The Moody’s credit rating agency anticipates that Egypt will face significant pressures in 2024 for both debt and financial liquidity.
In its report on the Middle East and North Africa region, the agency added that it expects a further depreciation of the official exchange rate of the Egyptian pound, as indicated by prices in the parallel market.
“For reasons including currency depreciation, we expect inflation to remain very high in Lebanon, while it will register a double-digit figure in Egypt,” the report explained.
It added that a combination of “depreciation of the local currency, rising inflation, and interest rates will dampen consumption and investment in Egypt.”
Over 60 percent of revenues in Egypt will continue to be directed to interest payments in the fiscal year ending June 2024, leaving the government with very limited financial flexibility to respond to shocks – such as those arising from the clashes between Israel and Hamas in Gaza.
The report said that Egypt is facing a financing gap due to large external debt payments.
Egypt’s IMF program, which is facing delays due to failure to meet its targets, will partially cover the country’s financing needs, Moody’s noted, adding that the government is relying on foreign direct investment to fill the gap.
The report said that its base case scenario assumes that the military conflict between Israel and Hamas remains concentrated in Gaza, pointing out that in this case the credit implications of the conflict will be limited to Egypt and Lebanon.
The agency added that redirecting ships away from the Suez Canal due to the Huthis’ “partial blockade” of Bab al-Mandab will reduce the Suez Canal’s revenues, of which between 60-70 percent goes to the government.
However, it said that the potential additional depreciation of the pound will mitigate the impact on the government’s budget, as the canal’s revenue is in dollars.
Moody’s expects that the impact of the conflict in Gaza on Egypt’s tourism sector will be long-lasting due to its geographical proximity to the sector, although the social and financial effects of this are limited currently.
Crisis at the seas
The Red Sea crisis has cast a shadow over global trade, with container ships turning to sailing around Africa to avoid the region.
Huthi militants in Yemen pledged to continue targeting ships heading to Israel, despite America’s move to form Operation Prosperity Guardian, an international maritime task force, to protect the shipments.
This has resulted in a sharp decline in the movement of oil tankers through the Bab al-Mandab Strait in the Red Sea.
The Chairman and Managing Director of the Suez Canal, Osama Rabie, announced Tuesday that the number of ships passing through the Suez Canal decreased by 30 percent compared to the same period last year, owing to tensions at the Red Sea.
During a telephone interview with Lamis al-Hadidi on Egypt’s “Last Word” (Kalema Akhera) television show, Rabie added that the return in US dollar also fell by 40 percent.
Devaluation of the pound
Capital Economics, an independent economic research business based in the UK, noted that Egypt’s agreement with the International Monetary Fund (IMF) for the next loan is on the way – and with it, a devaluation of the Egyptian pound.
Inflation in Egypt is slowing down, according to the report but will remain above the central bank’s target level until mid-2025, according to the Arab News Agency.
Capital Economics also noted that the talks between Egyptian officials, the US Treasury Department, and the IMF seem “positive”.
Egyptian Prime Minister Mostafa Madbouly back in December said that discussions with the International Monetary Fund (IMF) have not stopped, and emphasized that the economic reform program is purely national.
He continued in a press conference, “There may be disagreement and controversy over the tactics that are being dealt with. Communication is ongoing, and we are in the process of working with the Fund to develop a time plan that will be announced soon.”
The International Monetary Fund earlier in October lowered its growth forecast for the Egyptian economy during the current fiscal year 2023-2024 to 3.6 percent, compared to its previous estimates of 4.1 percent.
Officials from foreign tourism companies in Hurghada confirmed that current events have led to a decrease in the percentage of new reservations until February, in addition to a decrease in reservations during the Christmas and New Year holidays.
One of the international tourism companies, which manages about 65 hotels in Egypt, revealed that 50 percent of its reservations in Egypt were canceled for the remainder of 2023, due to the Israeli war on Gaza.