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Robert Springborg

Egypt: The debt crisis that no one is talking about

Egypt's debt crisis is substantially worse than Turkey's [AFP]

Date of publication: 3 September, 2018

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Comment: Sisi may be hoping for a quiet bailout, but there are no quick fixes for Egypt's mammoth debt crisis, writes Robert Springborg.
The Turkish financial crisis has received extensive media attention as the Lira has plunged and harsh words exchanged between Presidents Erdogan and Trump.

This crisis is playing out against a backdrop of deterioration of the currencies and even broader economies of many emerging market countries, resulting primarily from globally rising interest rates accompanied by an appreciating dollar.

Even the Chinese Renminbi has come under pressure, leading among other things to accelerating capital flight, a problem of concern in GCC economies as well.

In most emerging markets the interrelated debt and currency crises stem from the shift from borrowing in domestic currencies, to seeking loans in dollars and euros - a shift that commenced several years ago in response to lower interest rates for those hard currencies.

The primary lesson of the 1997 Asian crisis, brought on by the collapse of the Thai Baht due to similar foreign borrowing, was forgotten. 2018-19 could witness a similar financial meltdown.

Curiously, Egypt has remained below the horizon in most media reports on countries confronting debt and currency crises. This is due primarily to global financial institutions - led by the IMF, which in 2016 extended a $12 billion loan to the country, accompanied by the US, European countries, Russia and even China all seeking to portray the Egyptian economy in rosier terms than it deserves.

The primary concern of these institutions and countries is Egypt's political stability, not its economic performance, other than its ability to repay foreign debt.

In reality, Egypt's debt crisis is substantially worse than Turkey's. The headline figure is foreign debt as a proportion of GDP, which in Turkey's case is now 23 percent, causing Canada's National Bank Financial to note that "Turkey is especially exposed... as its $195 billion in debt is "a stunning 23 percent of GDP."

Egypt, in other words, is now borrowing mainly to cover the costs of previous loans and current consumption

Egypt's government debt alone stood at 36.8 percent of GDP at the end of June, having increased over the year by 11.6 percent. Egypt's domestic debt is also proportionately larger than Turkey's, reaching 86.8 percent of GDP. On world rankings of debt/gdp ratio, Egypt is 13th, whereas Turkey is not even in the top 50 most proportionately indebted countries. Of the 12 countries more indebted than Egypt, all but three are OECD members, hence far less threatened by inability to repay their debt.

Egypt's crushing debt burden is reflected by the high cost of servicing it. In 2017 interest payments absorbed some 31 percent of the budget. They are on track in 2018 to consume over 35 percent, at which time debt servicing will be eating up "almost 55 percent of all government revenues".

Three factors will continue to drive debt servicing costs upward into the foreseeable future.

The first is globally rising interest rates combined with increasing distrust in the value of the Egyptian pound, so causing domestic interest rates to remain extraordinarily high and probably to rise further.

At present, Egypt is paying about 6 percent interest on its 12-year Eurobonds and between 18 and 20 percent on its Egyptian pound denominated Treasury bills, with the proportion of foreign investors in the latter having dropped so sharply during 2018 that the Central Bank has stopped reporting their relative purchases.

Second, Egypt's external debts are set to continue to mount. The country is scheduled to float another seven billion worth of Eurobonds in 2018 and, according to the Ministry of Finance, just under $23 billion in additional euro and dollar bonds by 2021.

About 40 percent of the population now lives on less than $2 daily

The third factor that will continue to drive up the cost of debt servicing is that the borrowed funds are not being wisely invested, so are not generating adequate returns, especially in foreign currencies.

Indeed, they are hardly being invested at all. The key ratio is the nation's gross fixed capital investment as a proportion of GDP. It has sunk to one of the world's lowest, from 24 percent in 2014 to 15 percent two years later, and now about 12 percent. In Turkey, by contrast, gross fixed capital investment as a proportion of GDP was over 29 percent in 2016, almost double Egypt's.

Read more: Egyptians slam Sisi's new beach palace amid harsh austerity reforms

Egypt, in other words, is now borrowing mainly to cover the costs of previous loans and current consumption. White elephant projects - such as the new "Administrative Capital," the widening of the Suez Canal, the abysmal efforts to reclaim "one million acres of desert", the 2018 contract signed with Russia for a $25 billion nuclear power plant, of which Egypt will pay 15 percent with the balance taking the form of an interest bearing loan, along with the associated burden of Egypt having to invest $18 billion over five years to upgrade the electricity transmission network - all attest to Sisi's profligacy and the crushing financial burden it is imposing on his country.

Sisi can only hope that he and Egypt will remain below the world's financial radar.

The chances of this, however, will recede as emerging market financial problems intensify and heavily indebted countries come under investors' microscopes.

Their reluctance will propel interest rates further upward on Egypt's foreign and even domestic debt, putting renewed downward pressure on the currency's value, thereby re-igniting inflationary pressures that had slowly abated since 2017.

A new bout of inflation would have dire economic and potentially explosive political consequences

Egypt's people are ill-equipped to face another round of high inflation, it recently having dropped to 13.5 percent after having exceeded 35 percent in the wake of the IMF mandated devaluation in 2016.

Wages and salaries have not kept pace with inflation. Reductions in energy and food subsidies have driven up household expenditures. About 40 percent of the population now lives on less than $2 daily. Their margins of subsistence are so narrow that a new bout of inflation would have dire economic and potentially explosive political consequences.

Egypt's economic squeeze resulting from Sisi's profligacy, coupled with political pressure caused by the austerity he has imposed on his people, are bound to intensify in lock step with mounting debt. The Egyptian economy is considerably more fragile and exposed than the Turkish one, currently the focus of global media attention.

Sisi's hope is that he and his country will be bailed out because they will be deemed too big - meaning too politically important - to fail.

But intermittent commitments of external financial support, most notably from Gulf countries, important as they are, do not address the structural deficiencies of the economy nor its incompetent leadership.

These subventions would be insufficient to hold back an economic tide that has turned, as suggested by the precedent of the 1997 Asian financial crisis.

When and if panic over Egypt does strike global financial markets, the country's economy will suddenly be seen as too risky and expensive to save, whatever politicians in the US, the EU and elsewhere are saying about its strategic value and the merits of its president.


Robert Springborg is the Kuwait Foundation Visiting Scholar at Harvard University's Middle East Initiative, Belfer Center. He is also Visiting Professor in the Department of War Studies, King's College, London, and non-resident Research Fellow of the Italian Institute of International Affairs. 

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff. 

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