Is Egypt finding its path towards economic recovery?

Days before Ramadan, the Egyptian regime made the bold move to hike interest rates and free-float its currency, causing the value of the Egyptian Pound (EGP) to fall from 30 EGP to the dollar to 49 EGP, effectively wiping out over 60% of its value.

Foreign investors have praised the move, but domestically there are fears about Egyptian assets falling in value, with even more expensive imports and slower economic growth due to the interest hike.

“With the FX close to 50 coupled with the big interest rate hike, enough has been done to restore investor confidence. It’s a much better story from an investor perspective,” Anthony Symond, investment director of emerging market debt at Abrdn, told The New Arab.

On the back of the devaluation and the IMF’s announcement to sign off a new $8 billion facility hours after the price fall, Egypt’s international bonds rallied up to 4 cents. Egypt’s bonds have risen steadily this year in anticipation of the IMF deal, making it one of the best-emerging market performers.

"Foreign investors have praised the interest rate hike and floating the currency, but domestically there are fears about Egyptian assets falling in value with even more expensive imports and slower economic growth"

Investors are drawn by the steep influx of money arriving into Cairo and the latest numbers will easily allow Egypt to cover its budget funding gap for the next few years. The $8 billion IMF package was preceded by a $35 million agreement with a UAE investment consortium for the sale of resort Ras al-Hekma and is likely to be succeeded by $3 billion of financing from the World Bank and $5-6 billion from the EU.

“The large capital inflows from Abu Dhabi's ADQ and the IMF should be followed by private sector portfolio inflows,” said Hasnain Malik, Head of Equity Research at emerging markets data provider Tellimer. “That reduces substantially the near-term risks on foreign currency debt.” 

Hot money floods in

The day after the devaluation, Egypt’s Central Bank sold EGP 87.8 billion ($1.78 bln) worth of domestic debt in an auction three times subscribed thanks to the renewed interest from overseas investors.

“We’re already seeing that foreign investors are trying to get back into the local bond market,” said Symond. “The auction yesterday was hugely oversubscribed, they had to upsize it and it came at a yield that was maybe below market expectations.” 

Until the onset of Egypt’s economic crisis in early 2022, the country was one of the world’s most popular destinations for emerging market investors. Around $20 billion of hot money was withdrawn following the outbreak of the Ukraine-Russia war, leading to a foreign currency shortage in Egypt.

Investors are expected to renew their faith in Egypt thanks to new-found financial stability, sky-high returns, and the removal of capital controls, making it easier for overseas investors to take money out of the nation. 

At the time of devaluation last week, the Central Bank hiked interest rates by 6% to 27.25%, meaning those buying Egypt’s domestic debt will receive guaranteed returns in excess of 27.25%.

Domestic fears unchecked

A café owner in the leafy Cairene suburb of Maadi told TNA that she had to cancel her plans to serve Iftar at her cafe as the price of sugar, butter, and meat was too expensive to make it a viable business decision. 

“We keep praying the prices will go down, but they just keep going up and up,” she sighed. 

Since 2022, Egyptians have witnessed their currency lose value from EGP 15.7 to the dollar to EGP 49.4 to the dollar, interest rates spiral from 8.25% to 27.25%, and inflation rise from 7% to 36%. This has pushed everything from buying an imported car, getting a loan to buy a house or even buying meat out of reach for many. 

Before the devaluation and interest rate hike, inflation reached a high of 36% in February, up from 30% in January. Egypt’s statistics agency CAPMAS also revealed that food prices have risen by 50% in the last year. 

Inflation is expected to rise further during the Holy Month as productivity typically wanes due to fewer working hours, while consumer spending escalates and there is greater money supply as remittances from overseas workers rise.

"Before the devaluation and interest rate hike, inflation reached a high of 36% in February, up from 30% in January. Egypt's statistics agency CAPMAS also revealed that food prices have risen by 50% in the last year"

As businesses struggle to navigate high inflation and a newly devalued currency, Egyptian banks also face pressure to keep funding domestic debt, meaning they have less resources to fund local businesses.

“What remains a problem is domestic debt and the need to rely on local banks to fund it, at a cost to private sector access to capital," Malik said. 

Egypt’s domestic debt amounted to around $150 billion, compared to $164.73 billion of external debt as of August 2023. Analysts have previously warned that the Egyptian domestic debt market is incredibly costly for local banks and S&P Ratings put Egypt in the “most vulnerable” category of its African domestic debt index last year.

Egypt's future outlook

Egypt’s currency crisis is effectively over for now and the black market has largely disappeared since the official rate has converged on what was the street rate. Fresh multi-billion dollar funds will boost the economy, but the regime still has work to do to tackle inflation.

"With inflation at 30% and another bout of pressure coming after the large devaluation, in terms of more expensive imports, there is likely more devaluation pressure over the next year, assuming there is a free float and not another reversion to a quasi-peg," Malik said.

There have already been questions about the true nature of the free float, as the Egyptian pound has hovered almost rigidly at 49 on the Central Bank’s official exchange since the devaluation, as opposed to rising and falling slightly each day. If the regime has re-pegged the EGP at 49 to the dollar, the chance of a sudden steep devaluation in the future is more likely.

There are many reasons to stay optimistic about the future value of Egypt’s currency, Symonds believes. 

“The currency could appreciate in value for a number of reasons,” he said. “There are a lot of positive drivers which could boost the value of the EGP as there are the funds from the UAE Ras al-Hekma agreement, the $8bn from the IMF, foreign investor flows coming in as well as remittances which should start arriving through the official channels,” he added. 

“Now we actually have to watch EGP and see if it is going to move, or are they just going to fix it again at 49/50. If they start fixing it, that's gonna be a problem.”

Lara Gibson is a Cairo-based journalist closely following Egypt's economic and political developments.

Follow her on Twitter: @lar_gibson