High-risk Egypt is poised for a comeback

Struggling with political revolution, terrorism threats and the commodity crisis, its country risk score has shed 20 points in Euromoney’s survey since the 2007/08 global financial crisis and Arab uprising in 2011.

Last year alone, Egypt plummeted 13 places in the global risk rankings, to 119th out of 186 countries surveyed, as political and economic risk indicators worsened, together with debt ratings and the capital access score.

That puts Egypt on a par with sub-Saharan borrowers Malawi and Guinea-Bissau rather than its higher-ranking north African counterparts, and for most investors still off-limits:

However, preliminary survey data for the first quarter of 2017 show Egypt’s score stabilizing.

For sure, there are still numerous problems to overcome, including twin fiscal and current-account deficits, inflation soaring above 30%, a tourism crisis and high unemployment to name but a few, but there is a sense that with creditor support, a flexible exchange rate and commodity prices reviving the worst of the downturn is over.

Under a $12 billion extended fund facility from the IMF, Egypt plans to turn a 3.5% of GDP primary fiscal deficit into a 2% surplus, and lower the debt ratio from 98% of GDP to 88% in fiscal year 2018/19 (to end September).

The targets are ambitious, but with steady progress and the IMF on-side it will invariably attract other sources of investment, loans and foreign aid.

Marwan Barakat, head of research at Bank Audi, acknowledges the risks, pointing to periodic FX shortages, and the socio-political and security problems constraining investment, not to mention rising interest rates stifling domestic demand.

He and his team are nevertheless convinced the outlook will slowly improve, citing the government’s new economic programme, which is “based on a significant policy adjustment, strengthening social safety nets, far-reaching structural reforms and fresh external financing to close the financing gaps.”

Barakat goes on to give the change in exchange-rate policy the thumbs-up, arguing the decision to float the Egyptian pound “was a critical step toward restoring economic confidence”, with currency depreciation boosting export competitiveness, despite contributing to inflation.

This, and moves to rein in energy subsidies, will bolster investment and export growth – and already financial indicators show an improvement.

Remittance income from migrant workers increased by 12% year on year in the fourth quarter of 2016. Foreign investors are returning to Egyptian assets, prompting a rise in Treasury bill holdings and solid demand for sovereign bond issuance, and FX reserves are at their highest level in five years, providing more than five months of imports.

Egypt is still a very high risk option, nestled in the lowest of ECR’s five tiered categories, but there is reason to be cautiously optimistic in anticipating gradual improvement in the coming years.

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