K., the U.S. and the United Arab Emirates far outstrip China as the largest investors in Egypt, Beijing is quickly catching up, with Chinese foreign direct investment into Egypt growing 68% from 2015-20.
For Sisi, cultivating stronger ties with Russia and China helps counterbalance Egypt’s traditional political and economic dependence on the West. However, Egypt’s strategic orientation will continue to favour robust ties with Washington, given the latter’s enduring security commitments to Egypt and its expansive military footprint in the Middle East.
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The International Monetary Fund (IMF) has said Egypt needs to make “decisive progress” on deeper structural reforms to foster private sector development, improve governance, and reduce the role of the state in the economy. In a nod to these concerns, the government in mid‑June issued a strategy aimed at doubling the role of the private sector in total investment to 65% within three years (up from around 30%). In February, the president ordered the government to draw up a programme to attract USD10 billion in “private participation” over each of the next four years. This will involve floating stakes in 23 state-owned firms in a bid to attract USD40 billion in investment over the next four years. Some of the sectors offered up to the private sector will include electric vehicles, data centres, networks for oil and gas, and expansion of gas liquefaction plants. The privatisation drive suggests expropriation risks are low.
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Sisi has consolidated loyalists in Egypt’s intelligence and military services and enjoys full parliamentary support. A depreciating currency, which was devalued in March by 15%, to stem foreign currency outflows, has stoked a cost-of-living crisis, with Egyptians paying more for food and transport, as consumer inflation rose to 14.6% in August.
Despite these pressures, Egypt has not seen the sort of popular anger that a country such as Sri Lanka has experienced this year in response to higher consumer prices. This is partly because Egypt maintains much stronger financial buffers, allowing the Sisi government to continue with expensive bread and fuel subsidies that place a ceiling on prices. Egypt also maintains strong relations with the IMF and enjoys the financial backing of Gulf states, which view Egypt as a regional lynchpin. Furthermore, Egypt’s security services employ an array of surveillance methods and exercise a stranglehold over channels of dissent.
In May, Islamic State (IS) launched two surprise attacks in less than a week against Egyptian military positions in North Sinai, killing 16 soldiers. The attacks are among the deadliest in recent years. In 2018, Egypt launched a major counterinsurgency operation in the restive enclave of the Sinai Peninsula to root out IS elements there. The attack demonstrates that Egypt, particularly in the less developed North Sinai, remains vulnerable to the ambitions of extremist militants. Southern Sinai, which is popular with foreign tourists and is separated from the north by mountains and desert, has remained stable, with Sharm El-Sheikh in South Sinai hosting the UN climate conference, COP27, in November.
In January, the IMF projected solid 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 Russia/Ukraine crisis, which has proven a multi-layer shock to the Egyptian economy. Egypt is now in advanced talks with the IMF to secure a loan expected to be in the region of USD15 billion.
Ukraine and Russia together account for three quarters of Egypt’s wheat supply and are major sources of tourism. In March, as the conflict escalated, Egypt’s pound currency lost 16% of its value and the central bank responded to inflationary pressures by raising interest rates by 100 basis points, the first time since 2017. These steps are in line with economic orthodoxy and are expected to pave the way for another IMF funding package. The government is unlikely to exacerbate 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.
Egypt’s default risk rose to its highest level since 2013, the last time the country was rocked by mass protests. In May, Moody’s revised the outlook on Egypt’s debt to negative from stable, increasing the likelihood that Moody’s would downgrade Egypt in its next review. The agency cited Egypt’s tightening foreign exchange reserve situation and debt repayment obligations as factors. Egypt is looking at external debt service payments of USD25-30 billion over the next three years. The size of the country’s debt as a ratio of GDP is likely to reach 93.5% in fiscal year 2022.
As major central banks hike interest rates, Egypt’s borrowing costs have increased just as its portfolio outflows have accelerated, with the government estimating more than USD20 billion in outflows this year. As a major food importer, and being the world’s largest wheat importer, Egypt is highly vulnerable to the increase in global commodity prices, which have helped widen the country’s structural current account deficit.
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