Debt levels in Egypt have reached historic highs as the government finds itself dependent on borrowing to finance citizens’ needs. Fitch Ratings has said that a rapid recovery in Egypt is likely to take more time than anticipated. Looming energy shortages may make the problem more pronounced.
With high levels of spending on subsidies, the new minimum wage, staples, and stimulus investments, the Egyptian government is continuing to borrow to keep up with the pace of consumption and population growth in the 85 million strong country.
Meanwhile the Central Bank of Egypt (CBE) has been selling more treasury bills, with as much as LE19 billion worth sold last week and an additional LE17 billion the week before, according to the Ministry of Finance auction calendar.
Total issued t-bills for the first three months of 2014 stand at LE203 billion, in comparison to LE149 billion during the comparable period a year ago. This increased borrowing has pushed government debt to record highs. According to Ministry of Finance website the most recent figures, in December 2013, showed that gross domestic debt stood LE1.54 trillion.
Government debt to GDP stood at 82.4 percent by end-FY2013, up from 67 percent at end-FY2010. Gross domestic debt increased by over LE100 billion between July and December 2013.
Over 95 percent of government debt is borrowed locally, with interest rates that start at over 10 percent for treasury bills and go up to 14 percent+ for 10-year bonds. Treasury bills stand for nearly one third of government debt.
Although local borrowing is favored to foreign borrowing, the high interest incurred has amassed high levels of debt service that, in light of the slow economic growth, the government can only pay through additional borrowing.
Debt service in the period between July and December amounted to LE143 billion, with more than half of that figure paid out to interest payments and the remainder to principal payments.
This inflated debt service led to an increasing budget deficit of LE239 billion at end-FY2013, representing 13.7 percent of GDP. So far, the overall deficit for the first half of FY2014 stands at 4.4 percent of GDP, while the government expects a deficit of 9.1 percent for the whole year.
Fitch says Egypt’s rating stabilized, though rapid recovery unlikely
A recent Fitch Ratings Agency report on Egypt said the country’s economic performance would improve over the two-year forecast, but by 2015 the economy will still be much weaker than it was in 2010.
Last month the agency affirmed Egypt’s long-term foreign currency rating at B-, but revised the outlook from “negative” to “stable” for the first time since January 2011.
The report anticipated a modest strengthening of growth, though it will be insufficient to prevent a further increase in unemployment.
Public finances have historically been the weak point in Egypt’s credit profile, the report said, and have seen the greatest deterioration since 2010. Fitch forecast a budget deficit remaining in the double digits at end-FY2015, and a debt/GDP ratio of over 90 percent.
It estimated that since ousting of President Mohamed Morsi in July 2013, reserves have depleted by US$200 million every month, excluding irregular payments and disbursements. The rate could have been faster were it not for the dollar rationing undertaken by the CBE.
The agency also said that political tension remains a risk for the country, stating that the “clampdown on the Muslim Brotherhood brings a greater risk of radicalization than before 2011.”
While presidential elections are expected within the coming month, Fitch assumes that, “although the existing widespread support for the military and a desire for stability will make society more tolerant of tough labour market conditions, economic grievances will remain pronounced.”
Second stimulus package to shore up support
Finance Minister Ahmed Galal announced on Monday the launch of a second stimulus package that amounts to LE33.9 billion, with two thirds of that amount financed by the UAE.
The government introduced the first package, which totalled LE30billion, in late 2013, with the majority of financing going into infrastructure projects and industrial areas. More that half of the second will be dedicated to public investments, while one third will finance social programmes including the newly introduced public sector minimum wage. The remainder, about LE2 billion, will be expended on the Suez Canal development project.
Experts believe that the army-backed government is keen to boost the economy to shore up public support during the transition period leading up to elections.
Galal said the draft law for second stimulus package appropriation in the FY2014 has been prepared and will be submitted to the Cabinet for ratification.
Continuous quest for energy
Oil Minister Sherif Ismail told Reuters that Egypt needs to import an additional $1 billion worth of petroleum products, while securing significant gas supplies in its effort to meet growing energy demands.
The energy shortage was one of the reasons for popular frustration during Morsi’s one-year tenor. Yet despite government efforts to curtail consumption, the energy problem has been increasing.
Growing local demand has left the government prying into the share allotted to international oil companies in return for their oil and gas excavation. Recently, UK-based company British Gas declared a force majeure for its Egypt operations, “reflecting the ongoing diversions of gas volumes to the domestic market.”
In October, Egypt tendered for a floating storage and regasification unit (FSRU) needed to import liquefied natural gas. At the time, an official was cited as saying that the government wanted the terminal in place by April, before consumption spikes. The tender has not yet been awarded.