Record levels of insurance cost on Egyptian debts

"The burden of servicing the external debt amounted to USD4.8 billion from July to September during the fiscal year 2022-2023." (Photo: by Shutterstock).

Debts fell to USD155 billion, and US dollar futures jumped, explains Ahmad Abdul-Rahman.

Despite the continued decline in Egyptian debts, the confidence of Egyptian bond investors has declined. This is only two months after the conclusion of a financing agreement worth USD3 billion with the International Monetary Fund (IMF).

According to Bloomberg, Egyptian debt default swaps rose at the fastest pace worldwide in February, except for Ecuador. However, signs of distress appeared in the bond market. Derivatives show the risk of further currency depreciation in the near future.

The Bloomberg report showed that doubts about Egypt's progress in pursuing asset sales and its commitment to a more flexible exchange rate, pushed margins on some long-term government bonds to nearly 1,000 basis points above US Treasury bonds. This represents the minimum debt that should be considered non-performing.

The cost of insuring Egyptian debt against default rose to about 1,200 basis points, up from a nine-month low of 720 points last January. The Bloomberg report also stated that Egypt needs to accelerate the sale of assets and adopt a flexible exchange rate over the next two years, if it is to bridge the external financing gap and avoid defaulting. Bloomberg also noted that the failure to implement these reforms significantly increases the medium-term risks (including of insuring against debt relief).

A few days ago, the Central Bank of Egypt (CBE) announced that the balance of Egypt's external debt decreased. At the end of last September, it recorded USD155 billion, a decrease of USD700 million, or 0.5 per cent, compared to the end of June 2022. The CBE said that this is because of the decline in the exchange rate of the most borrowed currencies against the US dollar by a total of about USD2.7 billion. This is in addition to an increase in the net user of loans and facilities by about USD2 billion.

The bank said that the burden of servicing the external debt amounted to USD4.8 billion from July to September during the fiscal year 2022-2023. The bank added that the installments of debt service paid amounted to about USD3.2 billion and the paid interest amounted to about USD1.6 billion. The CBE said that the ratio of the balance of external debt to GDP amounted to about 32.4 per cent at the end of September 2022. This is still within safe limits according to the international standards set by the IMF.

The report attributed the decline in Egyptian debt to the decline in the exchange rate of most currencies against the US dollar, by about USD2.7 billion. This is in addition to an increase in the amount of used loans and facilities by about 2 billion dollars.

Data from the Egyptian Ministry of Finance revealed an increase in interest expenses on Egypt's debt during the first half of the current fiscal year of 36.2 per cent on an annual basis. According to the ministry's monthly report, debt interest expenses rose to EGP392.84 billion (USD12.721 billion) during the period from July to the end of last December, compared to EGP288.36 billion (USD9.338 billion) during the same period of the last fiscal year.

The losses of the Egyptian pound against the dollar do not stop

The foreign exchange reserves of the CBE rose to USD34.352 at the end of last February, an increase of about USD128 million from January 2023.

The Egyptian currency has also recorded the largest wave of losses in its history against the US dollar. The exchange rate of the dollar jumped from the level of EGP15.74 at the end of the first quarter of last year, to about EGP30.95 now. A few days ago, a group of international banks predicted that the Egyptian pound would lose about 10 per cent of its purchasing power against the dollar, to reach an exchange rate of EGP35 during the coming transactions.

The futures contracts for the Egyptian pound against the dollar fell to EGP38 per dollar for the first time for a year, amid anticipation among circles of a fourth flotation of the pound during the current month. The Egyptian pound futures contracts for April fell to EGP32.4, with the continued decline in the exchange rate in local banks

Egypt is facing a foreign currency shortage crisis, the worst in years, in light of the recent increasing pressure on the Egyptian pound, due to the repercussions of the Russian-Ukrainian war. For this reason, Egypt is actively seeking to attract foreign direct investments and foreign inflows to the local debt market.