Thursday,20 September, 2018
Current issue | Issue 1279, (21 - 27 January 2016)
Thursday,20 September, 2018
Issue 1279, (21 - 27 January 2016)

Ahram Weekly

More loans?

The 25 January Revolution led to the drainage of Egypt’s foreign currency resources, pushing the country to rely more on foreign aid and loans, writes Sherine Abdel-Razek

Al-Ahram Weekly

Back in mid-2011, a few months after the toppling of former president Hosni Mubarak, it was clear that the political turmoil had driven tourists and investors away from Egypt and the country would need to find an alternative source of finance.

It was then that talk of acquiring a loan from the IMF first surfaced, but Samir Radwan, the then finance minister, said that after a dialogue between the ruling Supreme Council of the Armed Forces (SCAF), political activists and members of civil society, it had been decided not to take out the loan in order not to increase the country’s debts.

This was followed by several rounds of negotiations to acquire a loan in the neighbourhood of $3.2 billion in 2011, increasing to $4.8 billion in 2012 and 2013, and speculation that said it would be around $6 billion at the middle of last year.

Throughout the first four years of the revolution, it was obvious that the authorities wanted to undertake reforms at their own pace while relying on financial handouts from the Gulf countries.

Since the revolution, an influx of billions of dollars of financial support from first Qatar during Muslim Brotherhood rule in 2012-2013 and then from Saudi Arabia, Kuwait and the UAE, following the 30 June Revolution in 2013, prevented Egypt from falling into an economic abyss.

The exact figure of these funds is nowhere to be found, but some observers put it in the neighbourhood of more than $40 billion in grants, loans and investments.

Eman Negm, an economic analyst at Prime Securities, said that since the 25 January Revolution the economy has needed foreign loans, especially those securing the country’s need for oil after the energy shortages that hindered growth, and for paying import dues.

“The need increased with the deterioration in the country’s main sources of foreign currency, like tourism, that was and still is being affected by security incidents, the Suez Canal revenues that are being negatively affected by the global recession affecting the flow of international trade, a cautious approach of foreign investment due to energy and foreign exchange shortages, and the still-persisting constraints faced by the country’s exports, harming its revenues and widening its trade deficit,” Negm said.

Jason Tuvey, a London-based analyst at Capital Economics, put the gap between Egypt’s foreign currency receipts and needs at some $15 billion a year by 2017 in June.

However, negative economic developments over the last six months have made the need to resort to foreign borrowing agencies inevitable. The currency crisis in emerging markets triggered by the devaluation of the Chinese currency has pushed the stock market downwards, to end 25 per cent lower last year than the previous year. This trend continued during the first two weeks of 2016, when the main market gauge, the EGX30 index, lost 18 per cent of its value.

The country’s balance of payments is showing a huge deficit, with cheaper oil prices failing to contain the imports bill and foreign investment and grants being much lower than expected. Things are not expected to improve soon, as tourism, by far the largest foreign currency earner, has suffered after the crash of a Russian passenger plane in Sinai in October.

This foreign-currency squeeze is fueling speculation that the authorities will be forced to further devalue the Egyptian pound, making the future of the currency linked to Egypt’s success in attracting external financing.

Adding to the gloominess of the picture is the decline in oil prices to less than $30 per barrel, which has been shaving off a chunk of the main income of the Gulf economies, causing the largest economy of them all, that of Saudi Arabia, to register a deficit in its budget for the fiscal year 2015-2016.

This is feared will lead to a cut in Gulf assistance to Egypt. However, the political motives behind the financing mean that this looks unlikely, according to Capital Economics.

In mid-December, Bloomberg quoted an unnamed official as saying that the Egyptian authorities plan to hold talks with Saudi Arabia, Kuwait and the United Arab Emirates to secure more investments, development aid and possible foreign-exchange deposits at the Central Bank, as well the supply of oil and non-oil products.

These soon materialised with Saudi Arabia announcing it is investing $8 billion in Egypt through its public and sovereign funds, with inflows beginning immediately. This is in addition to Egypt’s renewal of a deal to import Saudi oil products for five years on favourable terms.

“While we believe the Gulf countries will continue to provide support for Egypt in the near term, the key point is that over a longer horizon this is not sustainable,” Tuvey noted.

“This is for two reasons. First, the financial support from the Gulf is subject to political whim and could be shut off at any time. And second, unlike private foreign capital inflows, it isn’t necessarily being funneled into areas where it can be used to raise productivity levels, and thus living standards.”

Another worrisome fact is that resorting to the international markets to borrow through Eurobonds is no longer an option for Egypt. While its debut in the international debt markets after five years of absence back in June was highly welcome, with a $1.5 billion issue three times oversubscribed, the Ministry of Finance decided in November to shelve a plan to tap the market again.

In addition to the emerging markets turmoil resulting from China’s shock devaluation and US interest rate increases, the local economic fundamentals are much worse than they were six months earlier.

Foreign reserves are still disappearing, and a vague forex policy makes it unpredictable if and when a devaluation will happen. This uncertainty will definitely mean a higher yield on bonds than that paid on the $1.5 billion issue sold in June.

The possibility of inking a deal with the IMF is not far-fetched, given that last month Egypt agreed with the World Bank to acquire a $3 billion loan as part of a financing package in three tranches, each tranche linked to the implementation of certain reforms.

“Borrowing from the IMF doesn’t seem to be an invalid solution anymore, especially after the recent negotiations for acquiring $1 billion from the World Bank, $500 million from the African Development Bank and $500 million from African Bank for Imports and Exports, all of which follow IMF recommendations,” according to Negm.

However, social pressures on the horizon will include fallout from the passage of the new civil service law, as the minister of planning has said that this law is a prerequisite to get the loans.

Sara Saada, chief economist at HC Securities, said that with the structural reforms on the government agenda, including the value-added tax (VAT) and subsidy cut programme, Egypt might witness better borrowing opportunities.

Egypt is already enacting some policies the IMF typically requires as conditions for loans. Egypt slashed fuel subsidies in 2014, and it aims to cut its budget deficit by at least 1.5 percentage points to 10.5 per cent of economic output this year.

“The IMF deal is the best option for Egypt in order to place its external position on a more sustainable footing. The fact that the release of funds will be contingent on the government meeting certain targets means that these will act as an anchor for reform,” Tuvey said.

“This should help to attract more private foreign capital back into the country, and it will also untie billions of dollars of aid previously pledged to Egypt that hinged on a deal with the IMF,” he added.

At almost $46 billion, the country’s level of foreign debt is, theoretically, within a safe ratio as it represents around 15 per cent of GDP, considered reasonable for an emerging country like Egypt, according to Negm.

Foreign debt peaked from 95.4 per cent of net international reserves (NIR) in fiscal year 2010-2011 to 269.3 per cent in 2013-2014, before dropping to the level of 201.6 per cent of NIR in March 2015 and continuing to drop with the repayment of the Paris Club debt installment in July 2015, of the $1.5 billion of US-backed government bonds, and of the $1 billion final tranche of the Qatari deposit in the fourth quarter of 2015. Egypt last week repaid $770 million to the Paris Club of donors.

Negm pointed out that the low level of loans is not the only criterion being used to decide the feasibility of getting more. “The loans are mainly being used to cover imports through the Central Bank’s weekly auctions or to repay previously acquired debts, rather than being devoted to growth and development. Such figures will burden the upcoming generations without reaping any benefit,” she warned.

add comment

  • follow us on