Recent times have been tough
Egypt provides a clear – if cautionary – case study, highlighting some key themes seen in distressed, high-yield debt markets over the past few years. High-yield hard currency debt markets across the globe came under significant pressure in 2022 and 2023, with African markets caught in the eye of the storm. In addition to rising developed market yields, increased global recession fears and thinning liquidity, concerns around food security and external indebtedness weighed heavily on African markets amid a general souring of investor sentiment. As a result, the external funding tap was turned off abruptly for these markets. Credit rating downgrades ensued (for Egypt, multi-notch downgrades on its external debt in 2023), while resultant economic imbalances created a dysfunctional currency market – ultimately leading to Egypt’s removal from the JP Morgan GBI-EM local bond index.
With the country’s proximity to Israel and Gaza casting a shadow, the IMF’s recent decision to consider scaling up its programme helped to boost sentiment towards Egyptian assets. As for the country’s longer-term outlook, my trip to the bustling and vibrant capital gave cause for optimism, with various factors appearing to align to present a real chance of macro stability.
Stability in sight
An upsized IMF programme, together with increased funding from other bi-and multilateral partners (such as the EU, World Bank and EBRD) has the potential to inject almost US20 billion into the Egyptian economy over three years. That’s an ample sum for a potential stabilisation of credit ratings and an anchoring of investor sentiment – although both would take a significant amount of time to achieve.
My meetings pointed to positive dynamics around the IMF programme. First, I heard consistently that the IMF is adopting an increasingly accommodative tone on earlier sticking points relating to the pace of privatisation and the process of FX adjustments. Related developments on the domestic front are also encouraging. Egypt’s privatisation programme continues to tick along and new ‘mega’ projects – I learned a US$22 billon real estate deal is in the works – could provide positive surprises. Meanwhile, increased frustration at the incumbent president’s stewardship of the economy has given technocrats the upper hand for now, creating space for further monetary and fiscal tightening – both crucial for IMF support – at the expense of costly infrastructure projects.
Key areas to watch
While the exact path for exchange-rate policy and the Egyptian pound remains uncertain, as a base case, I think authorities will try to avoid mistakes of the past and at least initially allow a significant adjustment in the exchange rate and limit risks of re-fixing it below a fair clearing level. However, they will want the IMF to give them the leeway to defend the currency in the initial days and provide dollar liquidity.
While it appears that earlier fears around the economic impact of the conflict in Gaza have been allayed – with data shared by the Ministry of Tourism showing resilience and even improving tourist flows in aggregate – the impact of reduced Suez Canal traffic (resulting from disruption in the Red Sea) is real and will only accumulate over time. Longer term, an important consideration for Egypt’s macroeconomic outlook is whether the recent crisis will finally pave the way for a reduced role for the military in the private sector, with the privatisation programme reportedly poised to move its focus to military state-owned assets. That would represent a significant structural shift, with growth and private-sector investment implications.
Fiscal adjustments are never popular, and only time will tell how much scope the Egyptian authorities have domestically to enact further reforms. Externally, the potential for a renewed appetite for Egypt’s external debt is also uncertain, although healthy demand for Cote d’Ivoire’s recent issuance tentatively suggests brighter times lie ahead for other high-yield rated African nations seeking to access primary markets.
For investors with an existing allocation to Egyptian hard currency debt, it looks like conditions should remain supportive for credit spreads over the short term, provided the expected bilateral and multilateral support I learned of from the Egyptian authorities materialises. And while I still believe that an IMF disbursement will only be forthcoming once Egypt moves to a floating exchange rate, it might arrive quickly to help allay central bank fears around the need for upfront support.
An opportunity to turn the tide
There have been a number of false dawns for Egypt, as the inability to regain domestic confidence in the currency led to a stalemate between Egypt and its various partners. It seems that Egypt now has the opportunity to turn the tide from what was becoming an increasingly cautionary tale, and re-establish both macro stability and investor confidence.
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Specific risks. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
