Gross External Debt of Egypt

The world has experienced extreme market disruptions in the past 2 years. These disruptions were caused mainly by three events, the Covid-19 pandemic, supply chain problems and increasing prices, and finally the Russian-Ukrainian tensions occurred. Most countries had to cope with these conditions and introduce measures to protect their citizens. Furthermore, states usually have budget deficits and some may have deficits in their balance of payments that needs to be financed by debts. This placed a pressure on their debt levels. This article will focus on Egypt. Whereas the recent debt figures show an increase from approximately 139 billion dollars previously to 145.529 billion dollars, concerns might rise over this increase[1].

Recently on social media, several inexperienced people started sharing posts that Egypt can go bankrupt.?It’s worth noting that there’s quite a massive difference between a country going bankrupt and a country defaulting on its loans. Defaulting on a loan means that a country has failed to pay its obligations on a certain date. This failure can be due to bankruptcy or other reasons. If there’s a problem in the SWIFT system which lead to a payment 1 hour late, this is considered default, if there’s a human error and an employee forgot to send or check the receiving of a payment this is still default, a payment that was late due to a holiday for example is still a default, a payment not made on time due to difference in time zones is considered as a defaulted payment, and the list continues. How would the inexperienced people assume that Egypt would go bankrupt while it did not even default on a payment? Therefore, we needed to introduce a brief analysis on debt figures to explain why Egypt can’t go bankrupt.

1) Gross external debt as a percentage of GDP

As per the most recent figure of the IMF data mapper[2], Egypt’s GDP stands at 435.62 billion dollars. This means that gross external debt is approximately 33.4% of the GDP, just before the devaluation. This percentage is now over 40% after the most recent devaluation of the EGP but it’s not exceeding the safe levels of 45%.

2) Total debt as a percentage of GDP of Egypt compared to other countries

In Egypt, the total debt to GDP stands currently at 92%. This percentage fluctuates throughout the years, where it was formally 89% in 2020 and around 84% in 2019[3]. This increase in debt is explained by the measures introduced by the Egyptian government to mitigate the downturns the economy faced due to the pandemic, disturbances in supply chains and increasing prices, and the recent Russian-Ukrainian tensions. These measures include bringing back the Egyptians stuck abroad, incentives to private sector, expenditures on sterilizing and medical products, supporting the tourism sector, and the list continues. Efforts were divided into 2 contributions, the first is in the form of grants and subsidies to support the most affected categories of people and the second measures were to boost the industrial growth and encouraging the foreign investments. The sixth version of the “urgent reform agenda to boost industrial growth and encourage foreign investments” was published in September 2021 by the Federation of Egyptian Industries outlining these urgent efforts and measures taken to cope with the economy’s need. The country demonstrated excellence in balancing between a partial shutdown and the continuation of the production cycle to avoid any severe damages to the economy. As long as the debts are used to finance projects that will boost production and consequently generate income to repay back these debts, the country should have no limits to debt. This is called the fiscal multiplier effect. As a matter of fact, the greater the funding, the higher will the growth of the country be. This is particularly true in Egypt, where we witnessed several project financing such as the development of Abu Qir and Ain Sokhna ports, railway projects, and other major projects which are expected to generate very high return on investments. However, it’s well known that not all countries borrow to finance projects and most countries might take loans to refinance existing debts as well as to settle the state’s budget deficit. This point will be further clarified in the fourth point “Repayment method”

3) Tenors of the debts

According to the Central Bank of Egypt[4], Long-term debts account for 92% of total external debt where as short-term debt accounts for almost 8% in September 2021. Long term debts allow the Egyptian government to engage in structural reform projects that are expected to generate its revenues on the long term. Unlike short-term debts which makes it hard to engage in any project that generates real income. Another important point, Long-term loans can be either bullet, paid at the end of the period, or amortized (paid in installments). Bullet payments at the end of the period are the best option to seek since there will be no expected cash outflow from the financed project except to pay interests. Amortized loans are still better than short term loans because they provide grace periods of several years. When grace periods are introduced in loans, the loan’s Weighted Average Life decreases. The weighted average life (WAL)[5] is the average length of time that each dollar of unpaid principal on a loan, a mortgage, or an amortizing bond remains outstanding. In other words, the government could take a 10 years loan with a grace period of 4 years, and thus when taking the average of the remaining 6 years, the Weighted Average Life of the loan is 7 years as if the loan’s burden decreased from 10 years to 7 years and this burden has been shifted to the end of the loan period. This allows investment in long term projects, which usually have the greatest positive economic impact on the country.

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4) Repayment method

The following methods of payments conclude all possible ways that a country can possibly repay its debt from, and it doesn’t highlight a country in particular. Before a loan is given out, the lender conducts a due diligence on the borrower to assess his ability to repay. Loans are only given out if the borrower is sure that he will get the repayment of the debt. There are three methods for repayment:

a) Refinance: The ability to refinance is the first and most desirable method of repayment by Lenders. This is because it’s the fastest and most guaranteed repayment method by the borrower. Although countries like UAE have the ability to pay back its debts entirely, but they do not do that. Let’s take a simple example, UAE may have invested in US Bonds that matured on January. A loan repayment is due on March. Sometimes, it’s more expensive for a country to wait for the loan’s maturity period to repay back rather than investing the amount again. UAE will loose 2 months of income (January and February). Instead countries choose to knock on the doors of the financial markets to take new loans with a lower cost of fund. This is particularly true for developed countries who have the ability to raise funds at lower costs. In Egypt, the country followed an intelligent similar path to raise funds at lower costs. Egypt has issued the first yen denominated bonds at a coupon rate of 0.85% where an FX swap for small fees could be done to get USD and by this, Egypt is capable to secure funding at very low costs rather than issue USD denominated bonds directly at rates of 5%, 6%, or even 8.8%[6]! Another example of Egypt’s diversification in the loan markets include the green bonds. Recently, Egypt joined the JPMorgan’s Emerging Markets Bond Index (EMBI) followed by JPMorgan index on environment and governance for green bonds, allowing it as an emerging country to raise debts at very low costs[7]. Other examples of low-cost fund may include Sukuk bonds and loans from development entities such as the IMF and World Bank. Accordingly, due to the strong confidence of investors and their high appetite towards Egypt’s attractive low risk loan instruments, it became normal that International organizations such as the IMF and World bank praise the Egyptian governments effort on the country’s sound and resilient economy. Even the IMF itself is always keen to partner with Egypt and explore the different areas of cooperation due to their high confidence in the economy and that represents a green card for foreign investors to invest in Egypt.

b) Cash flow from profits: The second method is the cash flow from profits of the project that the borrower may have invested in. This may be slower and less guaranteed than refinancing because its not always that the maturity dates of loans match with the date of cash inflows of the business. This is why refinancing is always the most sought out option by both lenders and borrowers.

c) Sale of assets: Whereas this is the most guaranteed method of repayment, it’s the slowest and least desirable method of all. This repayment method entails that the lender will possess the asset (or security) should the borrower default or fail to meet its obligation. In Egypt due to the high confidence of lenders in our performing economy, they don’t require a security on the loan, and thus we don’t fall in the category of countries losing their assets. ?We particularly witnessed this in African countries that take secured loans such as the case of Uganda and China[8]. China Exim bank lent Uganda a secured loan (backed up by the asset itself) for the expansion of Entebbe airport (the asset) and a clause in the contract stated that should Uganda fail to repay back its obligations, China has the right to take over the country’s only international airport. Yet, China rejected these allegations and stated that they have no intention to substitute Uganda’s key assets for China’s cash. This method is the least desirable by the lender due to the hardness of selling the asset, as well as the borrower because a country will lose its assets.

Conclusion

In the end, it is clear that social media and the media are a double-edged weapon. We can notice their impact on that subject, specifically, in fragmenting the public opinion and spreading misleading information stating that Egypt might go bankruptcy. Yet, through the information provided it is clear to us that it is difficult for this crisis to lead to bankruptcy.

Sources:[1[4]https://www.cbe.org.eg/en/EconomicResearch/Publications/Pages/MonthlyStatisticaclBulletin.aspx

[2]https://www.imf.org/external/datamapper/NGDPD@WEO/EGY

[3]https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/EGY

[5]https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/average-life/

[6]https://www.arabfinance.com/en/news/details/egypt-economy/553042

[7]https://www.arabnews.com/node/2016136/business-economy